Volkswagen drives down road to nowhere

The astonishing revelation that the German car maker used software to fiddle emissions test results for several years has stunned the industry and business in general.

The German car maker has struggled to gain a foothold in the US, the world’s second-biggest car market. Erik S Lesser / EPA

Volkswagen’s admission that it cheated to make nearly half a million diesel cars appear cleaner-burning than they are leaves the car maker facing billions in fines, its executives risking criminal charges and its US expansion plans in peril.

VW admitted systematically cheating on US air pollution tests for years, the US environmental protection agency (EPA) announced at the weekend in citing violations that could add up to US$18 billion in fines. The company says it has also heard from the department for justice (DOJ), which the EPA said could pursue criminal prosecution.

Volkswagen is lowering group financial targets for this year after setting aside about €6.5bn (Dh26.67bn) in provisions this quarter to cover costs related to the scandal, it says.

The German car maker has struggled to gain a foothold in the world’s second-biggest car market with a strategy built in part on touting the efficiency of fun-to-drive “clean diesel” vehicles now shown to be anything but.

"It's a huge black eye for VW," says Matt DeLorenzo, a managing editor at Kelley Blue Book in California. Consumer Reports magazine reacted by suspending its "recommended" rating of two VW diesel models.

Diesel versions of the popular Beetle, Golf, Jetta and Passat comprise more than a quarter of the brand’s sales in the United States and are a vital part of the company’s strategy for meeting tougher US fuel economy standards going into effect in coming years. More than other car makers, VW has chosen to focus on diesel technology instead of electrics or hybrids.

“They were counting heavily on diesels to meet the fuel-economy numbers,” says Mr DeLorenzo. “This brings that whole strategy into question.”

Volkswagen admitted it sold 2009-2015 diesel Volkswagen and Audi cars with software that turns on full pollution controls only when the car is undergoing official emissions testing, the EPA says, calling the algorithm a “defeat device”. During normal driving, the cars pollute 10 times to 40 times the legal limits, the agency estimates.

The German car supplier Bosch says it delivered the components, so-called common jail injection systems, to Volkswagen cars.

“We produce the components after specification of Volkswagen,” Bosch says. “The responsibility for application and integration of the components lies with Volkswagen.”

The prime minister of Lower Saxony, Stephan Weil, whose state government holds a blocking 20 per cent stake in Europe’s largest vehicle manufacturer, says the accusations are “grave”.

“Any manipulation of emissions tests is completely unacceptable and cannot possibly be justified,” says Mr Weil, a Social Democrat. “It must obviously be in the interest of VW to conform with legal frameworks.”

As the premier of Lower Saxony, Mr Weil sits on Volkswagen’s supervisory board, which is scheduled to meet on Friday to decide on the contract renewal of the chief executive Martin Winterkorn. VW’s home base of Wolfsburg is also located in Lower Saxony. “The government will hold talks with Mr Winterkorn in the near future,” says Andreas Kuebler, a spokesman for Germany’s environment ministry. “We expect reliable information from the car makers” so German regulators “can check if comparable manipulations in the emissions control system also happened in Germany or Europe,” he says.

The EPA, working with the justice department, is likely to push for a stiff fine because there are clear violations of the law and harm to the environment, says Margo Oge, a former director of the agency’s office of transportation and air quality. VW’s competitors are spending more money on systems to comply with the law and help the environment.

“My hope is the agency will send a strong message to the rest of the industry,” Ms Oge says. “You want to make it clear that this isn’t acceptable.”

The closest parallel to the Volkswagen case was a group of lorry makers who used devices to suppress diesel-pollution controls to improve fuel economy, Ms Oge says. That case, settled 15 years ago, resulted in fines of more than $1bn, she adds.

The potential financial liability is unclear. The EPA could fine the company $37,500 per violation, says Cynthia Giles, the agency’s assistant administrator for enforcement. With 482,000 cars part of the case, the total could be more than $18bn. EPA allegations that car makers violated environmental rules often are settled for far less than the maximum possible fine.

VW says some 11 million diesel vehicles worldwide were fitted with the software involved.

Lawyers familiar with automotive law say the company could face criminal exposure if prosecutors agree with the EPA’s assertion about the defeat device. The Clean Air Act contains criminal provisions that apply to tampering with monitor devices, as well as making false statements to the EPA.

“What is so damning is that this was something actively pursued. This isn’t an oversight,” says the Bloomberg Intelligence car-industry analyst Kevin Tynan.

Someone at VW had to decide that cheating the system was a better use of time, money and resources than meeting the regulatory requirements, he says.

Germany, France, Switzerland, South Korea and Italy are among countries that say they will look further into the revelations.

Carl Tobias, a law professor at the University of Richmond in Virginia, agrees. “It sounds pretty damning from what EPA said. I think [VW executives] need to be worried about more than just the fines. It may be that DOJ will pursue some kind of criminal charge, and that could be very serious,” Mr Tobias says. The question will then be who in the corporate chain of command knew about the deception and when, he says.

Including diesel models from the company’s Audi and Porsche brands, Volkswagen accounts for 63 per cent of diesels sold in the US, he adds.

The reliability of car emissions data has also been questioned in Europe. Last year, Mercedes-Benz was accused of overstating fuel economy performance of its vehicles by 40 per cent compared with real-world results, according to a study by the Brussels lobby group Transport & Environment.

Volkswagen was sued at the weekend in a federal court in San Francisco in a consumer class-action case alleging that the defeat device has caused vehicles to lose value.

Consumers would not have bought the vehicles or paid as much as they did for them if they had known about the defect and stand to spend more on fuel when the cars are modified to comply with emissions standards, the complaint states.

Mr Tobias says it will be easier in some states than others to establish a class of consumers who can claim injury from Volkswagen’s actions. Some drivers will have to show they specifically relied on the company’s “clean diesel” promises, while elsewhere it will be enough that VW did not live up to its representations.

But given the nature of the allegations, just bringing the lawsuit should provide suing customers with “leverage enough to exact some reasonable settlement,” Mr Tobias says.

While Volkswagen is a global behemoth with the longstanding goal of surpassing Toyota as the world’s largest and most profitable car maker by 2018, it continues to struggle in the US, even after opening a $1bn factory in Tennessee. VW brand’s US sales fell 2.8 per cent this year through August, while industry-wide sales rose 3.8 per cent.

Now the company’s targets are at risk, says Mr DeLorenzo. It has always been expensive and difficult to tune diesel engines in a way that meets pollution regulations, he says. VW may have found it easier to write software that passed EPA tests than compromise the way its diesels drive, he adds.

The EPA and the California Air Resources Board say their investigations are continuing.

“We’re not discussing what the California fines might be at this point,” says David Clegern, a spokesman for the California Air Resources Board.

“Our priority is to get these vehicles into compliance and proceed from there. A recall is really the only way to do that.”

Volkswagen was deliberately creating more pollution for the people they were trying to sell clean diesels to, says Dan Becker, the director of the Safe Climate Campaign, a Washington environmental group.

“This is one of the companies that’s been trying to get Americans to buy diesels,” Mr Becker says. “They’ve banked their future in a significant way on diesel. They assumed the EPA would never catch them at it, and that was a huge risk.”

Consumers have not yet been ordered to return to their dealers for a recall, and it is safe to keep driving the cars, says Janet McCabe, the acting assistant administrator of the office of air and radiation.

Last year Ford was forced to lower mileage estimates and compensate more than 200,000 customers. The Michigan company sent out payments ranging from $200 to $1,050. In 2012, an investigation led to Hyundai and Kia relabelling some of their top-selling US models.

Mr Tobias says for VW, the situation is a good deal more serious. “There’s a lot that’s going to happen in the days ahead,” he adds.

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