German carmaker is seeking to finalise an agreement with US regulator but scepticism remains
As Volkswagen scrambles to meet a deadline this week to finalise a fix for almost 600,000 cars in the US equipped with test-cheating software, many industry insiders are sceptical that an engineering solution is possible.
It has been seven months since Europe’s largest carmaker became engulfed in scandal after admitting equipping up to 11m diesel-powered cars worldwide with defeat devices that understated pollution in official tests.
The scandal was uncovered in the US, and it is here that VW is most at risk of big fines because of the country’s tough emissions limits. The German carmaker is seeking to finalise an agreement with regulators by Thursday over what to do with 584,000 VW cars that emit nitrogen oxides at up to 40 times above permitted levels.
US district judge Charles Breyer in San Francisco originally set March 24 as the deadline for VW to find a fix for the cars that was acceptable to the Environmental Protection Agency, the California Air Resources Board and the Department of Justice. Last month he extended the deadline to April 21, citing “engineering technicalities and other important issues”.
Another extension to the deadline for the VW fix from the US court may not help the company, as VW must by German law release by April 28 its delayed results for 2015.
That report is expected by analysts to include new provisions for the cost of the scandal, an update on dividends and a 2016 outlook — none of which may be possible if VW has not resolved the cost of the scandal in the US.
“[VW] are under the gun themselves, and not just from Judge Breyer,” says Stephen Reitman, analyst at Société Générale. “They need to quantify the liability in order to make provisions.”
VW has so far set aside €6.7bn to cover the cost of fixing the cars fitted with software-based defeat devices, but it is also likely to face billions of dollars in fines and class-action lawsuits.
UBS analysts estimate the scandal will cost VW about €38bn, including €10bn of civil penalties and €9bn of criminal fines. By contrast, Mr Reitman puts the total cost at under €20bn.
Investors are therefore hopeful that any agreement unveiled by VW and the regulators this week will remove much of the uncertainty about the full cost of the scandal to the carmaker.
VW and the regulators declined to comment on the state of their negotiations. One person familiar with the talks says, “The intensity of negotiations increased dramatically in the past week,” as the justice department, which in January launched a civil lawsuit against VW, has taken a leadership role.
Numerous analysts have concluded that an engineering fix is not feasible for most of the offending cars in the US, particularly the older models sold between 2009 and 2014.
“It’s not really an engineering problem now,” says Julie Boote, analyst at Pelham Smithers. “The issue is that there is no ‘perfect’ fix, otherwise VW would have been able to come up with it.”
The problem, she adds, is that efforts to reduce NOx emissions would mean retrofitting older VW cars with new, heavier components that would increase the weight of the car. That in turn would increase emissions of carbon dioxide and make the cars more expensive for owners to run.
Mr Reitman says a fix for VW’s older models in the US could cost more than $ 2,000 per vehicle and sacrifice performance and driveability.
If an engineering fix is not possible for all VW’s US cars affected by the scandal, analysts say there are two options.
First, environmental regulators could allow certain VW cars to remain on the road although they are polluting more than is permitted. In exchange, VW could pay a hefty fine and also pledge to invest more in electric car technology to mitigate the environmental damage.
Julie Domike, an environmental lawyer at Haynes Boone who previously worked at the EPA, says, “It is highly accepted within the EPA and in California to have the defendant find other ways to reduce NOx.” But, she acknowledges, that would do nothing for unhappy VW car owners.
The second option is for VW to buy back most, if not all, of the affected US cars.
Mr Reitman predicts that all the VW cars with first-generation EA189 2.0 litre diesel engines will have to be repurchased at roughly $ 12,000 each, or €3.5bn.
The remaining cars, he says, will only require minor hardware and software fixes that cost €45m.
VW is reluctant to offer a buyback, say analysts. Not only is it the most expensive option, but such a move could potentially serve as a precedent for millions of VW owners across the world to demand equal treatment.
Brussels has criticised VW for giving $ 1,000 vouchers to US customers and treating Europeans in an inferior way. VW responded by saying Europe “is not automatically comparable” with other markets.
Gerhard Wolf, analyst at Landesbank Baden-Württemberg, does not see the risk of a US buyback creating a precedent.
European emissions regulations are less strict, which explains why German regulators last December were able to approve changes to VW cars with defeat devices that involved only limited modifications.
“They don’t have a need to buy back in Europe,” says Mr Wolf. “They can fix it.”
Some analysts say the long delay in finding a solution for VW’s US cars is not just due to the more onerous emissions limits, but also the company’s underestimation of how big the scandal was.
When the EPA first revealed the affair in September, VW chief executive Martin Winterkorn apologised and then resigned within days. His successor Matthias Mueller took a trip in January to the US where he portrayed the scandal as a mere technical problem. “We didn’t lie,” he said, before backtracking.
“[VW] tried to sell [the affair] as a misunderstanding, while the Americans clearly saw it as fraud,” says Ms Boote. “The mood was that this isn’t a major issue. VW probably thought they would find a quick fix.”
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