VW under fire amid EPA accusations it cheated on emissions tests

21 Sep 2015 | Author: | No comments yet »

EPA: Volkswagen, Audi used software to suppress diesel vehicle emissions during testing.

Volkswagen Canada Inc. has halted sales of diesel car models amid a scandal over falsified U.S. emissions tests that sent shares of its parent company plunging. Pressure piled on the head of Volkswagen on Monday in the wake of an emissions-testing scandal that’s seen around €15 billion (US$16.9 billion) wiped off the company’s market value.Volkswagen Canada has stopped selling certain diesel models in Canada after the German-based automaker admitted to cheating on U.S. air pollution tests for years. “We have issued, as of today, a stop-sale order to our dealers in Canada for all the affected vehicles.

Had Martin Winterkorn conceded defeat in his boardroom battle with Volkswagen corporate patriarch Ferdinand Piech five months ago, he would have avoided the disgrace of the company’s U.S. pollution control scandal, which earlier today wiped nearly a quarter off the value of VW’s stock.The Volkswagen Group has ordered U.S. dealerships to stop selling diesel-models of its Jetta, Beetle and Golf as well as the Audi A3 that were made within the past six years. The crisis is likely to batter Volkswagen’s reputation as it attempts to boost sales in the U.S. and Canadian markets as part of a goal to sell more than 10 million vehicles worldwide by 2018 and become the global leader in customer satisfaction and quality. Following revelations that the German carmaker had rigged United States emissions tests for about 500,000 diesel cars, VW CEO Martin Winterkorn apologised Sunday for the fact that his company had “broken the trust of our customers and the public.” But saying sorry wasn’t enough for investors as they digested the financial and reputational implications of the scandal on the world’s biggest carmaker by sales — in midafternoon trading in Frankfurt, Volkswagen’s share price was down a stunning 17.8 per cent at a near three-year low of €132.15. Already at the open, shares of the German car maker—the world’s largest auto maker by sales—tanked as investors got their first chance to react to news from Friday that the U.S.

Before becoming VW chief executive in 2007, Winterkorn was the company’s top executive responsible for “technical development,” which encompasses engineering and innovation. From 2009 to 2015, Volkswagen had been installing the software—known as a defeat device by the Clean Air Act definition—that uses an algorithm to tell when a vehicle is in a lab undergoing emissions test. The EPA indicated that VW faces fines that could run up to more than $18bn. “Five months ago Ferdinand Piëch, the former chairman, tried to oust him [Mr Winterkorn] but in the end resigned himself,” said Christian Stadler, professor of strategic management at Warwick Business School. “This Friday the board decides on whether to renew Mr Winterkorn’s contract until 2018. Diesel engines have been a big winner for Volkswagen Canada, whose sales soared 13 per cent in the first eight months of this year from a year earlier. Environmental Protection Agency is the lead agency on the matter as it certifies vehicles that have met certain emissions standards for all of North America.

After this a question mark now hangs over that decision. “From 2009 to 2011 Toyota recalled nine million cars for issues leading to unintended acceleration. On Winterkorn’s watch, the German automaker apparently put its considerable engineering expertise to underhanded use in support of the questionable business decision to meet ever stricter emissions rules by betting heavily on diesel technology. The scandal triggered investor flight on both sides of the Atlantic: In Frankfurt, Volkswagen’s home-listing VOW3, -18.19% VOW, -17.01% VOW, -17.14% shares closed down 19% at €132.20 ($147.95), erasing €14.1 billion, or about $16 billion, in market value to €62.9 billion. EPA will continue to investigate these very serious matters.” Because the issue is with the cars’ emissions systems, the vehicles aren’t considered a direct safety hazard to drivers, meaning the car is not being recalled, although the EPA said it hopes to compel the company to issue a recall in the future to have the issue addressed at no cost to owners. The software device then turns off the emissions controls during normal driving situations, allowing the cars to emit more than the legal limit of pollutants.

For Volkswagen, the selloff for its non-voting preferred shares VOW3, -18.19% —the stock included in the DAX 30 index DAX, +0.33% —would be the second biggest on record, according to FactSet data. “Not only is this a black eye and a huge problem for Volkswagen, from an industry perspective it may set back diesel technology as a means for auto makers to reach the requirements for high fuel economy,” said Matt DeLorenzo, managing editor at Kelley Blue Book’s KBB.com, in a note. Guido Reinking, a German auto expert, said that for a company to engage in such blatant trickery the company’s top executives would have to be informed.

Volkswagen’s June 2007 “Powertrain and Fuel Strategy,” published six months after Winterkorn took over as chief executive, said independence from fossil fuels lay at the end of the industry’s evolutionary path, but existing technology would still dominate for a long time, so VW would concentrate on developing it to fit new standards. “New powertrains, including an engine concept developed for use in the USA, under the working title ‘BlueTDI,’ are already in the prototype stage,” the document said. “These engines will fulfill the toughest emissions laws in the world – even the so-called ‘Tier2 Bin5’ in California, one of the most stringent emissions standards in the world.” In 2008, VW announced that the development of BlueTDI was completed, and in 2009, cars with such engines — the same ones the EPA has found to be in violation of the U.S. Winterkorn, who has led the company since 2007, said he was “deeply sorry” for breaking the public’s trust and that VW would do “everything necessary in order to reverse the damage this has caused.” Winterkorn, whose contract renewal is scheduled for a supervisory board vote on Friday, now faces a serious challenge to his leadership, said Arndt Ellinghorst, a London-based analyst for Evercore ISI.

Nitrogen oxide, according to the EPA’s notice of violation, is a highly reactive gas that reacts with volatile organic compounds to create ozone, or smog. He became chairman of the management board the same year. “It’s almost impossible to imagine that he didn’t know about this special way of programming the engine,” Reinking told German television station n-tv. A spokesman for Germany’s environment ministry said that authorities there were waiting to see how the US investigation develops. “The auto manufacturers have to work closely with US authorities to comprehensively clarify the matter,” Michael Schroeren said.

The problem with “clean diesels” that weren’t really all that clean has been known for years in Europe, where diesel cars routinely account for more than 50 per cent of new vehicle registrations. Equinet Bank called the situation a “major setback” for the company, downgrading its rating to reduce from neutral and lowering the target price to €145 from €180. Janez Potocnik, then the European Union’s environment commissioner, called in 2013 for a compliance crackdown on diesel fuel cars, noting that required a reduction in “real world emissions from diesel cars.” Last year, the International Council on Clean Transportation put out a white paper on diesel cars’ “real-world” NOx emissions and concluded that the technology for their reduction was already in existence; only carmakers were slow to adopt it. And at S&P Capital IQ, analysts cut the price target to €133 from €195 and lowered their 2015 full-year earnings per share estimate by 6% to €22.30.

The EPA insisted that the violations do not pose any safety hazard and said the cars remain legal to drive and sell while Volkswagen comes up with a plan to recall and repair them. The violations, which affect nearly half a million vehicles, could result in as much as $18 billion US in fines, based on the cost per violation and the number of cars. With hindsight, it appears that VW realized its early “clean diesels” didn’t really conform to environmental standards, so it added software that turned up the emission control systems when tests were being run and turned them down again when the car was on the road.

Criminal prosecution is also possible. “If this ends up having been structural fraud, the top management in Wolfsburg may have to bear the consequences,” said Sascha Gommel, a Frankfurt-based analyst for Commerzbank AG, whose share rating is under review. Winterkorn has promised to make VW a leader in environmental protection, but the cost of compliance with regulations has been a source of angst to him. “Climate protection is not available free of charge,” he railed at the Paris auto salon last year. “Every gram of reduction in C02 costs us 100 million euros. The cost to Toyota, including fines, was a little more US$5 billion, according to Warwick Business School’s Stadler. “To some extent the cheating by Volkswagen seems more blatant, but the numbers are lower and there are no fatalities involved,” Stadler said. “This suggests that in the ‘heat of the moment’ the long-term effect on Volkswagen may be overstated. As Ferdinand Duedenhoffer, a professor at the University of Duisburg-Essen who has consulted top German car manufacturers, told the Westdeutsche Allgemeine Zeitung: “Either Winterkorn knew what was going on, and that’s bad for him, or he didn’t know what was going on, which would be even worse. In that case he didn’t have a grip on his business.” The chief executive now says resolving the U.S. problem is a “first priority” for him, because it’s a matter of trust in the company.

It should have become a priority much earlier — at least when European officials started talking about discrepancies between lab and road tests for diesel emissions. Its dominance in diesel cars — the result of a Winterkorn strategic decision — has turned into a problem that will set back the carmaker’s effort to remain competitive in North America.

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