Since the emissions scandal broke in September 2015, Volkswagen (VW) has delivered three things: a third-quarter loss, a new CEO and an investigation into the “rogue coders” who supposedly fitted cheat software on up to 11m vehicles worldwide. None of these are satisfactory.
The third-quarter loss is due to provisions of 6.7bn Euros against anticipated fines, alteration costs for the 11m vehicles, and compensation for customers whose vehicles will, as a result of those alterations, have poorer fuel economy and diminished performance. Most analysts think the provisions will be nowhere near enough: estimates of the final cost for Volkswagen vary from 15bn to 25bn Euros. And this is without taking into account consequential losses for customers, over which Volkswagen may face lawsuits: the second-hand value of Volkswagen automobiles is already falling sharply. Volkswagen’s third quarter results were bad, but future results may well be far worse.
The new CEO, Matthias Mueller, was formerly the boss of Porsche, VW’s premier high-performance brand. Appointing an insider to replace a CEO who has stepped down due to a major scandal is hardly indicative of a major change in management and culture, which is what VW really needs: it would have been far better if the new CEO had come from elsewhere.
But there is now a more serious shadow over Mr. Mueller. On November 2nd, the US’s Environmental Protection Agency (EPA) notified Volkswagen of a second breach of clean air legislation (my emphasis):
Today, EPA is issuing a second notice of violation (NOV) of the Clean Air Act (CAA) to Volkswagen AG, Audi AG and Volkswagen Group of America, Inc. This NOV is also being issued to Porsche AG and Porsche Cars North America. These five companies are collectively referred to as Volkswagen (VW). The NOV alleges that VW developed and installed a defeat device in certain VW, Audi and Porsche light duty diesel vehicles equipped with 3.0 liter engines for model years (MY) 2014 through 2016 that increases emissions of nitrogen oxide (NOx) up to nine times EPA’s standard. The vehicles covered by today’s NOV are the diesel versions of: the 2014 VW Touareg, the 2015 Porsche Cayenne, and the 2016 Audi A6 Quattro, A7 Quattro, A8, A8L, and Q5.
So this time, the luxury VW brands are affected. Including Mr. Mueller’s Porsche. Oh dear.
In a statement, VW emphatically denied that it fitted “cheat software” to its luxury brand. But it also attempted to tone down the severity of the EPA’s charge. VW described the alleged violation thus:
The United States Environmental Protection Agency (EPA) informed Volkswagen Aktiengesellschaft on Monday that vehicles with V6 TDI engines had a software function which had not been adequately described in the application process.
Somehow, “developed and installed a defeat device” became “not adequately described in the application process”. So VW’s defense amounts to “We didn’t do it, and anyway it wasn’t a crime”. I can’t see this going down well with US regulators. This is a very poor start for the new CEO.
And things have since gotten a lot worse. After the EPA’s first violation notice, VW’s Board announced an investigation to establish whether there were other “irregularities” in relation to emissions testing for VW vehicles. And yes, it seems there are. On November 3rd, VW admitted that “unexplained inconsistencies” had been found in the testing process for CO2 emissions.
What VW seems to have done is understated CO2 emissions data for some of its brands, enabling it to make unrealistic (and therefore misleading) fuel economy claims:
Under the ongoing review of all processes and workflows in connection with diesel engines 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.
VW says about 800,000 vehicles are currently thought to be involved, mostly in Europe. But the question that immediately springs to mind is – why are only some brands affected? Why overstate fuel economy figures for some models but not others? This doesn’t seem likely. It’s worth remembering that the NOx emissions scandal originally involved less than 500,000 vehicles and was limited to the US: the figure is now 11m worldwide. This, too, could quickly spiral. And importantly, some of the vehicles involved this time have petrol engines. The scale of this scandal could be much, much bigger.
I suppose the claim that only some brands are affected might support VW’s argument that the emissions scandal is entirely caused by a small number of software engineers. But that argument was already hard to swallow, and is now frankly incredible. No way is this a “rogue coder” incident. This is systematic rigging of emissions test data to give VW an unfair (and illegal) competitive advantage over its rivals.
And it is tax fraud, too. A number of countries give discounts on vehicle tax for vehicles with low CO2 emissions. So some of VW’s customers have unwittingly paid a lower vehicle tax than was actually due. They are now liable for the unpaid tax, and could in theory face prosecution. According to the Wall Street Journal, the German government has pressured VW into offering to pay the additional tax bills:
Volkswagen Chief Executive Matthias Müller asked EU finance minister to ensure that their national tax authorities “charge Volkswagen directly, and not our customers, for any additional taxes.”
VW estimates that this latest scandal will cost it around 2bn Euros. This is in addition to its estimate of 6.7bn Euros for the NOx emissions scandal. Neither figure seems likely to be remotely adequate. VW faces far larger bills once litigation costs and compensation are taken into account.
VW has now been downgraded by the credit ratings agencies Moody’s and S&P, and all three major ratings agencies have it on negative watch for further downgrades. Moody’s, discussing the latest revelations, goes to the heart of the matter:
These new developments pose additional risk to Volkswagen’s reputation, future sales and cash. They also suggest serious internal control and governance issues, which may be more widely spread than believed initially, that Volkswagen will have to address aggressively in the coming months.
The scandal is already beginning to affect sales of VW vehicles. In the UK, sales in October were down 9.84% year-on-year across all models, including petrol engines – a huge drop. Further falls seem likely, and sales in other countries are falling as well. Toyota has now overtaken VW as the largest car manufacturer in the world by sales.
Unsurprisingly, VW’s share price – already down by a third due to the NOx emissions scandal – tanked again when the CO2 emissions news broke. VW is still financially strong, but to regain the confidence of customers and investors it will have to make far more radical changes to its management, governance and culture than have been evident so far.