Scandal Widens

Crisis Threatens VW’s Top Managers, Again

mueller head getty images
VW boss Matthias Müller is finding it hard to keep a grip on the emissions scandal.
  • Why it matters

    Why it matters

    • VW could plunge deeper into crisis amid news that more engine models, and at least another 800,000 cars, contain illegal emissions-rigging software.
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  • Facts

    Facts

    • Handelsblatt has learned VW will stop selling a range of diesel engine cars in the U.S.
    • The company said Tuesday that 800,000 more cars may have been rigged to beat carbon dioxide emissions, including not just diesel but gasoline-powered engines.
    • VW says that almost 12 million cars have illegal emissions-cheating software.
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    Audio

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With new admissions of wrongdoing, accusations leveled by U.S. regulators and Germany’s financial watchdog asking uncomfortable questions about delays in disclosing “Dieselgate,” some managers at Volkswagen are starting to wonder whether the automaker will weather the storm.

The bad news just keeps on coming. Handelsblatt learned on Wednesday that Volkswagen will stop selling a range of Audi and VW vehicles in the United States, after regulators announced that the company had cheated on emissions tests in its larger diesel engine cars.

Sources told the company Volkswagen will stop selling cars with V6 TDI diesel engines in the United States immediately. The move affects Audi models A6, A7 and A8, and SUV Q5 and Q7. The VW Touareg is also affected.

Porsche has already said it will stop selling its Cayenne diesel model in the United States.

The sources say the move is designed to secure the confidence of U.S. customers, after the U.S. Environmental Protection Agency said on Monday evening that it believed Volkswagen had cheated on  emissions on Porsche and Audi cars with larger diesel engines, as well as its Volkswagen range.

But the confidence of customers, and of shareholders, must be wearing thin.

Until Monday, there was a sense that despite the enormous costs of the scandal and technical complexities of recalling millions of diesel cars, VW at least had a fresh management team in place to handle the crisis: Chief Executive Matthias Müller and Supervisory Board Chairman Hans Dieter Pötsch.

But within a few hours on Tuesday, everything changed. Now, both of their positions are starting to look uncertain, and that’s very bad news for VW.

For almost six weeks, Mr. Müller was VW’s “Mister Innocent,” untainted by the emissions-rigging furor because he had been far away from VW’s main plant in the northern town of Wolfsburg, managing the group’s sports car unit Porsche from its base in Stuttgart, in southwestern Germany.

Mr. Müller came in as the new head of VW in September, a new broom to clean up the mess left by his predecessor, Martin Winterkorn.

But now, in a blow to VW, Dieselgate threatens to engulf Mr. Müller and Porsche as well. The U.S. Environmental Protection Authority said Monday VW used devices to rig air-pollution tests in 3.0-liter diesel engines found in luxury brands Audi and Porsche, the biggest profit generators of the VW group.

VW still denies the EPA’s claim, saying its own investigations had turned up no such evidence.

The next body blow was only hours away. On Tuesday evening Volkswagen admitted that another 800,000 cars – entirely separate from the EPA’s claims and from the initial scandal – may have been manipulated to beat emissions testing by regulators.

Unlike the first 11 million, which involved diesel engines and noxious gases, this time it concerned carbon dioxide testing and possibly including gasoline engines.

On Wednesday, Germany’s transport minister Alexander Dobrindt told the Bundestag that of the 800,000 vehicles affected by the latest revelations, 98,000 were gasoline-powered.

“Volkswagen has done a disservice to German industry.”

Ulrich Grillo, Federation of German Industry

The German carmaker estimated the cost of what has already been dubbed “Dieselgate 2” at €2 billion, or $2.19 billion. That comes on top of the €6.7 billion that had already been set aside to cover the costs of the initial scandal. While the costs themselves are still manageable – VW has billions of euros in reserves – the massive dent to its reputation may become too great to bear.

The new vehicles affected include the VW, Audi, Seat and Skoda brands. Both the cost and number of cars affected were initial estimates and could still grow.

The latest revelations involve the new generation diesel motors, the EA 288, but may also include some gasoline engines, VW said. It “was established that the CO2 levels and thus the fuel consumption figures for some models were set too low during the CO2 certification process,” according to the statement. The “majority” of cars affected had diesel engines.

VW’s stock price was down nearly 7 percent in Frankfurt Wednesday morning, trading at €115.65 at 9:25 local time. It had fallen 5 percent on Tuesday.

 

Stephan Weil source Franz Bischof for Handelsblatt
VW board member Stephan Weil is among those worried by events at the automaker. Source: Franz Bischof for Handelsblatt

 

The latest allegations are the last thing the automaker needs as it struggles to organize recalls for 11 million diesel vehicles fitted with fraudulent software designed to cheat emissions tests.

Meanwhile, Handelsblatt has learned that VW’s management board is rushing to answer a tough set of questions posed by German financial regulators. The Federal Financial Supervisory Authority (BaFin) has demanded information about possible insider trading and whether the company broke rules by not informing investors about the scandal soon enough.

VW has until Wednesday of next week to respond to questions that one insider described as “brutal.” One manager said VW might not be able to meet BaFin’s deadline.

VW admitted the initial diesel test fraud to U.S. authorities on September 3. But it wasn’t made public until September 18 by U.S. officials. If BaFin finds any wrongdoing, VW faces a fine as well as a damaging debate about the suitability of Hans Dieter Pötsch, the group’s supervisory board chairman who was chief financial officer — and therefore in charge of informing investors — when the news broke.

BaFin is trying to find out “who was informed of the emissions scandal when,” said one manager, adding that BaFin was trying to shed light “in every corner.”

Mr. Pötsch received verbal backing from one of VW’s largest shareholders on Tuesday. The automaker needed a “clever and experienced supervisory board chairman like Mr. Pötsch who has deep knowledge of the company and can steer it through the crisis in a calm, level-headed way,” Stephan Weil, a supervisory board member and premier of the state of Lower Saxony, which owns 20 percent of VW, told Handelsblatt.

Calm and level-headed? Not everyone has been that forgiving. VW is in turmoil and is under fire from all sides.

“Volkswagen has done a disservice to German industry,” Ulrich Grillo, the head of the Federation of German Industry, said on Tuesday.

 

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Whether Mr. Müller himself will continue to receive the supervisory board’s backing is also another story. In a first reaction to Tuesday’s revelations, the board said it was “deeply concerned” and would be meeting in the near future. It placed its own investigations into the irregularities at the forefront – a word of confidence in the management board was left out of the statement.

The supervisory board, one insider said, is getting increasingly irritated. The new allegations weigh especially heavily because VW earlier said engineers had examined all the diesel engines manufactured by the VW group and concluded that all of them were clean.

If the new scandal widens, Mr. Müller’s job will be at stake. And VW will be at risk of being rudderless at a time when it needs resolute leadership more than ever.

The latest allegations by U.S. authorities are particularly serious because they affect models that are on sale now, 2015 and 2016 cars, the latest and freshest offerings from VW and its premium subsidiaries Audi and Porsche. According to U.S. authorities, all new diesel vehicles being sold by the VW group in the coming year are affected.

Unlike in September, when the EPA gave VW executives several days’ advance warning that it was going to make the allegations public, the new claims came virtually out of the blue. VW was told less than hour before the EPA went public, said company sources.

But VW has rejected the U.S. allegations and decided to fight. On Monday evening, senior engine developers at Audi questioned by company lawyers insisted that Audi engines weren’t manipulated, said one manager.

“Volkswagen AG stresses that no software was installed in the 3-liter V6 diesel aggregates to change emissions in an illegal way,” VW said in a brief statement on Tuesday. Sources at VW and Audi said the firms were certain about this.

It’s VW’s word against the EPA’s. The U.S. authority has circumstantial evidence: as with Dieselgate 1, it simply looked at how the vehicles perform in test conditions and under normal driving conditions. It said it had found that once the vehicle’s electronic system detected that its emissions were being tested, it would heat the engine to the optimum combustion temperature that is hardly ever attained in normal driving. On the road, the cars’ nitrogen oxide emissions were up to nine times higher.

But the EPA can’t explain how this supposed manipulation works exactly. Unlike in Dieselgate 1, VW isn’t admitting to any wrongdoing this time. And the Americans can’t deliver concrete proof. That’s because of the complicated engine control system in modern vehicles. Even experts these days are unable to analyze the thousands of codes in electronic control systems. “There’s hardly anyone who has a full overview of it all,” said one engineer at an auto components firm.

It’s impossible to say at this point what the impact of the new allegations will be. Leading supervisory members will meet this week to discuss them.

Managers said that there’s growing desperation at VW’s head office in Wolfsburg about whether the carmaker will be able to get to grips with the crisis. The management had been sure that no more engines would come under scrutiny.

But despite the debacle, VW’s U.S. sales remain stable. In October, the first full month after the scandal came to light, unit sales rose 0.24 percent to 30,387 units. “We would like to again thank our customers for their patience and loyalty,” said Mark McNabb, chief operating officer of Volkswagen of America in a statement. “Volkswagen is committed to making things right and actively working to restore trust.”

VW’s steady sales are down to money and luck. VW has been offering discounts to prop up volumes but it’s also being helped by the nature of U.S. buyers. Tim Fleming, an analyst at Kelley Blue Book, a vehicle valuation and automotive research company, said Americans tend to be more forgiving.

The response by U.S. consumers to previous auto scandals confirm that assessment. Several years ago, Japanese car giant Toyota launched huge recalls following several cases of cars accelerating unintentionally.

One year later, there was no sign that the scandal had impacted either sales volume or the list price, said Mr. Fleming. There’s a further example: some General Motors vehicles had an ignition switch problem that could shut off the engine during driving and prevent the airbags from inflating. More than 100 people died. But Americans went on buying GM brands.

But VW differs from Toyota or General Motors in one key point. The competitors quickly responded with a recall. According to VW’s U.S. chief Michael Horn, VW may take more than a year to find a technical solution for its engines.

A quick recall may be expensive but it would be worth the money, said Mr. Fleming.

Volkswagens U.S. Market Struggles-01 (2)

 

Martin Murphy and Markus Fasse cover cars and companies for Handelsblatt in Düsseldorf. Oliver Stock is a deputy editor in chief who coordinates online coverage. To contact the authors: murphy@handelsblatt.com, fasse@handelsblatt.com and stock@handelsblatt.com

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