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 will dismiss Chief Executive Martin Winterkorn, a German newspaper said on Tuesday, after the carmaker admitted to cheating U.S. vehicles emissions tests and said 11 million of its cars could be affected worldwide. Volkswagen has revealed that 11 million diesel cars worldwide are equipped with devices that can cheat pollution tests, a dramatic expansion of a scandal that immediately sent its shares plummeting by another 20 per cent. The Tagesspiegel newspaper, citing unidentified sources on Volkswagen’s supervisory board, said Winterkorn would be replaced by Matthias Mueller, the head of the carmaker’s Porsche sports car business. 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. Authorities from France, South Korea and the United States announced investigations and threatened legal action, prompting VW to disclose that it was setting aside 6.5 billion euros ($A10.23 billion) in provisions for the third quarter to cover the potential costs of the scandal.

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. 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. Shares in Europe’s biggest carmaker plunged almost 20 percent on Monday after it admitted using software that deceived U.S. regulators measuring toxic emissions in some of its diesel cars.

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 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. 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. France’s finance minister Michel Sapin called for a “Europe-wide” probe, telling French radio it seemed “necessary” to check cars manufactured by other European carmakers in order to reassure the public. Volkswagen warned that sum could rise, adding diesel cars with so-called Type EA 189 engines built into about 11 million Volkswagen models worldwide had shown a “noticeable deviation” in emission levels between testing and road use.

The trigger to the company’s market woes was last Friday’s revelation from the U.S.’ Environmental Protection Agency that VW rigged nearly half a million cars to defeat U.S. smog tests. In addition to the environmental probe already underway, the US Department of Justice has launched a criminal investigation, US officials told Bloomberg. 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. 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.

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. The crisis has sent shockwaves through Germany, with Chancellor Angela Merkel calling for “complete transparency” and newspapers putting the blame squarely on Winterkorn. In Germany, the government has already launched an investigation into whether Volkswagen or other car makers are doing anything similar in Germany or Europe. The 68-year-old was due to have his contract extended at a supervisory board meeting on Friday, but is now facing questions over why the scandal wasn’t averted.

It added that the software is also installed in other vehicles with diesel engines, but 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. TV commercials lauding its “clean diesel” cars, was challenged by authorities as far back as 2014 over tests showing emissions exceeded California state and U.S. federal limits. In the second, one needs to ask why such a far-reaching violation was not reported to the top and then things will get tough too.” Porsche’s Mueller was promoted to Volkswagen’s executive board on March 1 and was previously its head product strategist. As a management board member of family-owned Porsche SE, he is also close to the Porsche-Piech clan that has a controlling shareholding in Volkswagen. 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.

Winterkorn, who recently saw off a challenge to his leadership with the ousting of long-time chairman Ferdinand Piech, has built Volkswagen into a global powerhouse since he took the helm in 2007, with brands ranging from budget Seats and Skodas to premium Audis and top-end Porsches and Lamborghinis. But he has also faced criticism for a centralised management style which some analysts say has hampered the company’s efforts to address long-standing underperformance in North America. “I am sure that there will be personnel consequences in the end, there is no question about it,” supervisory board member Olaf Lies told German radio station Deutschlandfunk on Tuesday. Shares in rivals including Peugeot, Renault and Fiat Chrysler also fell sharply amid signs regulators across the world will step up scrutiny of vehicle tests, which environmentalists have long criticised for exaggerating fuel-saving and emissions results. “No doubt we will hear a lot from plaintiffs’ attorneys representing the poor car buyers but I guess the group that would have been hurt most would have been the other car manufacturers who compete with Volkswagen,” said one Swiss based hedge fund manager, speaking on condition of anonymity. South Korea’s environment ministry also said it would investigate 4,000 to 5,000 of Volkswagen’s Jetta, Golf and Audi A3 vehicles produced in 2014 and 2015, and could expand its probe to all German diesel cars if it found problems.

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