Volkswagen sets aside €6.5b to deal with emissions scandal

The crisis enveloping Volkswagen AG, the world's top-selling carmaker, escalated Tuesday as the company issued a profit warning following a stunning admission that some 11 million of its diesel vehicles worldwide were fitted with software at the centre of a United States emissions scandal.

The German company said it was setting aside around €6.5 billion (US$7.3 billion) to cover the fallout from the scandal that has tarnished VW's reputation, raised questions over the future of CEO Martin Winterkorn and battered its share price.

German Transport Minister Alexander Dobrindt said he was setting up a commission to determine whether the VW diesel vehicles were built and examined in a way that complied with German and European rules. The governments of France and South Korea also said they would investigate the Volkswagen vehicles.

The reputational damage to Volkswagen is implicit in the market's response. Volkswagen's share price slid a further 16.2 per cent Tuesday to a near four-year low of €112. The fall comes on top of Monday's 17 per cent decline.

The trigger to the company's market woes was last Friday's revelation from the US Environmental Protection Agency that VW rigged nearly half a million cars to defeat US smog tests.

The company then admitted that it intentionally installed software programmed to switch engines to a cleaner mode during official emissions testing. The software then switches off again, enabling cars to drive more powerfully on the road while emitting as much as 40 times the legal pollution limit.

"In my German words: we have totally screwed up," the head of Volkswagen's US division, Michael Horn, told an audience in New York on Monday.

In its statement Tuesday, Volkswagen gave more details, admitting that there were "discrepancies" related to vehicles with Type EA 189 engines and involving some 11 million vehicles worldwide. The number of vehicles involved is more than the 10 million or so cars Volkswagen sold in 2014.

Volkswagen said it is "working intensely" to solve the problem and that it "does not tolerate any kind of violation of laws whatsoever".

To cover the necessary service measures and what Volkswagen says are "other efforts to win back the trust" of customers, the company said it is setting aside some €6.5 billion in the current quarter. There was no mention of fines or penalties in the company's statement. The EPA has indicated that it could, in theory, fine VW up to US$18 billion.

Christian Stadler, professor of strategic management at the Warwick Business School, said he was surprised at the scale of the VW's potential infringement but noted that companies that transgressed US regulations rarely pay the full fine that could be imposed.

"I don't think this is a life-threatening event, but it's clear it's going to be very expensive," he said.

 

Earnings to suffer

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. It didn't specify by how much.

The company appears to have conducted a fairly thorough review so far, even venturing that the software that's caused it so many problems has also been installed in other vehicles with diesel engines. However, for the majority of these engines, it said the software "does not have any effect".

It also said new vehicles with EU 6 diesel engines currently on sale in the European Union comply with legal requirements and environmental standards.

The EU has yet to say whether it will be conducting its own investigation, although French Finance Minister Michel Sapin indicated a preference for one.

"It seems necessary to do it also for French carmakers, to reassure both sides," Sapin told Europe-1 radio. "But I have no particular reason to think that French manufacturers behaved themselves like Volkswagen."

The German government is to also conduct new emissions tests in VW's diesel cars.

"I hope that the facts will be put on the table as quickly as possible," German Chancellor Angela Merkel said in Berlin.

Before the scandal, Winterkorn, CEO since 2007, was hoping to have his stewardship of the company extended at a board meeting Friday. Earlier this month, Volkswagen said it planned to give Winterkorn a two-year contract extension which would keep him in charge through the end of 2018.

Even before Tuesday's statement, a member of Volkswagen's supervisory board suggested that heads will roll in the wake of the scandal. Yet, speaking on Germany's Deutschlandfunk radio, Olaf Lies cautioned against "overhasty calls for resignations."

Lies, who is also the economy minister of the German state of Lower Saxony, which holds a 20 per cent stake in Volkswagen, said he was sure there would be "personal consequences" once the investigation is complete.