Volkswagen sets aside $ 7.2 billion towards rectifying emission glitches

German car major Volkswagen has stated that it is setting aside a provision of some Euro 6.5 billion (approximately US $ 7.2 billion) to cover the necessary service measures pertaining to software glitches resulting in circumventing emission standards. The money will also be used for “other efforts to win back the trust of our customers”.

Volkswagen has been in the eye of a storm every since the U.S. Environmental Protection Agency and the California Air Resources Board (EPA and CARB) revealed their findings a few days back that while testing diesel cars of the Volkswagen Group they detected manipulations that violate American environmental standards.

On September 22, 2015 Volkswagen admitted that, “Discrepancies relate to vehicles with Type EA 189 engines, involving some eleven million vehicles worldwide. A noticeable deviation between bench test results and actual road use was established solely for this type of engine. Volkswagen is working intensely to eliminate these deviations through technical measures. The company is therefore in contact with the relevant authorities and the German Federal Motor Transport Authority (KBA – Kraftfahrtbundesamt).”

Volkswagen was responding to an EPA statement made a few days back wherein it said that it is issuing a notice of violation (NOV) of the Clean Air Act (CAA) to Volkswagen AG, Audi AG, and Volkswagen Group of America, Inc. (collectively referred to as Volkswagen). The NOV alleges that four-cylinder Volkswagen and Audi diesel cars from model years 2009-2015 include software that circumvents EPA emissions standards for certain air pollutants. California is separately issuing an In-Use Compliance letter to Volkswagen, and EPA and the California Air Resources Board (CARB) have both initiated investigations based on Volkswagen’s alleged actions.

“Using a defeat device in cars to evade clean air standards is illegal and a threat to public health,” said Cynthia Giles, Assistant Administrator for the Office of Enforcement and Compliance Assurance. “Working closely with the California Air Resources Board, EPA is committed to making sure that all automakers play by the same rules. EPA will continue to investigate these very serious matters,” she said in a statement.

As described in the NOV, a sophisticated software algorithm on certain Volkswagen vehicles detects when the car is undergoing official emissions testing, and turns full emissions controls on only during the test. The effectiveness of these vehicles’ pollution emissions control devices is greatly reduced during all normal driving situations. This results in cars that meet emissions standards in the laboratory or testing station, but during normal operation, emit nitrogen oxides, or NOx, at up to 40 times the standard. The software produced by Volkswagen is a “defeat device,” as defined by the Clean Air Act, the statement from EPA noted.

EPA and CARB uncovered the defeat device software after independent analysis by researchers at West Virginia University, working with the International Council on Clean Transportation, a non-governmental organization, raised questions about emissions levels, and the agencies began further investigations into the issue. In September, after EPA and CARB demanded an explanation for the identified emission problems, Volkswagen admitted that the cars contained defeat devices.

VW may be liable for civil penalties and injunctive relief for the violations alleged in the NOV.The allegations cover roughly 482,000 diesel passenger cars sold in the United States since 2008. The affected diesel models include:

•             Jetta (Model Years 2009 – 2015)

•             Beetle (Model Years 2009 – 2015)

•             Audi A3 (Model Years 2009 – 2015)

•             Golf (Model Years 2009 – 2015)

•             Passat (Model Years 2014-2015)

Meanwhile in the statement issued by Volkswagen, it said, “It is incumbent upon Volkswagen to initiate the process that will fix the cars’ emissions systems. Car owners should know that although these vehicles have emissions exceeding standards, these violations do not present a safety hazard and the cars remain legal to drive and resell. Owners of cars of these models and years do not need to take any action at this time.

“... Volkswagen plans to set aside a provision of some 6.5 billion EUR recognized in the profit and loss statement in the third quarter of the current fiscal year. Due to the ongoing investigations the amounts estimated may be subject to revaluation.

The company clarified that it is working at full speed to clarify irregularities concerning a particular software used in diesel engines. “New vehicles from the Volkswagen Group with EU 6 diesel engines currently available in the European Union comply with legal requirements and environmental standards. The software in question does not affect handling, consumption or emissions.”

It also noted that “Further internal investigations conducted to date have established that the relevant engine management software is also installed in other Volkswagen Group vehicles with diesel engines. For the majority of these engines the software does not have any effect.”

It concluded by saying that “Volkswagen does not tolerate any kind of violation of laws whatsoever. It is and remains the top priority of the Board of Management to win back lost trust and to avert damage to our customers. The Group will inform the public on the further progress of the investigations constantly and transparently.”

Commenting on the U.S. Environmental Protection Agency and the California Air Resources Board findings, on September 20, Prof. Dr. Martin Winterkorn, CEO of Volkswagen AG in a statement said that the “The Board of Management at Volkswagen AG takes these findings very seriously. I personally am deeply sorry that we have broken the trust of our customers and the public. We will cooperate fully with the responsible agencies, with transparency and urgency, to clearly, openly, and completely establish all of the facts of this case.”

While the Volkswagen episode sent shockwaves in the US and in Europe, with the company’s shares crashing on the German stock exchange, back in India the VC Sehgal controlled Motherson Sumi too faced a ripple effect.

Motherson Sumi Systems supplies components to several brands of the Volkswagen group and 44pc of consolidated sales come from these entities.

Sehgal, however denied that this turn of events would have any repercussion at all on his company. He said recalls are not a risk at all to his business.

Source: Volkswagen / U.S. Environmental Protection Agency / Motown India