Scam to force key changes in VW

For now, the company will review new projects and delay or cancel any that are not considered essential
Last Updated : 08 October 2015, 16:53 IST

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Volkswagen’s new chief executive warned early this week that the financial effect of the company’s emissions cheating scandal would be worse than previously acknowledged, forcing the company to curtail investment at a time when all carmakers are trying to keep ahead of a rush of new technology.

The automaker previously said it would set aside 6.5 billion euros ($7.3 billion) to cover the cost of bringing vehicles with illegal software into compliance with emissions standards. “But that will not be enough,” said Matthias Mueller, the Volkswagen chief executive, adding that job cuts might be ahead.

Mueller said it was impossible to calculate the cost from penalties that Volkswagen was likely to face from governments – including state and federal authorities in the United States – or from lawsuits that are proliferating from unhappy customers and shareholders. About 11 million Volkswagen diesel vehicles, primarily in Europe and the United States, have software meant to fool emissions tests.

For now, the company will review new projects and delay or cancel any that are not considered essential, Mueller said, according to a text of his address to 20,000 employees gathered in a building at the company’s main factory in Wolfsburg, Germany.

His remarks point up how the crisis has expanded and troubled Volkswagen. The scandal might damage not only the company’s current sales and its image, but it could also impinge on its ability to keep current with the fast-changing technology trends, which are forcing carmakers to continually reinvent their vehicles.

Volkswagen could face significant financial restraints as it works on new technologies like self-driving vehicles and battery-powered cars. In addition to those advances, automakers are also bracing for competition from Silicon Valley. Mueller referred to rumours that Apple would begin selling a car in the next few years.

“This self-made crisis and its repercussions hit us at a time when mobility is undergoing broad changes,” Mueller said. Volkswagen is likely to announce how it intends to alter the affected vehicles to meet emissions standards without cheating.

There is deep scepticism within the auto industry that doing so will be easy or even possible. Particularly in the United States, where emissions standards are more stringent than in Europe, some industry experts say it could be hard for Volkswagen to make its cars follow the air-quality rules without drastically diminishing the cars’ performance and fuel economy.

Mueller said that in some vehicles, reprogramming the software would suffice. Some cars will not need any repairs because the illegal software was not activated. But in other cases, the company will need to install new components, he said. Gennadi Zikoridse, executive director of the Research Association for Diesel Emission Control Technologies in Dresden, Germany, said he thought it would be technically possible to fix the affected vehicles, “but it won’t be simple or cheap.”

Mueller, who was appointed chief executive last month after his predecessor, Martin Winterkorn, resigned, did not rule out job cuts stemming from the damage that Volkswagen has suffered financially and to its reputation. The company will do everything it can to preserve jobs, Mueller said, but he added: “This will not be a painless process.”

Volkswagen has almost 6,00,000 workers worldwide, including about 2,70,000 in Germany. The German workforce is concentrated in the state of Lower Saxony, including 72,000 people at the Wolfsburg factory. Mueller said a substantial number of high-ranking managers had been suspended in connection with what he promised would be a ruthless inquiry into who was responsible for the scandal.

He did not name those executives suspended, but three of them – whose suspensions had been previously disclosed – played prominent roles in the development and deployment of the engines with the software.

They are: Ulrich Hackenberg, head of development for all Volkswagen Group brands, and previously head of development for Volkswagen-brand cars from 2007 to 2013; Heinz-Jakob Neusser, currently head of development for the Volkswagen brand; and Wolfgang Hatz, head of engines and transmissions development for all Volkswagen brands.

A spokesman for Porsche, a Volkswagen subsidiary where Hatz is also the head of research and development, said he was using the paid suspension to defend himself against the accusations. Hackenberg and Neusser did not respond to requests for comment.

Mueller’s remarks suggest that the company believes approval for the cheating took place at a high level. “Employees who were not in leadership positions do not need to fear that they will be blamed for transgressions at management level,” he said.

For the first time on Tuesday, Volkswagen gave a breakdown of where most of the cars wi-th illegal software are. The largest number, 2.8 million, are in Germany. An additional 1.2 million are in Britain, 9,00,000 are in France, and about 4,82,000 are in the US. About five million are Volkswagen brand cars and 1.8 million are Volkswagen brand light commercial vehicles. An additional 2.1 million are Audi cars, while 1.2 million are Skodas and 7,00,000 are SEAT cars.

At the same time, Mueller did not seek to distance himself from Winterkorn, who resigned under pressure even while maintaining that he had no knowledge of the emissions cheating.

Preserving jobs
Volkswagen has traditionally been reluctant to impose layoffs because one of its main shareholders, with a 20 per cent stake, is the state of Lower Saxony, which has a strong economic and political interest in preserving local jobs. In addition, worker representatives at Volkswagen are powerful even by the standards of a country where employees are guaranteed a voice on corporate supervisory boards.

Berthold Huber, former president of the IG Metall labour union, is acting chairman of the Volkswagen supervisory board. Huber is expected to be replaced by Hans Dieter Poetsch, the chief financial officer of Volkswagen, an Austrian who is close to the majority shareholders, the Porsche family. The Volkswagen supervisory board is to meet to appoint a new chairman.

Bernd Osterloh, chairman of the Volkswagen workers council, which is separate from the union but works closely with it, said Tuesday there would be no immediate consequences for Volkswagen workers, including temporary employees. But he added, “Realistically, it is not yet possible to foresee how our customers will react to this scandal.”

The German economy, which depends on exports of cars and machinery, is already feeling the effects of the economic slowdown in China and other developing countries. Orders to German factories unexpectedly fell by 1.8 per cent in August from July, according to figures published Tuesday. The data covered a period before the emissions scandal broke. Any subsequent downturn in factory orders could reinforce fears that the damage to Volkswagen’s image will infect other companies.

“There is a risk the whole image of German engineering, of ‘Made in Germany,’ will come under suspicion,” said Joerg Rocholl, president of the European School of Management and Technology in Berlin.

Published 08 October 2015, 16:53 IST

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