Volkswagen Drops 23% After Admitting Diesel Emissions Cheat

Volkswagen Admits Cheating U.S. Diesel Emissions Tests
  • Top executives to convene this week to discuss crisis
  • CEO said on Sunday he's "deeply sorry" for broken trust

Volkswagen AG lost almost a quarter of its market value after it admitted to cheating on U.S. air pollution tests for years, putting pressure on Chief Executive Officer Martin Winterkorn to repair the reputation of the world’s biggest carmaker.

Top supervisory board members will convene on Wednesday, according to two people with knowledge of the plans, who asked not to be named because the meeting is private. Volkswagen plunged as much as 23 percent to 125.40 euros in Frankfurt, wiping out about 15.6 billion euros ($17.6 billion) in market value. The stock closed at 132.2 euros, its lowest in more than three years.

VW said it’s cooperating with regulators probing gaps between emissions on the road and lab tests on some diesel models. According to the Environmental Protection Agency, the company insisted for a year that discrepancies were mere technical glitches. Winterkorn, who has led VW since 2007, was forced to halt sales of the cars on Sunday and issue a public apology, saying he’s “deeply sorry” for breaking the public’s trust and that VW would do “everything necessary in order to reverse the damage this has caused.”

Contract Renewal

Winterkorn, whose contract renewal is scheduled for a supervisory board vote on Friday, now faces a serious challenge to his leadership, said Arndt Ellinghorst, a London-based analyst for Evercore ISI.

“This latest saga may help catalyze further management changes at VW,” Ellinghorst wrote in a note Monday.

The U.S. charges are “grave” and must be clarified swiftly, said Stephan Weil, prime minister of the German state of Lower Saxony, which owns 20 percent of Volkswagen’s voting shares. “Possible consequences can be decided after that.”

The European Commission also said it’s taking VW’s cheating seriously and is in contact with U.S. regulators and the company about details of the case.

German competitors BMW AG and Daimler AG said on Monday they aren’t aware of a similar U.S. probe into their cars. Shares of both slipped the most in almost a month.

$18 Billion

Diesel and VW’s reputation for German engineering were cornerstones of Winterkorn’s effort to catch up in the U.S. market. The violations, which affect nearly half a million vehicles, could result in as much as $18 billion in fines, based on the cost per violation and the number of cars. Criminal prosecution is also possible.

“If this ends up having been structural fraud, the top management in Wolfsburg may have to bear the consequences,” said Sascha Gommel, a Frankfurt-based analyst for Commerzbank AG, whose share rating is under review.

The Wolfsburg, Germany-based company admitted to fitting some of its U.S. diesel vehicles with software that turns on full pollution controls only when the car is undergoing official emissions testing, the EPA said Friday. Affected are diesel versions of the VW Jetta, Golf, Beetle and Passat and the Audi A3.

Analysts at Kepler Cheuvreux cut their recommendation on Volkswagen stock to hold from buy, reducing their target price 27 percent to 185 euros. Volkswagen faces not only a short-term drop in sales and a hit to its reputation but also the longer-term risk of litigation in the U.S., the analysts wrote in a note on Monday.

The crisis is unlikely to trigger an immediate downgrade of the company’s debt rating, Fitch Ratings said on Monday. It may come under pressure if the situation deepens, Fitch said.

40-Fold Excess

During normal driving, the cars with the software -- known as a “defeat device” -- would pollute 10 times to 40 times the legal limits, the EPA estimated. The discrepancy emerged after the International Council on Clean Transportation commissioned real-world emissions tests of diesel vehicles including a Jetta and Passat, then compared them to lab results.

Volkswagen has struggled in the U.S. for years. Sales of VW-brand cars in the country dropped 10 percent last year to 366,970; the company aimed to almost double annual Audi and VW brand sales to 1 million vehicles by 2018.

“VW’s U.S. sales target for 2018 had been ambitious as is,” said Klaus Breitenbach, a Frankfurt-based analyst for Baader Bank AG. “Now I believe it is no longer reachable.”

Before it's here, it's on the Bloomberg Terminal. LEARN MORE