Shares in German auto giant Volkswagen have suffered their biggest one-day fall, after plunging 20 per cent on the news that the car maker had been caught out fudging its emissions data in the US market.
News emerged in the US over the weekend that hundreds of thousands of VW diesel cars had been found to have software installed that was specially programmed to skirt American air-pollution controls.
That is, VW installed software in 482,000 cars exported to the US that turns off emissions controls when driving normally, but automatically turns them on again when it detects the car is undergoing an emissions test.
Here’s how Vox explains it: “Since 2009, Volkswagen had been installing elaborate software in …”clean diesel” vehicles sold in the US, so that the cars’ pollution controls only worked when being tested by regulators. The rest of the time, the vehicles could freely spew hazardous, smog-forming nitrogen oxides.”
The discovery is nothing short of scandalous, and puts VW in violation of the Clean Air Act in America, and in “deep shit” in almost every other sense, as the company scrambles to explain why and how this could have happened.
The car maker has halted sales of all its diesel vehicles in the US while the probe continues – the Environmental Protection Agency (EPA) says it will also begin screening diesel vehicles produced by other automakers for the so-called “defeat devices.”
VW CEO Martin Winterkorn has apologised and pledged an external probe to find out what happened, while German authorities look into the company’s emissions data at the European end.
The US investigation alone could lead to fines of more than $US18 billion ($A25 billion). And the US government is reportedly considering laying criminal charges.
Meanwhile, the reputational fallout – for VW in particular, and for “clean diesel” cars in general – could be huge. This is already playing out on the market, with some €14 billion wiped off the value of Volkswagen’s stock in one day.
Shares in Porsche SE, a holding company which controls 51 per cent of VW’s common stock, also plunged around 20 per cent, while the European autos index was down 4.1 per cent.
So how – and why – did this happen?
As Vox explains it, diesel cars – popular for their fuel economy, but unpopular for their smog-generating nitrogen oxides – have gradually been getting cleaner through a combination of lower-sulfur fuel, advanced engines, and new emission-control technology.
“So automakers have taken a renewed interest in ‘clean diesel’ cars that, in theory, don’t suffer from that trade-off between performance and pollution,” Vox says.
Except in the US market, where the Obama administration has been tightening fuel economy standards, “Volkswagen couldn’t balance performance with low pollution, so it cheated.”
And it cheated a lot. According to the tests of independent researchers, VW’s Jetta was emitting 15 to 35 times as much nitrogen oxide as the allowable US standard. The VW Passat was emitting 5 to 20 times as much – much more pollution than they had emitted in the labs.
When the discrepancy was first brought to Volkswagen’s attention, in May 2014, it was blamed on a software glitch. But when the problem didn’t go away, and regulators started grilling VW engineers about it, the company confessed to the use of the defeat devices, carefully hidden in the software code.
As to the why, Vox explains that the NOx emission controls installed by VW likely affected the diesel cars’ performance when switched on, perhaps even their torque and acceleration, making them less fun to drive.