What Volkswagen means to the German economy

22 Sep 2015 | Author: | No comments yet »

VW CEO says he’s ‘endlessly sorry’ for tarnishing brand.

The Volkswagen and Audi diesel emissions scandal which has thrown the global car industry into turmoil has spread to Europe and threatens to embroil more models and rival carmakers. The German carmaker’s market capitalization shrank 16.6 billion euros, or $18.6 billion, in just over a day, after it was caught falsifying emissions on certain cars sold in the United States.Volkswagen AG’s emissions scandal crisis escalated Tuesday as the company issued a profit warning, set aside billions to cover the fallout and lost billions more in market value.Volkswagen chief Martin Winterkorn has offered his “deepest apologies” for the pollution-cheating scandal engulfing the auto giant and threatening to tarnish Germany’s industrial reputation. “I am infinitely sorry that we have disappointed people’s trust.

The Volkswagen emissions-rigging scandal has shifted into high gear, as company officials have admitted that up to 11 million diesel vehicles worldwide included software intended to evade air-quality testing. The chief executive of Volkswagen AG, the parent company of Porsche, Seat, Skoda, Bentley, Lamborghini and Bugatti as well as VW and Audi, was fighting for his career, after it emerged the firm had fitted 11m vehicles worldwide with a “defeat device” designed to cheat emissions tests. The Tagesspiegel newspaper, citing unidentified sources on Volkswagen’s supervisory board, said the board would decide on Friday to replace the 68-year-old with Matthias Mueller, the head of the automaker’s Porsche sports car business.

I offer my deepest apologies to our customers, the authorities and to the public at large for our misconduct,” the 68-year-old executive said in a video statement after VW admitted that 11 million of its diesel cars worldwide had been fitted with devices that could skew emissions data. And, according to Bloomberg, the US Department of Justice has opened a criminal probe, which could result in charges against the company under criminal provisions of the US Clean Air Act or more general statutes against fraud. Millions of people all over the world trust our brands, our cars and our technologies.” The company, one of the heavyweights of the German blue-chip DAX index, has seen its market capitalisation slashed by nearly a third in two days and said the costs of the scandal will cause it to miss its profit targets for this year. “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,” Mr Horn said at an event in New York, according to video posted by CNBC. Weil, a supervisory board member representing Volkswagen’s second-largest shareholder, earlier this year helped Winterkorn to see off a challenge to his leadership by long-time chairman Ferdinand Piech and earlier this month backed the CEO’s contract extension.

This came after the US Environmental Protection Agency (EPA), which has recalled nearly 500,000 cars in US, said it was considering expanding its review of the car giant to cover a range of luxury models manufactured by VW, including the high-end Porsche Cayenne SUV and the Audi Q5, A6, A7 and A8 models. VW shares, which dived 18.6 per cent on Monday, plunged by another 20 per cent on the Frankfurt stock exchange as the new revelations, including a warning that it will have to lower its profit outlook, sent investors fleeing. By the afternoon of 22 September, the scandal, which originated in California on 18 September, had spread across Europe and in Britain the Department for Transport called for an EU-wide investigation. “It’s vital that the public has confidence in vehicle emissions tests and I am calling for the European Commission to investigate this issue as a matter of urgency,” Transport Secretary Patrick McLoughlin said. No deaths can be directly pinpointed to Volkswagen blocking accurate checks on emissions – though the software installed in some vehicles hid levels of harmful nitrogen oxide up to 40 times above permitted levels.

The stock tumbled another 20 percent to a four-year low on Tuesday after some countries in Europe and Asia said they would launch investigations themselves. The world’s largest car makers is now facing a major criminal probe by US Justice Department and could face up to £11.7bn in fines under an EPA probe set up last week. It also 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 EPA that VW rigged nearly half a million cars to defeat U.S. smog tests, exposing the carmaker to potential fines of $37,500 per vehicle, and anyone found personally responsible to $3,750 per violation. After blaming unrelated issues for more than a year, the company finally told U.S. regulators 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. In its citation, the agency said that the company had systematically placed the devices in four-cylinder Audi and Volkswagen diesel models since 2009. The E.P.A. could be kinder than that, but Volkswagen, run by Martin Winterkorn, cheated government tests for six years, dissembled when confronted and meanwhile lauded Volkswagen’s status as an environmentally sustainable carmaker.

The crisis has sent shockwaves through Germany, with Chancellor Angela Merkel calling for “complete transparency” from a company long seen as a beacon of the country’s engineering excellence, and newspapers putting the blame squarely on Winterkorn. In a statement issued by the EPA, Cynthia Giles, the assistant administrator at the EPT’s Office of Enforcement and Compliance Assurance, called the intentional circumvention of federal emissions tests “illegal” and “a threat to public health.” The company immediately responded to the allegations on Friday, stating that it was “committed to fixing the issue as soon as possible,” and adding that Volkswagen was fully cooperating with the investigation. That, though, doesn’t factor in other costs, including recalls, refits, vehicle buybacks and class-action lawsuits – or the possibility that Volkswagen’s emissions shenanigans were more pervasive. 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.

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. While diesel vehicles are estimated to account for less than 1 percent of US auto sales in 2014, the Union of Concerned Scientists estimates that they could be emitting between 10 to 25 percent of all nitrogen oxide emissions from passenger vehicles. 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.

Volkswagen has more than 600,000 employees “building the best vehicles for our customers,” he added. “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.” “Brands are all about trust and it takes years and years to develop. Defeat device cases, he explained, got a lot of bad press in the 1970s and 1980s. “Auto manufacturers know better, because the defeat device concept in auto manufacturing is well known — every one knows you’re not allowed to do it and that if you do, you’re subject to recalls and fines.” The use of defeat devices, he explained, is intended to boost car performance. 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. 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. With such a device installed, the energy and fuel that normally would go to running the pollution control devices would instead be able to give the car added horsepower and acceleration, which consumers like.

Winterkorn 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 Lamborghinis. 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. Some scientists, however, warn that this violation could have the effect of giving diesel a bad name, despite the fact that clean diesel technologies have been successfully developed. “Those cars passed certification, and they can function with those limits,” said Young. “What we want is for them to function as well in the real world as they do on the test bench.” In 2007, the EPA reduced the allowable amount of nitrous oxide emissions as part of the so-called Tier 2 Program aimed at getting emissions from diesel vehicles on par with those burning gasoline. 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. Workers in Wolfsburg, where Volkswagen employs over 50,000 people, were dismayed by the damage to the company’s image. “If Winterkorn knew of the manipulation, then he must go,” said one staffer who works at the plant’s human resources department.

But shares in rivals including Peugeot, Renault and Fiat Chrysler fell on Tuesday 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. Christian Stadler, professor of strategic management at the Warwick Business School, expressed surprise at the scale of this scandal, but said companies rarely pay maximum fines under U.S. regulations.

The EPA said on Monday it would widen its investigation to other automakers, and French Finance Minister Michel Sapin said on Tuesday an EU-wide inquiry was needed too. VW conceded that the costs it is booking in the third quarter are “subject to revaluation” in light of its investigations and that 2015 earnings targets will be adjusted.

Germany’s transport ministry said it would send an investigative commission to study whether cars built at Volkswagen’s headquarters complied with German and European emissions guidelines.

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