Accused of cheating on emissions standards, Volkswagen saw a massive sell-off of its stock Monday, wiping out $16.9 billion of market value.
VW and its upscale Audi brand have been ordered to recall nearly 500,000 diesel cars sold in the U.S. – but that is likely to be only the start of the problems facing the German maker.
Within hours of the announcement on Friday from the Environmental Protection Agency, several high-profile law firms had already weighed in, threatening potentially costly class action lawsuits. That’s on top of multi-billion dollar fines Volkswagen could be subject to. The maker may also be targeted by the U.S. Justice Department for creating a so-called “defeat device” to get around strict diesel emissions standards.
"I personally am deeply sorry that we have broken the trust of our customers and the public," Volkswagen CEO Martin Winterkorn said in a statement issued over the weekend. “We at Volkswagen will do everything that must be done in order to re-establish the trust,” he said, adding that the maker will work openly with authorities investigating the alleged scam.
The company also said it would stop sales of the 4-cylinder diesel engines involved in the recall, including the VW Jetta, Beetle and Golf models sold during the 2009 to 2014 model-years, the Audi A3 sold during the same period, and the 2014-15 VW Passat.
VW has been offering consumers technology it claimed was clean, sporty and fuel-efficient. Diesel-equipped models like the Jetta and Golf have accounted for about 25% of the maker’s U.S. sales in recent years, and VW has been the leader in the reviving American diesel market.
But according to the EPA, a number of Volkswagen and Audi vehicles equipped with 4-cylinder diesel engines were programmed to detect when they were undergoing emissions tests. Otherwise, the software deactivated some of the onboard pollution control equipment. The process apparently helped improve performance but resulted in the vehicles emitting up to 40 times the allowable levels of additional particulates and smog-causing oxides of nitrogen.
The agency has ordered VW to fix the cars at its own expense but said car owners do not need to take any immediate action. 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. However, it said the cars posed a threat to public health.
The influential magazine Consumer Reports almost immediately suspended its "recommended" rating from the Jetta and Passat diesels until it can get a recall repair and re-test the cars.
Neither VW nor EPA officials have yet said what it will take to fix the problem, though it is likely to start with changes to the onboard engine control software. The cost is expected to run into the millions of dollars. But that could be the least of VW’s financial worries.
For one thing, the EPA could fine VW as much as $37,500 for each of the 482,000 recalled vehicles that violated clean air rules. That would work out to more than $18 billion. And the California Air Resources Board, or CARB, could levy its own penalties. Under U.S. law, California sets its own, tougher automotive emissions standards.
Volkswagen is likely to also find itself in the crosshairs of the U.S. Justice Department, which has been taking a more aggressive stance on white collar crime, and has come down hard on the auto industry in recent years. It has levied major fines and sent a number of Japanese executives to prison for price fixing in the auto parts industry. In March 2014 it levied a $1.2 billion fine against Toyota for mishandling safety problems and last week accepted a $900 million settlement involving General Motors’ deadly ignition switch issue.
Significantly, the EPA last Friday described the VW recall as an “opening salvo” into a broader investigation, and noted it is cooperating with both the Justice Dept. and the State of California.
What is unclear is whether that implies that other manufacturers may also have developed ways to cheat on emissions tests. Diesels had all but vanished from the U.S. market starting in the early 1990s, regaining momentum only recently, and primarily through European brands such as Volkswagen, Audi and Daimler AG’s Mercedes-Benz.
"We heard of the EPA's accusations against VW from the press. The issue described by the press does not apply to Mercedes-Benz Cars," Daimler said in an statement e-mailed to reports. It noted it was not aware of any investigation involving its own products.
Meanwhile, the impact of the cheating scandal could stretch beyond U.S. borders. Michael Schroeren, a spokesman for Germany’s environmental ministry, told reporters in Berlin that authorities there intend to “check whether comparable manipulation has happened in Germany or Europe."
While Volkswagen faces potentially serious problems with federal regulators and prosecutors, there could be a costly civil side to the cheating scandal. Several law firms that specialize in large class action cases have already announced plans to look into the problem. That includes Seattle-based Hagens Berman Sobol Shapiro LLP, which took on both Toyota and GM over their safety problems.
“The tinkering that Volkswagen will have to do by law to fix these vehicles will almost certainly degrade the performance to less than what Volkswagen claimed when it originally sold these cars,” said Steve Berman, a managing partner at Hagens Berman. He said that the use of a defeat device “blindsided” consumers who “went to great lengths” who wanted vehicles that were both clean and sporty.
Some VW customers were furious.
Zeeshan Shah, 39, of Fulton, Maryland, said that he bought a Volkswagen Diesel Passat 2015 model in July after he totaled his Jetta two years ago.
"The selling point," for the Diesel Passat was that the technology was so good, he said. Now, Shah said he plans to bring the car back to the local dealer to have it examined and doesn't want to buy another Volkswagen. "Once they cheat you on this issue, what other issues can they cheat you on?" he said. "You don't trust them."
San Francisco resident Marsha Riggs, who owns a 2009 Jetta SportWagen, said she was shocked. "I bought this car because I thought it was clean," she said. "And it's not clean." She had been happy with the car but now doubts she'd buy another Volkswagen. "They sort of compromised that trust," she said.
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