Tumultuous Week for Volkswagen

On Friday, September 18th,  the Environmental Protection Agency (EPA)  made accusations that Volkswagen found a way to circumvent emissions requirements on its marquee line of diesel-powered automobiles in the U.S. The accusations stated Volkswagen, the world’s biggest automaker by sales thus far in 2015, installed “defeat device” software on approximately 482,000 of its diesel-powered, or TDI, vehicles. The “defeat device” is capable of detecting when the vehicle is being tested for emissions and then adjusting the reported emission level to fall within the EPA’s legal limits. Thus, allowing the vehicle to pass environmental tests. When not activated during normal driving, the engine could emit between 10-40 times the legal limit of certain pollutants.

Affected vehicles all utilized the company’s 2.0-liter turbodiesel four-cylinder engine. Models affected include 2009-2015 model year TDI Volkswagen Golf, Jetta, Beetle, and Audi A3 as well as the 2014-2015 Volkswagen Passat models. In response to the accusations, Volkswagen announced a stop-sale on all affected vehicles in the U.S. of model year 2015 and 2016 currently sitting on dealer lots. No recall has been enacted as of yet.

The scandal, which has been dubbed “dieselgate,” was uncovered by standard research conducted by West Virginia University’s Center for Alternative Fuels Engines and Emissions as a result of a request by The International Council on Clean Transportation (ICCT). The goal was to compare U.S. diesel car performance with those of their European counterparts. Researchers conducted testing on 3 different cars: Volkswagen Passat, Volkswagen Jetta, and BMW X5. Crucially, the researchers measured emissions via a method allowing them to drive the vehicles in the real-world for hundreds of miles each. EPA regulations test vehicles on a stationary test bed, or dyno. The results showed the BMW to be within the legal limit of pollutant emissions, but both Volkswagens consistently proved to be emitting significantly higher levels of pollutants.

Volkswagen has violated two parts of the Federal Clean Air Act and subject to a potential fine of $37,500 per vehicle totalling more than $18 billion. The EPA has announced a full investigation of all vehicles.

Under significant scrutiny for its misconduct, Volkswagen came forward on Tuesday and disclosed that as many as 11 million vehicles worldwide contain the software initially found in the cars in the U.S. In addition, the company announced it would set aside $7.27 billion to deal with the crisis. CEO Martin Winterkorn publicly apologized and stated Volkswagen had “betrayed that trust” millions of customers worldwide had placed in the automaker.  He also pledged, “Everything will be put on the table at this time, as quickly, thoroughly and transparently as possible.”

However, despite his reassurances, Mr. Winterkorn later announced his resignation as CEO of the company and stated he was “stunned” by the misconduct undertaken by employees. The executive committee of the supervisory board thanked Mr. Winterkorn for his tenure at the company and stated he had “no knowledge of manipulation of the emissions data.”

On Friday, Volkswagen Group, who sells passenger cars under the Volkswagen, Audi, Bentley, Lamborghini, Skoda, SEAT, Bugatti, and Porsche brands, confirmed earlier reports by announcing Porsche CEO Matthias Müller as CEO of the entire company. No other significant managerial moves have been made. Mr. Müller now faces the difficult task of having to manage the aftermath of the scandal. At this stage it is unclear what will happen moving forward with the cars. Most likely a recall will be utilized in an attempt to correct all issues but the company could also be forced to make payments to owners of the vehicles or even be forced to offer to buy them back. Furthermore, Volkswagen has been the largest advocate of diesel-powered cars as an alternative to hybrid and electric cars to promote better fuel efficiency. The market for diesel cars moving forward could be significantly impacted. In the U.S., diesel cars are already not very popular, with hardly any other manufacturers even offering consumers the option.

But, the largest impact moving forward will be on Volkswagen itself. The company could face significant fines and penalties and an investigation will take place in an effort to figure out specific individuals responsible for the software’s implementation into the vehicles or knowledge of the software. These individuals could face criminal prosecution. The company itself could also face lawsuits from the owners of the affected vehicles. Lastly, the impact on brand equity and perception of the Volkswagen name could be immeasurable. Switzerland is reportedly contemplating a ban on the sale of diesel cars sold by Volkswagen.

The EPA will also most likely face questioning and scrutiny over its ability to effectively monitor environmental initiatives undertaken by the government. The process of measuring air pollutants by cars will most likely become more stringent and the EPA may also test other diesels used by other manufacturers, even Volkswagen’s 3.0-liter diesel utilized in other cars. Tougher testing standards may be put into place by the EPA across all industries monitored as well, not just the automobile industry.

Lastly, Volkswagen is one of the largest employers in Germany, currently employing roughly 300,000 workers in the country. Significant financial penalties could force layoffs and also impact operations enough to present a tangible impact on the heavily industrial German economy.

The company’s stock price fell 19% on Monday and nearly 17% on Tuesday. The company’s stock price closed last Friday at $162.40 and closed this past Friday at $107.30.

This is just the beginning of what is sure to be a long-lasting landmark moment for emissions enforcement, Volkswagen, and the entire automobile industry.

By: Gerald Lizzo

Sources:

Wall Street Journal

Wall Street Journal

Wall Street Journal

Wall Street Journal

Wall Street Journal

Wall Street Journal

Wall Street Journal

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