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The American nightmare

5 January 2016 By Olaf Storbeck

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 item has been corrected to change the potential penalty to at least $45 billion from $90 billion in paragraph 3 of the view, and to clarify the terms of the penalty in paragraph 3 of the Context News.)

 

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