Expanded Coverage: VW Emissions Scandal Latest

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Below is the latest on the VW emissions scandal.  If you missed the Car Pro Show Saturday, September 26, in hour one, Jerry and Kevin had Alan Brown on the air; he is the VW National Dealer Council Chairman.  You can catch all three hours of the podcast by clicking on Car Pro Show Podcast.

Recall Coming Quickly/Website Set Up:

Volkswagen Group plans to recall up to 11 million vehicles globally as it tries to address the scandal over its admission that it cheated U.S. diesel emissions tests.

New CEO Matthias Mueller said the automaker had drawn up a “comprehensive” refit plan to submit to regulators aimed at ensuring its diesel models complied with emissions standards.

VW will ask customers “in the next few days” to have diesel models equipped with manipulated software refitted and brief authorities on technical fixes in October, Mueller told a closed-door gathering of about 1,000 top managers at the company’s Wolfsburg headquarters in Germany on Monday.

VW did not say how the planned refit would make cars with the “cheat” software comply with regulations, or how this might affect vehicles’ fuel efficiency, which is an important consideration for customers.

The German government has set an Oct. 7 deadline for VW to say how it will bring some 2.8 million diesels in its home market up to standard, threatening to pull the cars off the road if the carmaker fails to do so.

To inform customers, Volkswagen is looking into setting up websites in various countries so drivers can check on actions locally. The company has already set up a site in the U.S., where the scandal started.  That website is http://www.vwdieselinfo.com.

New VW CEO Faces Many Challenges:

Volkswagen knows it will take much more than just new leadership and a corporate overhaul to clear the air after it was caught cheating in U.S. diesel emissions tests.

Beyond the measures announced by the automaker last Friday, VW executives, customers, investors and workers alike are struggling to divine what lies ahead.

New CEO Matthias Mueller, 62, faces a host of problems that had already been looming before the diesel scandal broke and may now be worsened by its repercussions. The 62-year-old VW Group veteran until now was in charge of the automaker’s highly profitable Porsche sports car unit.

Not least among these is falling profitability at the VW brand, but the immediate priority will be to clean up the mess in the United States, whose potential impact on the company has been compared to the 2010 BP oil spill.

First may come a sustained show of contrition in a U.S. advertising campaign, said one VW manager, who asked not to be identified. “Humility will be the name of the game,” he said.

Following the crisis-management path taken by General Motors and News Corp., VW has tapped a U.S. law firm to lead a thorough investigation.  It promises to be a long and rough ride.

VW faces dozens of public and private lawsuits, government investigations, compensation and recall expenses, the combined cost of which could exceed the $7.28 billion it has put aside.

The company’s market value has plunged by $23.75 billion, or 30 percent, in the week since U.S. authorities revealed that it had used a “defeat device” to mask illegal levels of nitrogen oxide pollution from diesel engines.

Dealing with the fallout in the United States must override all other considerations, said a European fund manager who is among Volkswagen’s 20 biggest shareholders.

“Then we need to talk about strategic direction,” the fund manager said, adding that VW could review its commitment to diesel because of a likely consumer and regulatory backlash. “This scandal has given them an opportunity to consider where they should go with their portfolio of models.”

Mueller should go further and abandon U.S. diesel vehicles altogether, said Bernstein analyst Max Warburton, recommending that the company funnel cash into plug-in hybrids and other low-emissions technology instead.

“VW needs to think big and bold,” he said.

Another big challenge for Mueller will be navigating a sharp downturn in China, where VW’s bumper earnings have until recently more than offset its underperformance in Europe.

Many insiders are calling for a change of corporate culture. VW’s centralization under Winterkorn and Ferdinand Piech — ousted as chairman in April — was ill-suited to a 12-brand empire with 119 plants in 31 countries.

The “climate of fear” may have been a factor in the test rigging, said one company official, just as it was two years earlier when Chinese customer complaints about defective gearboxes were suppressed for months.

“We need to create an atmosphere in which problems can be communicated openly to superiors rather than concealed,” labor chief Berndt Osterloh told staff. 

The emissions trickery and its consequences are also spreading beyond North America. Germany’s transport ministry said VW had also manipulated tests in Europe, with 2.8 million vehicles affected in Germany.

VW’s humiliation could weaken its European prices, further eroding the core brand’s narrow margins and requiring still bigger cuts from unions.

“The U.S. disclosures may impact negatively on VW’s ability to maintain its global premium pricing power,” Morgan Stanley analyst Harald Hendrikse said in a note this week.

To limit the damage, dealers are already urging VW to improve its communication with baffled customers. Sales staff said they were “getting a lot of phone calls” from clients but silence from Wolfsburg headquarters.

One dealer in Cologne said he was eager to recall some 2,000 vehicles for the illegal engine software to be neutralized, generating 1.5 million euros in servicing revenue as well as opportunities to repair customer relationships — or even sell some more cars.

“It’s a tough market and we don’t mind the extra business,” he said, “as terrible as it is for the brand.”

VW Resale Value:

Massive recalls of Toyota and General Motors vehicles since 2009 produced no long-term damage to those companies’ used-vehicle values, but it’s too early to tell how Volkswagen’s diesel scandal will affect its vehicles’ prices at auction, said Anil Goyal, vice president of automotive valuation and analytics at Black Book.

“Right now we have more questions than answers,” Goyal told Automotive News last week at the National Auto Auction Association convention here. “Is it going to be a recall? Is it going to be a fine? Is it going to be reimbursement to the consumer? Is it going to be trade in your vehicle and we’ll have another one for you? It could end up in a number of ways. We don’t know yet what it’s going to be.”

Goyal said only “a couple” of Volkswagen vehicles with diesel engines were offered for sale at auction early last week and they were no-sales, meaning bidding on the vehicles failed to reach the minimum price set by the seller.

“I suspect most dealers are holding back” from buying diesel-powered VWs at auction until they know more, he said.

Manheim North America President Janet Barnard said her auction company’s policy in the case of vehicles with open recalls, or in the VW case, is “it falls to the seller ultimately to identify those cars, and we pass along” to potential buyers “the information we have.”

The Lawsuits Begin:

Independent used car dealerships sued Volkswagen AG in California over losses they say they will incur following revelations that the company fitted some diesel models with software to cheat on U.S. vehicle emissions tests.

The proposed class action was filed in California federal court on behalf of independent car dealers in the state and seeks damages likely to exceed $1 million, according to the lawyer who filed the case, Robert Starr.

Volkswagen has been hit with dozens of lawsuits, primarily filed on behalf of owners of affected cars, since the EPA disclosed that some of its diesel cars used software to deceive regulators measuring toxic emissions.

Franchise dealerships for Volkswagen and its Audi brand may be able to seek some compensation for their losses, while independent dealerships will likely be out of luck, Starr said.

A letter sent by Volkswagen to its U.S. dealers said that a “mandatory stop-sale order” was in effect for 2009-15 models with a two-liter diesel engine, and that dealers would be reimbursed for their expenses until repair instructions are released.

Independent dealers were not offered a similar deal, Starr said. By selling vehicles affected by the scandal, the dealers may be put themselves at risk of lawsuits from irate customers, he said.

If the independent dealers cannot sell the cars, the dealerships will shoulder the losses, he added.

Californians alone own 14 percent of affected U.S. vehicles compared with 7 percent in Texas and 5.7 percent in Florida, according to Kelley Blue Book.

VW Is Not Alone In Emission Issues:

Volkswagen AG’s software designed to hoodwink environmental regulators was hardly the first instance of automakers getting busted for running afoul of U.S. emissions rules using so-called defeat devices.

It wasn’t even Volkswagen’s first. In fact, VW is a repeat offender.

General Motors, Ford Motor Co. and American Honda Motor Co. also have had to pay hefty fines and take other steps to resolve their use of defeat devices in the past. Some of the cases stemmed from differing regulatory interpretations or from loopholes that have since been closed.

VW’s deliberate move to game U.S. tests for diesel emissions will likely result in stiff penalties, but the past settlements offer clues about the kinds of tools the EPA and U.S. Justice Department have in their arsenal when handling such cases.

In 1974, Volkswagen agreed to pay $120,000 to settle a complaint filed by the EPA that the company failed to properly disclose the existence of two devices that modified emissions controls on about 25,000 1973 model VWs, according to a Wall Street Journal report and an EPA press release about the case. The settlement included no admission of wrongdoing by VW, the Journal reported. The devices consisted of two temperature-sensing switches that deactivated part of the emissions control systems, the EPA said.

The EPA said at the time that VW failed to disclose the existence of the devices on its 1973 emissions certification applications. VW did disclose them on a 1974 application, which the EPA rejected, and VW agreed to remove the devices.

In 1995, GM agreed to pay nearly $45 million to settle government charges that it put illegal devices in some 470,000 Cadillacs that defeated emissions controls, resulting in the cars spewing 100,000 tons of excess carbon monoxide pollution, the U.S. Justice Department said at the time. The total penalty included an $11 million fine, $8.75 million to be spent on projects to offset the excess emissions and $25 million to recall and retrofit the vehicles — the first court-ordered vehicle recall for environmental issues.

GM had installed a computer chip on the Cadillacs, including the 1991-95 DeVille and Seville, that made the cars’ 4.9-liter engine operate at a higher idle speed by burning more fuel when drivers used the climate control system. The move helped solve a stalling problem the engines faced when drivers used the climate control, but it increased carbon monoxide emissions.

At the time, the EPA’s test procedures didn’t measure emissions levels with climate control systems turned on, so the chip’s impact on emissions wasn’t measured. GM cooperated with the EPA’s investigation and settled out of court. The EPA considered the chip to be a defeat device and announced the deal without GM’s participation, a move that blindsided the company, GM officials told Automotive News at the time.

The EPA’s test procedures have since been revised to measure emissions with air conditioning systems turned on. Test changes also could stem from VW’s current debacle. Chris Grundler, head of the EPA’s office that oversees auto emissions, says the agency is reviewing its testing procedures and working on a process to screen for defeat devices similar to the software that VW used to make its cars run cleaner during emissions tests.

In 1998, American Honda and Ford both agreed to settlements worth millions of dollars to resolve defeat-device charges from the EPA.

The EPA alleged at the time that Honda had disabled part of the onboard diagnostic computer that detected engine misfires on 1.6 million Accords, Civics, Preludes, Odysseys and Acuras from the 1996 and 1997 model years, as well as the 1995 Civic, and failed to report it to the EPA when applying for emissions certification.

The misfire monitor checks emissions performance while a vehicle is driven, and disabling it meant the dashboard warning light would not illuminate when emissions controls were malfunctioning. When that happens, drivers would be unaware that their vehicles needed service, resulting in possible excess emissions, the EPA said then.

Honda agreed to settle the charges by extending the emissions warranty for the cars to 14 years or 150,000 miles, plus other steps, resulting in at least $250 million in costs, the EPA said. Honda also agreed to pay $12.6 million in fines and $4.5 million on pollution reducing projects. The EPA commended Honda for its cooperation during the agency’s investigation.

Ford spent $7.8 million after the EPA alleged the automaker installed a device to defeat the emissions control system on 60,000 1997 Econoline vans. According to the EPA, Ford had installed software in the vans that boosted fuel economy but also increased nitrogen oxide emissions above levels permitted by the Clean Air Act.

Ford agreed to remove the software through service campaigns and a recall, a $1.3 million cost. It also agreed to pay a $2.5 million fine, purchase nitrogen oxide credits worth an estimated $2.5 million and spend $1.5 million on pollution reduction projects.

Advertising Stops For Now:

Volkswagen of America is further reducing its media presence in the wake of its diesel emissions scandal by putting national advertising on hold for at least the next two weeks.

In a memo to dealers obtained by Automotive News, marketing chief Vinay Shahani said the company would “temporarily pause a majority” of its national, “tier-one,” media through October 11, effective immediately.

VW pulled all marketing related to its diesel-powered cars earlier this week as the scandal mushroomed. This latest step affects other campaigns, including the ad blitz with spots starring actors Adam Scott and Michael Peña for VW’s App Connect infotainment platform debuting on its 2016 model year lineup.

VW announced the campaign Sept. 17, a day before the EPA and California emissions regulators revealed that some 482,000 VW diesel vehicles contained software designed to cheat on emissions tests.

“Ongoing press coverage and negative consumer social sentiment in the marketplace has effectively drowned out any positive messaging from our national App Connect campaign,” said Shahani, who is vice president of marketing, in the memo.

While TV ads will be pulled, the brand will maintain some of is branding properties, including its sponsorship of post-game coverage on NBC’s Sunday Night Football broadcasts to avoid forfeiting its presence on the highly rated live sports platform, according to the memo. VW will also maintain digital ads targeting in-market shoppers, Shahani said in the memo.

VW pulled diesel marketing at the tier-two, or regional level, replacing them with an “alternate message,” earlier this week, according to the memo. The brand is evaluating its regional campaign strategy for the rest of the year and plans to recommend a new plan to dealers soon, Shahani said. The company is also working to remove new and certified-used diesel models from VW dealer inventory listings online, both on dealer websites and third-party sites like AutoTrader.com and ebay.com.

A VW spokeswoman confirmed the details of the dealer memos, noting that the advertising pullback was done to avoid confusing customers while the diesel stop-sale was in effect.

Feds React:

U.S. environmental regulators will add more spot-checks to cars already on the road following Volkswagen AG’s admission that it fitted as many as 11 million diesel cars worldwide with software that rigged pollution tests.

“We are upping our game,” said Christopher Grundler, director of the Environmental Protection Agency’s Office of Transportation and Air Quality.

The U.S. Justice Department is conducting a criminal investigation of Volkswagen, and the company said it’s cooperating with regulators. 

The EPA is sending a letter to automakers informing them that emissions monitoring is being enhanced. Grundler wouldn’t say what changes the agency will make to the testing.

“They don’t need to know,” Grundler, speaking to reporters on a conference call, said of the automakers. “They need to know that we will be keeping their cars a little bit longer.”

Grundler earlier told the Associated Press that the agency may add on-road testing. It already has on-road testing ability but it’s only been used to check carmaker gas mileage estimates and diesel trucks, two situations in which they had uncovered emissions cheating in the past.

The current VW case resembles a 1998 case involving seven manufacturers of heavy-duty truck engines: Caterpillar Inc., Cummins Inc., Detroit Diesel Corp., Mack Trucks Inc., Navistar International Transportation Corp., Renault Vehicules Industriels, S.A. and Volvo Truck Corp.

The companies agreed to spend more than $1 billion, including $83.4 million in penalties, to settle the case — the biggest civil fine to that point for violating an environmental law.

29 Attorneys General Are Investigating:

At least 29 U.S. state attorneys general have initiated a multi-state investigation of Volkswagen over its representations to consumers over their diesel vehicles, according to a spokeswoman for Illinois Attorney General Lisa Madigan.

As part of the probe, the group will send subpoenas to Volkswagen, the spokeswoman said.

News of the subpoena and state attorneys general participating in the group so far comes after New York Attorney General Eric Schneiderman said a group was forming to probe the carmaker over the U.S. emissions test scandal.

Audi Information:

Audi has confirmed that Volkswagen’s emissions-cheating software has been installed in approximately 2.1 million of its luxury vehicles worldwide.

The vast majority were sold in Europe, including 577,000 units in Germany, a spokesperson told Reuters. Affected models include select diesel-powered variants of the A1, A3, A4, A5, A6, TT, Q3 and Q5.

The numbers are comparatively minimal in the US market, where the company sold just 13,000 A3 sedans outfitted with the offending 2.0-liter TDI turbodiesel engine.

Reports surrounding Volkswagen Group’s emissions crisis have mostly focused on the US market, where the company faces potential fines of up to $18 billion, numerous civil lawsuits, several criminal investigations and a tarnished brand. With 11 million cars affected globally, however, the damage is beginning to spread.

Less than a week after VW ousted CEO Martin Winterkorn, the executive now faces a criminal investigation in home Germany, according to The Wall Street Journal. He recently claimed to be “unaware of any wrongdoing on my part.”

The government inquiry will attempt to determine if he or any other executives can be charged for their roles in the alleged fraud.

“We are investigating Winterkorn and other responsible people,” a spokesperson for the prosecutor said. “We are pursuing every possible lead.”

Photo Credit: Volkswagen
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