Volkswagen Sets Aside $7.2 Billion to Pay for Emissions Cheating Scandal

22 Sep 2015 | Author: | No comments yet »

VW admits 11m cars have faulty device.

Volkswagen’s woes stem from allegedly cheating on emissions tests of its TDI Clean Diesel engines in the U.S. but the problem grew bigger on Tuesday. The chief executive of Volkswagen America, Michael Horn, has candidly apologised and admitted wrongdoing after the German car giant was caught cheating in US pollution measuring tests. “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,” Horn said at an event in New York, according to video posted by CNBC.

Volkswagen says that an internal investigation has revealed that 11 million of its vehicles sold worldwide are fitted with the same software designed to trick emissions testing equipment as the 500,000 vehicles involved in an emerging scandal in the United States. For the jokers, that’s easy. “Total Disaster In diesel” and “Trickery Disguised as Innovation” are among the favorites doing the rounds, according to one analyst note on Tuesday. In reality, there’s not that much to joke about in terms of the future of diesel-engine technology which Volkswagen and other European car makers and components suppliers have invested in heavily over the years.

VW shares, which dived 17 per cent on Monday, plunged by another 23 per cent to a low of €101.30 during trade on the Frankfurt stock exchange as the new revelations, including a warning that it will have to lower its profit outlook, sent investors fleeing. “In order to cover the necessary service and other measures to win back customer confidence, VW plans to set aside €6.5 billion in provisions in the third quarter.” The spiralling scandal has led to France calling for a Europe-wide probe into the revelations, South Korea summoning Volkswagen officials, and the US Justice Department reportedly launching a criminal investigation. The Volkswagen crisis, in knocking the clean-air and fuel-economy reputation of the fuel, might accentuate “a secular long-term shift from diesel to gasoline,” say analysts at brokerage house Evercore ISI. The scandal went public on Friday when US regulators ordered Volkswagen, the world’s largest automaker by sales, to fix the defect and said they were launching a probe. The fall comes on top of Monday’s hefty 17 percent decline and means the company has lost an eye-watering 25 billion euros or so in just two days of frenzied trading. Max Warburton, an automotive analyst at Bernstein Research, is more categorical about whether this means the end of diesel. “Yes, it probably does,” he says. “Diesel has been under growing pressure in recent years, as regulators recognize that it is still not as clean as gasoline, despite meeting official tests.

The trigger to the company’s market woes was last Friday’s revelation from the U.S.’s Environmental Protection Agency that VW rigged nearly half a million cars to defeat U.S. smog tests. The EU’s promotion of diesel in the 1990s was surprising, and seemed to be driven by a focus on CO2 and global warming ahead of local air quality,” Mr. The software then switches off again, enabling cars to drive more powerfully on the road while emitting as much as 40 times the legal pollution limit. It’s too early to judge how serious diesel’s loss of status might be for the rest of the industry even if the fallout for Volkswagen, from possible multibillion-dollar fines to damage to management’s reputation and the image of its brand, is sure to be significant. Volkswagen plans to book a €6.5 billion ($7.3 billion) third-quarter charge. “A lost diesel turbo [engine] must equate in the future to gained gas/petrol turbo or [clean-air] regulations will never be met,” say the Evercore analysts.

In Germany, the government has already launched an investigation into whether Volkswagen or other car makers are doing anything similar in Germany or Europe. It added that the software is also installed in other vehicles with diesel engines but that that for the “majority of these engines the software does not have any effect.” Volkswagen said that new vehicles with EU 6 diesel engines currently on sale in the European Union comply with legal requirements and environmental standards. The German government is to also conduct new emissions tests in VW’s diesel cars, while France called for a wider Europe-wide investigation into Volkswagen’s practices — and into those of French carmakers.

Even before Tuesday’s statement, a member of Volkswagen’s supervisory board suggested that heads will roll in the wake of the scandal, though he said it was too soon to start assigning blame. Lies, who is also the economy minister of the German state of Lower Saxony, which holds a 20 percent stake in Volkswagen, said he was sure there would be “personal consequences” once the investigation is complete.

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