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Volkswagen’s shares tumbled by around a third following revelations by the US Environmental Protection Agency that the German car giant cheated on emissions tests in America. The company’s diesel cars had been fitted with software designed to allow car engines to release fewer smog-causing pollutants during the tests, compared to when cars were driven under normal conditions. As a result, the world’s largest carmaker could face penalties of up to $18bn, in addition to criminal charges.
VW was ordered to recall almost half a million cars, and has revealed that up to 11 million of its vehicles worldwide could be affected. The production of affected diesel car models, including the Audi A3, Beetle and Golf, has been halted in the US. Martin Winterkorn, the group’s CEO, apologised and ordered an external investigation, before stepping down on Wednesday. US Volkswagen chief Michael Horn admitted the company had “totally screwed up”, while German economy minister Sigmar Gabriel expressed concern that the scandal could damage the German car industry. Credit rating agency Fitch placed the company’s “A” credit rating on “negative watch”, citing the reputational damage caused.
This scandal is “of an entirely different character”, compared to earlier breaches of US law by Hyundai and Ford, which tended to stem from errors, said Ambrose Evans-Pritchard at The Daily Telegraph. “VW appears to have engaged in a cynical plan to trick regulators in a wholesale breach of the US Clean Air Act.” The reputation of both “made in Germany” and the image of diesel cars, already confined to a niche in the US (though not in Europe), will be severely damaged as a result of this, argued German newspaper Die Welt. VW’s rivals, Daimler and BMW, were quick to argue that accusations against VW do not apply to them, according to Reuters.
But others doubt the breach is exceptional. “We need to ask the question – is this happening in other countries and is this happening at other manufacturers?” said John German in The Guardian, who is a co-lead at the International Council on Clean Transportation, the non-governmental organisation that first raised the alarm about the scandal. Investors shouldn’t hang around to find out what happens next, said Helen Thomas in The Wall Street Journal. “A change at the top could ultimately prove cathartic for investors. Meanwhile, they are confronting a morass of financial, legal, operational, managerial and strategic uncertainty. The sensible thing to do is to hit the road.”
This article was originally published in MoneyWeek on 24. September 2015: http://moneyweek.com/scandal-at-volkswagen/