GERMANY: VW allocates EUR6.5bn for EPA scandal costs

By Graeme Roberts | 22 September 2015

Jetta (latest model shown) is the most common of the diesel models VW will recall in the US

Jetta (latest model shown) is the most common of the diesel models VW will recall in the US

Volkswagen, clearly in damage control mode, has said it "is working at full speed to clarify irregularities concerning a particular software used in diesel engines" and "to cover the necessary service measures and other efforts to win back the trust of our customers", plans to book a charge "of some EUR6.5bn" in the third quarter of this financial year.

The automaker also insisted current diesel vehicles sold in European Union comply fully with local emission laws.

"New vehicles from the Volkswagen Group with EU6 diesel engines currently available in the European Union comply with legal requirements and environmental standards. The software in question does not affect handling, consumption or emissions. This gives clarity to customers and dealers," the automaker said in a statement.

It added: "Further internal investigations conducted to date have established that the relevant engine management software is also installed in other Volkswagen Group vehicles with diesel engines. For the majority of these engines the software does not have any effect.

"Discrepancies relate to vehicles with Type EA189 engines, involving some 11m vehicles worldwide. A noticeable deviation between bench test results and actual road use was established solely for this type of engine. Volkswagen is working intensely to eliminate these deviations through technical measures. The company is therefore in contact with the relevant authorities and the German Federal Motor Transport Authority (KBA - Kraftfahrtbundesamt)."

The statement also noted the initial EUR6.5bn charge against third quarter profits "due to the ongoing investigations the amounts estimated may be subject to revaluation. Earnings targets for the group for 2015 will be adjusted accordingly".

The company added: "Volkswagen does not tolerate any kind of violation of laws whatsoever. It is and remains the top priority of the board of management to win back lost trust and to avert damage to our customers. The group will inform the public on the further progress of the investigations constantly and transparently."

Despite the scandal breaking earlier in the day, VW's US unit last night (21 September) launched a substantially revamped version of its US-made Passat in Brooklyn, New York. A US source told just-auto the event was 'too big and too pricey' to cancel.

US CEO, Michael Horn, commented briefly on the diesel issue before the unveiling: "Our company was dishonest, with EPA, the California Air Resources Board, and with [the public]," he said. "In my German words, we totally screwed up. We must fix those cars [to] prevent this from ever happening again and make things right," he continued, "with the government, the public, customers, employees, and our dealers. This [dishonesty] is completely inconsistent with our core values, which include… responsibility," he added. "It goes totally against what we believe is right."

Horn did not take questions after the event.

Earlier, the Reuters news agency, noting VW shares had plunged by nearly 20% on Monday after the carmaker admitted it had rigged emissions tests of diesel vehicles in the US, and that US authorities had said they would widen the probe to other automakers, reported that German officials, alarmed at the potential damage the scandal could inflict on its car industry, had urged Volkswagen to fully clear up the matter and said it would investigate whether emissions data had also been falsified in Europe [which VW appears to deny in its statement].

"You will understand that we are worried that the justifiably excellent reputation of the German car industry and in particular that of Volkswagen suffers," German economy minister Sigmar Gabriel said.

According to Reuters, the US White House said it was "quite concerned" about the reports of VW's conduct while the US Department of Justice reportedly started a criminal probe of the effort to falsify the emissions tests. Meanwhile, EPA and California officials said they would test diesel vehicles from other manufacturers for similar violations. As well as Volkswagen, General Motors and Fiat Chrysler Automobiles sell diesel cars and SUVs in the United States.

EPA spokeswoman Liz Purchia told Reuters her agency would be "working closely" with the Department of Justice on the probe but she would not comment about the possibility of a criminal probe. The alleged attempt to fool the emissions tests also attracted congressional notice, with a House of Representatives panel planning a hearing in the coming weeks [similar panels grilled top GM execs over the ignition switch debacle and Toyota over 'unintended acceleration' - ed].

Shares in VW on Monday fell 18.6% to close at EUR132.20, wiping about EUR14bn (US$15.6bn) off its market capitalisation.

Reuters also cited Germany's transport ministry as saying VE CEO Martin Winterkorn had promised to support testing by German authorities of the company's diesel cars.

Analysts told the news agency it was unclear what the ultimate cost could be for VW, which reported 2014 net income of EUR10.84bn (US$12.15b), according to Thomson Reuters data.

Rival German automakers Daimler and BMW insisted the accusations made by US authorities against VW did not apply to them.

Throughout Monday and into Tuesday, more and more information has entered the public domain. Reuters, citing a letter from CARB to VW dated 18 September, noted the evidence of increased toxic emissions at VW first emerged in 2014, prompting the California Air Resources Board (CARB) to start investigating the automaker.

Volkswagen initially denied it was trying to 'game' the inspections, attributing the higher emissions readings to "various technical issues and unexpected in-use conditions,” the news agency quoted the EPA as saying. The stonewalling continued until the agency threatened to withhold certification for the carmaker’s 2016 models, the EPA said.

“Only then did VW admit it had designed and installed a defeat device” that purposely lowered emissions while a vehicle was being inspected, the agency said. During regular driving, emissions would return to as much as 40 times the level of pollutants allowed under clean air rules.

Any decision on emissions control mechanisms would have been taken at the group's Wolfsburg headquarters and not by regional divisions, a source close to Volkswagen told Reuters. Robert Bosch supplies diesel emissions control devices to VW, another news agency industry source said. Asked whether Bosch had supplied the electronic module central to the EPA test findings, a company spokesman told Reuters: "We supply components for exhaust after-treatment to several manufacturers. The integration is the responsibility of the manufacturer."

The news agency noted the way carmakers test vehicles has been coming under growing scrutiny from regulators worldwide amid complaints from environmental groups that they use loopholes in the rules to exaggerate fuel-saving and emissions results. In 2013, an Indian government-named panel accused GM of flouting testing regulations by fitting engines with low emissions in vehicles sent for inspection. That led, among other things, to a recall of 114,000 units of the locally made Tavera SUV.

And in 2014, Hyundai Motor Co and affiliate Kia Motors Corp paid $350m in penalties to the United States for overstating fuel economy ratings.

The European Commission told Reuters it was in contact with VW and US regulators but it was too early to say whether VW vehicles in Europe were also affected.

US-based Green Car Reports said the cars covered by the expected US recall were sold by Volkswagen and Audi between 2009 and 2015, and powered by a two-litre turbocharged diesel engine which earned them the designation 'TDI' following the model name. The highest-volume model is the Jetta TDI, but VW also offered TDI versions of the Passat, Golf, Jetta SportWagen, and Beetle. The recall will also apply to the Audi A3 TDI, in two generations: both the one sold from 2009 through 2013, and the new version introduced for 2015.

Across those models there are two engines in three versions. The most common is the 140-hp EA188 two-litre turbodiesel I4 introduced for 2009. That same engine in the Passat TDI was fitted with selective catalytic reduction (SCR), also known as urea aftertreatment, starting in 2012. A new generation of two-litre diesel engine, known as EA288, was fitted to various VW vehicles (the Golf TDI, for instance) starting with the 2015 model year.