Business & Real Estate

Price to pay in Volkswagen diesel emissions scandal: Billions of dollars, loss of public trust

Volkswagen cars for sale are on display on the lot of a VW dealership in Boulder, Colo., Thursday, Sept. 24, 2015.
Volkswagen cars for sale are on display on the lot of a VW dealership in Boulder, Colo., Thursday, Sept. 24, 2015. AP

German manufacturer Volkswagen, which spent the past decade promoting its clean-diesel cars and clawing its way to the worldwide auto sales mountaintop, is now clamoring to preserve its assets and reputation amid disclosures that its recent-model diesel vehicles included technology to circumvent U.S. pollution limits.

Regaining the trust of angry consumers might be the biggest struggle of all, based on random interviews at Sacramento-area Volkswagen dealerships last week.

“It’s a terrible, terrible thing if the (Volkswagen) bosses decided to do this. I don’t see how it can be forgiven if that’s how it started,” said Sacramentan Walt Oliver, looking at passenger cars at Niello Volkswagen on Arden Way.

For Jane Pinson-Perez, a Sacramento office worker browsing outside Folsom Lake Volkswagen in the Folsom Automall, “any attempt to deceive the public like that is horrible, but it also bothers me to think how much pollution has been poured into the air all this time. How many tons are we talking about … here and all over the world? That’s what I want to know.”

Retired Sacramento resident Bill Walker, who said he has driven Volkswagen vehicles for more than 30 years and recently bought a used VW Jetta for his daughter, said the emissions fraud disclosure “hit me like a ton of bricks. I couldn’t believe it. Why would they risk all that goodwill? To save a few bucks? How can you trust them after this?”

Although Volkswagen is not a dominant force in California’s nation-leading new car sales market – VW’s 5.1 percent market share in 2014 ranked eighth statewide, far behind top-ranked Toyota’s 22 percent, according to the Sacramento-based California New Car Dealers Association – the emission scandal could have a significant impact throughout the Golden State.

Irvine-based Kelley Blue Book, citing IHS Polk data on new vehicle registrations, said 65,931 of the cited 2009-15 VW/Audi diesel models were purchased in California. That represents 14.28 percent of all U.S. purchases in the period and nearly twice the 34,106 registrations (7.39 percent) in No. 2 Texas.

Since the emissions fraud charges were made public by the California Air Resources Board and the U.S. Environmental Protection Agency on Sept. 18, VW has seen nearly a third of the company’s market value erased by investor desertions and set aside more than $7 billion for the third quarter to cover the potential costs related to the scandal. Ominously, probes into millions more Volkswagen diesel vehicles operating worldwide have been promised. On Wednesday, Volkswagen CEO Martin Winterkorn resigned amid a storm of questions and angry allegations.

Winterkorn’s comments prior to resigning and VW’s actions in general angered Sacramento County Supervisor Phil Serna, who also is an ARB board member and the owner of a 2012 Audi A3 diesel passenger vehicle, one of those cited as having the emissions-evading technology.

In a Facebook post on Tuesday, Serna said “Volkswagen intentionally defrauded consumers and compromised the health and well-being of the people I represent.” In a subsequent telephone interview, he added: “Now, in all the conversations I’m having people they’re asking, ‘Are you going to be part of a class-action (lawsuit)?’”

In Sacramento, dealers likewise were stunned by the growing scandal.

“It is huge … If they’re guilty of some kind deception, they’re going to pay a price for it,” said Rick Niello, president of the Sacramento-based Niello Co., which oversees VW and Audi dealerships locally.

Auto industry analysts say that even if 78-year-old Volkswagen can weather fines estimated at up to $18 billion, plus an expected blizzard of lawsuits, restoring its credibility in the United States might prove impossible.

“This is right up there with the worst scandals in the history of the industry,” said Len Brewster, a Detroit-based auto industry analyst. “To be caught manipulating emissions implies premeditation on a corporatewide scale, and that is something that governments do not take lightly.”

For now, dealers and consumers have plenty of questions about what comes next.

Rick Niello had one question answered last week when Volkswagen issued a stop-sale order on designated 2015-16 diesel cars on dealership lots. He said that was not a crushing blow to his operations as his inventory of diesel vehicles is not significant. He added that Volkswagen said “it will pick up our cost of carrying that inventory that we can’t sell, which of course would be their responsibility.”

What dealers are waiting for now, Niello said, is word from Volkswagen on how it wants dealerships to handle an expected massive recall that will replace software that allegedly enables VW diesels to pass pollution tests but allows on-road emissions up to 40 percent higher than standards.

Meanwhile, drivers of the ARB/EPA-cited vehicles – 2009-15 Volkswagen Golf, Jetta, Beetle and Audi A3 models and the 2014-15 VW Passat, all equipped with 2-liter, four-cylinder turbodiesel engines – might have to wait weeks to get their diesels brought into compliance with state and federal regulations.

Jessica Caldwell, director of industry analysis for Santa Monica-based Edmunds.com, noted: “The good news for these owners is that there is no imminent safety threat in driving these vehicles.”

Caldwell added, however, that some motorists “who bought these diesel vehicles in part because of any environmental benefits may have moral objections to driving them, and they may feel they have no other option but to keep their cars parked for the time being. And then there are owners who just feel flat-out deceived and will want their money back.”

Jack Nerad, executive editor and analyst at KBB.com, believes the flap is a massive public trust issue that could haunt VW for decades.

“Volkswagen owners are notably loyal and knowledgeable and that goes double for VW diesel buyers, so this amounts to a betrayal of their trust that they are less likely to forgive than if they had less emotional attachment to their car and their brand,” Nerad said.

KBB says diesel vehicles account for about 25 percent of VW sales in the United States. In California, Volkswagen has been talking up diesel technology for a decade.

At the Los Angeles Auto Show in 2005, then-VW CEO Bernd Pischetsrieder told hundreds of automotive journalists that Volkswagen was committed to developing clean diesels, even as rival automakers were digging deep into gas-electric hybrid technology.

Karl Brauer, KBB senior analyst, believes VW could lose U.S. customers it won over by touting the virtues of diesel.

“Now those customers will be questioning the benefits of diesel as they deal with a recall procedure that could reduce their vehicles’ performance and fuel efficiency. VW was already struggling to regain volume and market share in the U.S. It will now face an even bigger challenge after breaking the trust of American consumers,” Brauer said.

Mark Glover: 916-321-1184, @markhglover

Volkswagen Emissions Flap

The allegations: On Sept. 18, the California Air Resources Board and the U.S. Environmental Protection Agency announced that the EPA had issued a notice of violation of the Clean Air Act to Volkswagen AG, Audi AG and Volkswagen Group of America Inc., alleging that 2-liter, four-cylinder Volkswagen and Audi diesel cars from model years 2009-15 had software that circumvents EPA standards for air pollutants. California separately issued an “In-Use Compliance” letter to Volkswagen in connection with the allegations. Both the EPA and ARB continue to investigate.

How it worked: ARB/EPA officials say a sophisticated software algorithm on the diesel vehicles detects when the car is undergoing official emissions testing, and turns full emissions controls on only during testing. During normal vehicle operation, onboard emission controls operate at sharply reduced efficiency, emitting nitrogen oxides at up to 40 times the pollution standard. The software is commonly called a “defeat device” as defined by the Clean Air Act.

The pollutants: Federal officials say nitrogen oxides, or NOx, pollution contributes to nitrogen dioxide, ground-level ozone and fine particulate matter. Exposure has been linked with a wide range of serious health issues, including asthma attacks. Exposure to ozone and particulate matter have also been associated with premature death due to respiratory-related or cardiovascular-related effects. Children, the elderly and people with pre-existing respiratory disease are particularly at risk, experts say.

The affected diesel models: 2009-15 Volkswagen Jetta, Beetle and Golf; 2009-15 Audi A3; and 2014-15 Volkswagen Passat.

Scope: The allegations involve about 482,000 diesel passenger cars sold in the United States since 2008. ARB and EPA officials noted that the emissions-altering devices on the named vehicles do not represent a safety hazard. The cars can be driven as usual, but emissions will exceed standards.

The response: EPA and ARB said that when they demanded an explanation from Volkswagen in early September, VW “admitted that the cars contained defeat devices.”

Potential penalties: Technically, Volkswagen faces a possible fine of $37,500 per vehicle, equating to around $18 billion overall. Beyond that, Volkswagen is looking at other significant costs related to a recall of the diesel vehicles, lawsuits, state prosecutions and reimbursements to U.S. auto dealers temporarily unable to sell new diesel cars on their lots.

Sources: Volkswagen, U.S. EPA, California ARB, Bee research

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