Canadian Manufacturing

Volkswagen’s smog-test shenanigans cost US$26B in market value; investigations start piling up

The EPA said that Volkswagen faces potential fines of $37,500 per vehicle



BERLIN—Volkswagen AG’s smog-test troubles escalated as the company acknowledged putting stealth software in millions of vehicles worldwide. The scandal has now cost the German automaker more than 24 billion euros (US$26 billion) in market value.

Volkwagen stunningly admitted that some 11 million of the German carmaker’s diesel vehicles contain software that evades emissions controls, far more than the 482,000 identified by the U.S. Environmental Protection Agency as violating the Clean Air Act.

Volkswagen also warned that future profits could be affected, and set aside an initial 6.5 billion euros ($7.3 billion) to cover the fallout.

CEO Martin Winterkorn apologized for the deception under his leadership and pledged a fast and thorough investigation, but gave no indication that he might resign.

“Millions of people across the world trust our brands, our cars and our technologies,” Winterkorn said Tuesday in a video message. “I am endlessly sorry that we have disappointed this trust. I apologize in every way to our customers, to authorities and the whole public for the wrongdoing.”

“We are asking, I am asking for your trust on our way forward,” he said. “We will clear this up.”

VW has yet to explain who installed the software, under what direction, and why.

“I do not have the answers to all the questions at this point myself, but we are in the process of clearing up the background relentlessly,” Winterkorn said.

The damage to Volkswagen’s reputation was reflected in the market’s response. Volkswagen’s ordinary shares fell 31 per cent since the crisis began.

The EPA said Friday that VW faces potential fines of $37,500 per vehicle, and that anyone found personally responsible is subject to $3,750 per violation.

The U.S. Justice Department has joined the investigation, and on Tuesday, New York Attorney General Eric. T. Schneiderman announced that he’ll collaborate with other states to enforce consumer and environmental protections in the case.

After blaming unrelated issues for more than a year, the company finally told U.S. regulators on Sept. 3 that it installed software that switches engines to a cleaner mode during official emissions testing. The software then switches off again on the road, enabling cars to drive more powerfully while emitting as much as 40 times the legal pollution limit.

“Let’s be clear about this. Our company was dishonest. With the EPA, and the California Air Resources Board, and with all of you. And in my German words, we have totally screwed up,” the head of Volkswagen’s U.S. division, Michael Horn, said Monday while unveiling a new Passat model in New York.

“We must fix those cars to prevent this from ever happening again, and we have to make things right. With the government, the public, our customers, our employees, and very importantly, with our dealers.”

The shockwaves were felt across the sector as traders wondered who else may get embroiled. Germany’s Daimler AG, the maker of Mercedes-Benz cars, was down 7 per cent Tuesday, while BMW AG fell 6 per cent. France’s Renault SA was 7.1 per cent lower.

“Brands are all about trust and it takes years and years to develop. But in the space of 24 hours, Volkswagen has gone from one people could trust to one people don’t know what to think of,” said Nigel Currie, an independent U.K.-based sponsorship and branding consultant.

Volkswagen said the “discrepancies” related to vehicles with Type EA 189 engines actually involve some 11 million vehicles worldwide _ more than the 10 million or so cars it sold last year.

“Manipulation at Volkswagen must never happen again,” Winterkorn said in his video message. He said VW’s employees are “building the best vehicles for our customers,” and said “it would be wrong to place the hard and honest work of 600,000 people under general suspicion because of the grave mistakes of a few.”

The company said the 6.5 billion euros it is setting aside this quarter will cover necessary service measures and “other efforts to win back the trust” of customers. Even these costs are “subject to revaluation,” it said, and 2015 earnings targets will be adjusted. It didn’t specify by how much.

The statement didn’t mention possible fines or penalties. The violations described by the EPA could, in theory, total about $18 billion.

Christian Stadler, professor of strategic management at the Warwick Business School said companies rarely pay maximum fines under U.S. regulations.

“I don’t think this is a life-threatening event, but it’s clear it’s going to be very expensive,” he said.

The company hasn’t revealed the results of internal investigations, although it has said that the software in question was installed in other vehicles with diesel engines, and asserted that in most cases, it “does not have any effect.”

It also said new vehicles with EU 6 diesel engines currently on sale in the European Union comply with legal requirements and environmental standards.

“I hope that the facts will be put on the table as quickly as possible,” German Chancellor Angela Merkel said in Berlin.

Before the scandal, Winterkorn, CEO since 2007, was hoping to have his stewardship of the company extended at a board meeting Friday. Earlier this month, Volkswagen said it planned to give Winterkorn a two-year contract extension which would keep him in charge through the end of 2018.

Other authorities looking into VW’s actions include Germany, where the transport minister announced a commission of inquiry to determine whether VW’s diesel vehicles comply with German and European rules; the French government, which demanded that its automakers “ensure that no such actions are taking place in France,” the South Korean government, and the European Commission.

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Pylas reported from London. Dee-Ann Durbin contributed from Detroit.

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