The noose tightens

Daimler faces growing risk of VW-style Dieselgate disaster in US

Mercedes-Benz Intelligent World Drive, USA 2018
Whatever emissions happen in Vegas, stay in Vegas. Source: Daimler

Daimler, the maker of Mercedes-Benz cars, could soon be engulfed in the Dieselgate scandal and face billions in fresh fines and retrofitting charges, as US and German investigators delve deeper into the company’s alleged efforts to deceive emissions tests. Internal documents from the Stuttgart-based carmaker show that engineers were concerned about its diesel vehicles failing a stiff US auto emissions test known as PEMS, according to the Bild am Sonntag newspaper. Daimler’s diesel models, the paper said, exceeded permitted nitrogen oxide levels by a factor of 10.

“The authorities are aware of these documents and they have not led to indictments. The documents reported by the newspaper have clearly been deliberately leaked to damage Daimler and its 290,000 employees,” the company said in a brief statement Sunday, refusing to comment further.

The Dieselgate scandal first broke in September 2015, ensnaring Wolfsburg-based Volkswagen. The company has admitted to developing software that could detect when a car was undergoing emissions testing and adjust engine setting to produce far lower emissions. Once back on the road, the cars became illegal polluters. Once the practice leaked, investigators began looking at a parcel of other carmakers using similarly controversial methods to keep diesel cars on the market.

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So far, revelations regarding diesel emissions testing have cost Volkswagen around €25 billion ($31 billion) in fines, damages and product recalls in the United States.

The Bild article detailed Daimler’s own alleged cheating program. One software function, known as “Bit 15,” was apparently designed to switch off emissions cleaning after 26 kilometers of driving. US investigators may have also discovered a suspect function in Mercedes’ vehicle control system known as “Slipguard”, which can apparently recognize whether a car is undergoing testing. Internal Daimler emails allegedly show engineers questioned the software’s legality.

The Environmental Protection Authority, or EPA, which was pivotal in prosecuting Volkswagen, could not be reached for comment. Daimler CEO Dieter Zetsche has repeatedly denied that there was any manipulation of emissions testing data by his company.

Although the specific revelations are new, Daimler management and shareholders have long known that diesel emissions presented a major risk for the company. The possibility of Volkswagen-style damage has been a brake on Daimler’s share price, which has gained just 8.3 percent since Dieselgate broke despite record sales – Germany’s benchmark DAX index has added 30.6 percent over the same period.

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Although CEO Zetsche and CFO Bodo Uebber have largely avoided the topic, the firm’s annual report earlier this month outlined the risks associated with diesel emissions testing. The carmaker sees numerous issues. In Germany, Stuttgart prosecutors are investigating possible fraud and false advertising regarding the sale of diesel vehicles. In the US, half a dozen federal and state authorities have demanded information from the company. It is also facing class-action suits from customers and shareholders in 13 states.

The class-action suits “could result in substantial damages, punitive damages, fines, product improvements, recalls, and other cost-intensive measures,” the company warned. In addition, the report mentions another carmaker – unnamed but thought to refer to Fiat Chrysler – which admitted to US authorities that it installed cheat software in diesel engines – yet another liability.

It seems increasingly likely that Daimler will be hit with billions of dollars in resulting costs. Daimler’s management is reporting to US authorities on an almost weekly basis. In addition, US authorities have ordered Daimler to carry out internal investigations, with the participation of auditors Deloitte. Engineers from major auto industry supplier Bosch are also known to have been closely questioned.

Daimler’s close cooperation with US authorities appears so far to have succeeded in avoiding immediate penalties. Unlike Volkswagen, the company has not yet been served with a “Notice of Violation,” a confirmation that it had broken laws and would be subject to fines and class-action suits. However, it has already recalled millions of cars in Europe for software updates. Germany’s Federal Motor Vehicle Transport Authority this week also said it was investigating irregularities in diesel emissions data associated with the Vito, Daimler’s light commercial van.

Markus Fasse specializes in aviation and automobile industry news and works from Handelsblatt’s Munich office. Martin Murphy covers the steel, car and defense industries for Handelsblatt. To contact the authors: murphy@handelsblatt.com, fasse@handelsblatt.com

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