Lawsuits could force VW to buy back cheating diesels

19 Oct 2015 | Author: | No comments yet »

‘Fewer than 10′ targeted in VW probe.

Two-thirds of Germans still believe Volkswagen builds “outstanding” cars, despite a high-profile emissions-test cheating scandal that has damaged its image.Volkswagen made several versions of its “defeat device” software to rig diesel emissions tests, three people familiar with the matter told Reuters, potentially suggesting a complex deception by the German car maker.

The American engineers who discovered that Volkswagen used a ‘cheat device’ to pass emissions tests said they originally wanted to test Mercedes and BMW diesels, but the cars were too pricey to rent. As many as 65 per cent of respondents to a survey said they either fully or largely agreed the scandal was overdone and that VW still made excellent cars. During seven years of self-confessed cheating, Volkswagen altered its illegal software for four engine types, said the sources, who include a VW manager with knowledge of the matter and a U.S. official close to an investigation into the company. VW said on Oct. 12 that it was recalling 1,950 diesel vehicles in China to change engine software, while Singapore has suspended sales of the company’s diesel cars.

After VW admitted last month to fitting 11 million vehicles worldwide with the rogue devices, plunging the world’s biggest carmaker by sales into an unprecedented crisis, the prosecutors in the northern city of Brunswick near VW’s headquarters launched a criminal investigation into suspected fraud. Spokespersons for VW in Europe and the United States declined to comment on whether it developed multiple defeat devices, citing ongoing investigations by the company and authorities in both regions. Millions of cars are affected, lawsuits are being prepared, and the financial costs — as well as costs to the environment and public health – are only just beginning to be calculated.

Earlier this week, news weekly Der Spiegel reported that “at least 30 people” were involved in the deception – a number that VW dismissed as “completely without basis”. Six out of 10 said they did not believe the “Made in Germany” label would be damaged by the scandal in the long term, and 63 per cent believed the affair would soon be forgotten. The group’s new chief executive, Matthias Mueller, said last week that four employees, including three executives in charge of engine development at different stages, had been suspended.

Some Germans have expressed concern that VW’s problems could harm other businesses that depend on the country’s reputation for engineering prowess and reliability. Despite dubious political origins, VW emerged from the ashes of war to build a global reputation epitomising the technical excellence of “brand Germany”. Daniel Carder, who led the testing team from the Centre for Alternative Fuels, Engines and Emissions at West Virginia University, said: “We didn’t set out to trap Volkswagen – it was just that we could spend less money on using their cars.” More than 11 million cars are being recalled worldwide and Volkswagen has set aside €6.5 billion (R96 billion) to deal with the fallout from the scandal, but analysts at Credit Suisse say it could cost it closer to €77 billion (R1147 billion). German press reports named two of them as Ulrich Hackenberg, development chief at VW’s Audi subsidiary, and Wolfgang Hatz, his counterpart at luxury sports car brand Porsche. The number of people involved is a key issue for investors because it could affect the size of potential fines and the extent of management change at the company, said Arndt Ellinghorst, an analyst at banking advisory firm Evercore ISI.

Meanwhile, a survey found that public trust in the motor industry has been badly damaged, with nearly eight in 10 people now saying they expect more manufacturers to be drawn in to the scandal. The auto industry accounts for more than 750,000 jobs in Europe’s biggest economy, and politicians from Chancellor Angela Merkel down have rallied around the sector. From a regional breakdown of the sales figures, it was not immediately apparent whether the scandal, which broke on September 18, has had any direct effect on business just yet. Its U.S. chief, Michael Horn, told U.S. lawmakers earlier this month that he believed “a couple of software engineers” were responsible, while a letter dated Oct. 8 from VW to the European Parliament blamed “the misconduct of a few people.” VW admitted publicly on Sept. 18 to using software that could tell when a diesel vehicle was being tested and temporarily lower its toxic emissions to pass U.S. regulations.

North American sales were up six percent in September, despite the fact it was US regulatory authorities who set the ball rolling, accusing VW of fitting its diesel engines with the cheating software. By contrast, sales in Brazil, Russia and China – whose slowing economies are causing headaches not just for VW, but for other carmakers as well – fell by 43.7 percent, 26 percent and 0.8 percent, respectively. A U.S.-based expert on diesel engines and testing said the defeat device software also had to be altered when VW changed the emissions control system in its engines. From around 2012, it introduced a more sophisticated and expensive system called Selective Catalytic Reduction. “Since the standards are different, my understanding is that the defeat devices in those (European) cars are as well,” he said, without elaborating.

Horn added VW was withdrawing its application for regulatory certification of 2016 diesel models because it contained another software feature that had not been disclosed as required by the authorities. On Thursday, the German federal transport authority KBA said it would order VW to recall 2.4 million vehicles in Germany alone, starting from January 2016. Following Germany’s move, the European Commission on Friday stressed that each member state would be expected to monitor closely if Volkswagen recalls affected vehicles on their (respective) territories. And on Friday Italian business raised concerns for the country’s auto parts manufacturers, and the Bank of Italy said in its monthly bulletin that the VW crisis adds “a new element of uncertainty for European economies,” with repercussions “still difficult to evaluate”. Add to that the cost of likely fines, penalties and lost sales, and it is a high price given the original deceit was driven by short-sighted cost-savings of around $100 per car.

That said, we have seen previous egregious business behaviour forgiven or forgotten by consumers, and in this case many car buyers may soon find that VW cars at reduced prices will be difficult to resist. Nonetheless, as the full scale of the cover-up emerges, so inevitably will conclusions that this was not just the act of “a few bad apples” operating in isolation.

VW’s device was able to fool US emissions tests because its software was able to recognise the very specific, controlled — and generally unrealistic — conditions in which testing is conducted. This is largely because it regulators allow carmakers to conduct a range of fixes to their vehicles to reduce drag and create more favourable results. It may be therefore that the shockwaves from the VW scandal will help push regulators towards a more realistic testing cycle, perhaps using standard vehicles picked at random from the production line or showroom. Kulwant Singh is professor of strategy and policy while Jochen Wirtz is professor of marketing at the National University of Singapore Business School, which is celebrating its 50th year.

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