In 2015, Volkswagen became embroiled in a scandal that could cost the company billions in reparations payments. Dubbed ‘Dieselgate’, it was discovered that Volkswagen had been cheating emissions tests by installing ‘defeat devices’ into their diesel cars, which selectively turned on emissions controls for testing.
These ‘nitrous oxide traps’ reduce fuel mileage and acceleration when fully active. Larger diesel vehicles use a more effective system, but presumably in an effort to retain performance whilst adhering to emissions regulations, the company programmed the traps to be fully operational only when the engine software detected that tests were taking place. The installation came, in part, because of Volkswagen’s inability to find a way of complying with federal emissions regulators.
Since the scandal broke, prices for Volkswagen diesels have dropped by nearly 16% and the German car giants are now facing lawsuits from both diesel owners and independents dealers alike - both are stuck with cars that have plummeted in value and have a valid case to sue. A hearing in San Francisco in January was, according to the New York Times, so crowded that lawyers spilled out of the courtroom and into the corridor. The Department of Justice also sued the company, complicating the matter further .
An engine software updated is being planned to fix the European cars along with, in some cases, plans to make hardware changes to the vehicles, adding a part intended to reduce the emission to an acceptable level. The company are yet to work out a fix in the US, though, thanks to tighter regulation on nitrous oxide. Soon after the story broke, VW promised compensation worth $1,000 each the tens of thousands of owners of the emission limit-breaching cars, but more needs to be done and a buyback may soon be the only option available to the company. ‘We are concentrating in Europe on the repair and service process,’ VW said in a statement. ‘The situation in the USA and Canada is not automatically comparable with other markets in the world. Therefore this action [the compensation scheme] cannot simply be rolled out in other markets.’
Further amends are being demanded, too. The US Environmental Protection Agency has asked that Volkswagen begin producing electric vehicles from their Chattanooga, Tennessee factory - according to German paper Welt am Sonntag - alongside demands that they develop a network of charging stations for electronic cars. Volkswagen already produce cars with either electric or hybrid motors, and the report was unclear as to whether the EPA was demanding they roll out new models or increase production of existing ones. No deal is confirmed, with both Volkswagen and the EPA unwilling to divulge further information on the talks.
Volkswagen will likely be made to fix 255,000 newer diesel cars in the US, but the bigger issue is the 325,000 older vehicles that will require more complex hardware fixes if they are to comply with regulations. A buyback could be the cheapest option available, whilst appeasing customers and potentially winning back some goodwill with the regulators. If the manufacturer currently does not possess the capability to successfully bring some of the cars in line with emissions regulations, the strategy could get the offending cars off the road quicker than a recall. Financially, a buyback makes considerable sense too; any customers accepting the deal would be forced to waive their legal claims, potentially saving Volkswagen billions in damages payments. The manufacturer would also save further cash if customers were successfully encouraged to put the payments towards newer Volkswagens. Any offering would likely resemble Chrysler’s major recall of RAM trucks and Dodge autos in 2015 - the American manufacturer offered the original value of the vehicles plus 10% or more.
Standard & Poor’s found that Volkswagen could afford to spend 10 billion euros, on top of the 6.7 billion currently set aside to deal with the recall costs, without affecting its credit rating. Even so, however much a buyback deal makes sense for the German giants, the company’s image - as well as at least a portion of its customer base - will take a hit.