Emissions Scandal

American Dream Turns Sour for Volkswagen

Mueller (2)dpa distorted
For the VW CEO, the year will be a tough one.
  • Why it matters

    Why it matters

    If Volkswagen cannot persuade the U.S. authorities it is doing all it can to atone for the emissions scandal, it will be hit by heavy fines.

  • Facts

    Facts

    • The United States has sued Volkswagen for breaking the Clean Air Act.
    • Total fines could theoretically amount to more than $50 billion, but are expected to be significantly below that number.
    • About 11 million cars worldwide, of which 600,00 in the United States, contain manipulated engines, which lower nitrogen oxide emissions during tests but increase them when driving on the road.
  • Audio

    Audio

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For Matthias Müller the New Year could hardly have had a worse start. A few days before the Volkswagen chief executive’s visit to the important North American International Auto Show in Detroit the U.S. Justice Department filed a complaint against the automobile company. The timing was hardly a coincidence. Mr. Müller can forget any hopes he had of reaching a settlement with the U.S. authorities any time soon.

On the contrary, Volkswagen is now facing a long and expensive legal confrontation with the American government, which has announced it will use all the legal means at its disposal in the dispute about manipulated emission levels. Indeed, the emissions scandal could escalate to an unprecedented transatlantic legal dispute. That is neither good for Volkswagen nor for Germany as an industrial location.

There are several indicators as to just how seriously the U.S. government is taking the legal action against Volkswagen. The Justice Department has included in its application a possible fine per vehicle affected of up to $37,500. As the prosecutors are accusing Volkswagen of offending against several clauses, total fines could theoretically amount to more than $50 billion. For this to happen, Volkswagen would have to be found guilty on every charge, allowing maximum penalties to be imposed.

It is unlikely that it will come to such draconian penalties – penalties which would hit Volkswagen very hard. But the risk has now increased and the almost €7 billion (€7.5 billion) in provisions Volkswagen has made so far to deal with the emissions scandal, will be insufficient.

It will probably take Volkswagen years to repair the damaged relationship with the American public and politicians.

The vehemence of the complaint clearly has something to do with the German company’s perceived lack of cooperation in dealing with the diesel scandal. In the opinion of the U.S. Justice Department, the efforts of the United States to discover the truth about excessive emission levels have been hindered by misleading information and the withholding of material. This accusation is not just serious, it also affects the reputation of Mr. Müller, who was brought in to rescue the car group. After all, Volkswagen repeatedly emphasized in recent months that it would cooperate fully with the U.S. authorities.

It remains to be seen if the accusations are correct. However, Mr. Müller has clearly not managed to create an atmosphere of trust between the American Justice Department and the German automobile concern. And that is bound to make it difficult to bring about a significant reduction of the penalties threatened.

And the civil lawsuit is by no means Mr. Müller’s only problem. The U.S. Justice Department has also hinted at criminal proceedings against Volkswagen, quite apart from class action suits from hundreds of disappointed customers citing fraud and breach of contract.

It is also unclear when and under what conditions the American environmental authorities will give Volkswagen the green light for its recall plan affecting some 600,000 diesel vehicles in the United States. The environment protection agencies, EPA and CARB have repeatedly rejected the company’s proposals as inadequate. The U.S. Justice Department has also emphasized once more that it considers Volkswagen’s proposals insufficient.

The delaying tactics are also no coincidence. When Deutsche Bank was struggling with the Libor market interest rate affair, it also learned that negotiations with U.S. authorities can drag on much longer than expected.

Mr. Müller is just finding out how difficult it will be for the automobile concern to get over its biggest crisis. He will hardly be able to use discussions with U.S. politicians in the coming week for public relations purposes regarding the promised change of culture in Wolfsburg. It will be more like running the gauntlet. It will probably take Volkswagen years to repair the damaged relationship with the American public and politicians.

So the automobile boss would therefore be well advised to change the structures of the huge VW empire as quickly as possible to ensure there is no repeat of such an affair. Mr. Müller has taken the first steps in this direction, but more have to follow. It is difficult for the Americans to understand why Volkswagen still has not named a new U.S.A. boss.

Above all, Mr. Müller has to make sufficient provision for the billions of dollars in penalties anticipated. An open and honest discussion is overdue about what Volkswagen can still afford, faced with a series of expensive legal suits. Volkswagen’s fight for survival requires tough decision-making – even if it means taking on the powerful head of the works council.

 

The author is editor in chief of Handelsblatt. You can reach him at: afhueppe@handelsblatt.com

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