VW’s U.S. lawsuit shows reboot is only half done

January 5, 2016

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

The United States is reversing Volkswagen’s recent progress in tackling its emissions scandal. The U.S. Department of Justice on Jan. 4 issued a strongly worded lawsuit against the German carmaker, upending a six-week rally in VW shares. Wolfsburg needs something big to stop American lawmakers wielding a scarily large stick.

Last year ended on a relatively positive note for the battered company. German regulators rubberstamped an inexpensive and simple fix for the majority of the 11 million vehicles sold in the European Union. Suspected manipulation of fuel efficiency data uncovered by VW’s internal investigation turned out to be much less widespread and severe than initially feared.

Yet both precedent and the lawsuit’s content suggest the United States will be tougher. The Department of Justice accuses Volkswagen of four different violations of the Clean Air Act. Most strikingly, VW’s theoretical maximum fine if found guilty has more than doubled to in excess of $45 billion – almost 65 percent of its market capitalisation.

Moreover, Volkswagen has done little to win the goodwill of U.S. authorities. It admitted wrongdoing in September 2015 only after months of stonewalling. The company still lacks a technical fix to lower toxic emissions of its affected U.S. diesels to pass the country’s more demanding emission regimes and effectively reduce exhaust fumes. And the complaint filed on Jan. 4 also accuses VW of continuing to impede and obstruct its investigations “by material omissions and misleading information” after the September confession.

VW cannot afford to lose more time in the United States. It needs to ditch the ill-fated plan to repair the 580,000 U.S. vehicles. A swift buyback of all these would be far more effective, as it would end the extra air pollution at once. These benefits would by far outweigh the initial costs Evercore ISI analysts see at 5.8 billion euros.

More sweeping changes in Volkswagen’s governance are also important. Chairman Hans Dieter Poetsch should go. The former finance director was one of Volkswagen’s most senior managers during the emissions cheating era. A credible outsider, who is unburdened by the past and embodies a new culture, could then set about trying to limit the fallout across the Atlantic.

This story has been updated to correct the potential penalty from $90 billion to at least $45 billion in paragraph 3.

No comments so far

We welcome comments that advance the story through relevant opinion, anecdotes, links and data. If you see a comment that you believe is irrelevant or inappropriate, you can flag it to our editors by using the report abuse links. Views expressed in the comments do not represent those of Reuters. For more information on our comment policy, see http://blogs.reuters.com/fulldisclosure/2010/09/27/toward-a-more-thoughtful-conversation-on-stories/