VW's Emissions Retrofit May Be Among Costliest Recalls Ever
Volkswagen AG’s worldwide repair of 11 million diesel vehicles to bring their emissions systems into compliance with pollution regulations is shaping up to be one of the most complex and costly fixes in automotive history.
The German carmaker will need to install parts for vehicles already on the road that weren’t designed to accommodate the equipment. The work may need to be done in special shops set up for the purpose. And it will have to pass muster with dozens of countries with their own regulations.
“I can’t think of any other recall that would be as comprehensive,” said Jake Fisher, director of automotive testing at Consumer Reports magazine. “It’s really an expensive rework.”
The repair costs are only part of what Volkswagen is going to have to spend to get through a corporate crisis sparked by revelations it rigged its diesel cars for years to fool emissions tests. The company is also compensating dealers for storing cars they can’t sell. It faces more than 325 consumer lawsuits in the U.S., according to data compiled by Bloomberg, and has hired U.S. law firm Jones Day to conduct an internal investigation into the company’s actions.
Adding in likely fines, settlements with the U.S. Environmental Protection Agency, state authorities, the Justice Department and dozens of countries in Europe, and the cost could exceed 30 billion euros ($34 billion), according to the Center of Automotive Management in Bergisch Gladbach, Germany.
Forecast Cut
The 6.5 billion euros already set aside will be inadequate, according to a Sandford C. Bernstein Ltd. note released Oct. 19. The firm has cut its VW forecast “very substantially” because of the expected charges, which will amount to at least 10 billion euros in 2015 and another 5 billion in 2016.
“We believe a figure of 15 billion euros to 20 billion euros is an able estimate at this stage for cash-out costs,” Bernstein said.
Volkswagen is equipped to take a big financial hit. The company had 21.5 billion euros in net liquidity at the end of June and since then sold shares it owned in former partner Suzuki Motor Corp. for about 3.4 billion euros. The company is moving to increase that position by cutting annual investment by about 1 billion euros at its namesake car brand. Additionally, all non-essential projects are being delayed or canceled.
Options for VW to raise additional funds include selling off one or more of its brands, spinning off the heavy trucks marques or a capital increase. A share sale is currently not on the table, said a person familiar with the matter, who asked not to be identified discussing private deliberations.
VW shares closed up 3.4 percent to 103.8 euros ($115.60) in Frankfurt.
Retrofit Required
Michael Horn, VW’s U.S. chief, told Congress in testimony on Oct. 8 that the company is considering a combination of software and hardware repairs. Many of the older cars may require a retrofit with technology VW once eschewed but is used in most other diesels cars sold in the U.S., a system known as urea-based selective catalytic reduction.
That kind of exhaust treatment involves spritzing a chemical into the exhaust to reduce harmful emissions, and would require a major re-engineering. Horn said a rear tank for the urea mix and an additional catalytic converter might have to be added. Because of the complexity, Horn said, there is no definite timetable to complete the repairs but it could take more than a year.
The company won’t comment on specific plans yet as they need to be approved by government agencies, Jeannine Ginivan, a VW spokeswoman, said in an e-mail. “Volkswagen is working as quickly as possible to develop a remedy for the affected vehicles,” she said.
Hardware Fixes
About 325,000 of the 482,000 affected cars in the U.S. are expected to need the hardware fix. In Europe, about 3 million cars also will need a hardware remedy. Cars featuring a 1.6-liter engine will require the technical tweaks, while software updates are sufficient to make the other affected engines compliant, according to VW.
The company reaffirmed on Thursday that its latest diesel engine complies with European regulations and an investigation into other motors for older standards also has shown that they don’t have the cheating software.
Fisher said the only comparably complex recalls involved replacing an entire engine or a structural frame in older pickup trucks. Even then, automakers in those recalls were replacing a defective part with a new part of a similar size in the same place.
Volkswagen will have to find a place for a multigallon urea tank. They may have to drill through sheet metal to create a filler neck that’s convenient for consumers who would need to replenish the liquid every three or four months. It may cost thousands of dollars per car, he said.
The urea technology has been used by most other automakers to meet ever-stricter pollution standards by the U.S. Environmental Protection Agency and the California Air Resources Board. Volkswagen itself has been using it in the U.S. since introducing a reworked EA 288 engine on models like the Passat, Golf, Beetle and Jetta in the 2015 model year.
Not Pretty
The EA 288 was designed to accommodate a modular exhaust-gas treatment system. That could help, too. Volkswagen may have parts made for other vehicles that can be used for the older models needing new hardware, which would reduce the costs.
“It’s going to require an uncomfortable amount of hacking at the car,” said Bill Visnic, an independent automotive analyst based in Weirton, West Virginia. “There’s no real pretty way to put it. You’re going to have to drill some holes and run some lines under the car. You’ve got to find someplace to put the tank. It’s going to add up pretty quickly.”
Visnic estimates the per-car costs will be conservatively “at least several hundreds of dollars per car, maybe higher.”
Linford Berry, owner of Mountain Valley Motors, a Volkswagen specialist in Dayton, Virginia, said adding a urea tank system to a customer’s Volkswagen TDI could cost more than $3,500 in his shop.
Special Shops
There would be the tank, a heater to keep it from freezing, a pump and injectors to shoot a mist of urea-based fluid into an exhaust chamber to enable the chemical reaction that breaks nitrogen oxide into nitrogen and oxygen. There would also be wiring from the engine computer back to the tank. There also might need to be reprogramming of the computer, or a new computer if the existing unit doesn’t have circuits that could control the new equipment.
Volkswagen’s costs would be less because of economies of scale, but it’s hard to say how much lower they would be, Berry said.
CEO Matthias Mueller told Frankfurter Allgemeine Zeitung newspaper on Oct. 7 he was considering setting up specialized repair shops temporarily in every market where there’s a recall.
Asked about trying to fit new parts like a catalytic converter into an engine where there’s no space, he said:
“Then we will just have to make space, to rebuild it if need be. Of course at no cost to the consumer.”
The German carmaker will need to install parts for vehicles already on the road that weren’t designed to accommodate the equipment. The work may need to be done in special shops set up for the purpose. And it will have to pass muster with dozens of countries with their own regulations.
“I can’t think of any other recall that would be as comprehensive,” said Jake Fisher, director of automotive testing at Consumer Reports magazine. “It’s really an expensive rework.”
The repair costs are only part of what Volkswagen is going to have to spend to get through a corporate crisis sparked by revelations it rigged its diesel cars for years to fool emissions tests. The company is also compensating dealers for storing cars they can’t sell. It faces more than 325 consumer lawsuits in the U.S., according to data compiled by Bloomberg, and has hired U.S. law firm Jones Day to conduct an internal investigation into the company’s actions.
Adding in likely fines, settlements with the U.S. Environmental Protection Agency, state authorities, the Justice Department and dozens of countries in Europe, and the cost could exceed 30 billion euros ($34 billion), according to the Center of Automotive Management in Bergisch Gladbach, Germany.
Forecast Cut
The 6.5 billion euros already set aside will be inadequate, according to a Sandford C. Bernstein Ltd. note released Oct. 19. The firm has cut its VW forecast “very substantially” because of the expected charges, which will amount to at least 10 billion euros in 2015 and another 5 billion in 2016.
“We believe a figure of 15 billion euros to 20 billion euros is an able estimate at this stage for cash-out costs,” Bernstein said.
Volkswagen is equipped to take a big financial hit. The company had 21.5 billion euros in net liquidity at the end of June and since then sold shares it owned in former partner Suzuki Motor Corp. for about 3.4 billion euros. The company is moving to increase that position by cutting annual investment by about 1 billion euros at its namesake car brand. Additionally, all non-essential projects are being delayed or canceled.
Options for VW to raise additional funds include selling off one or more of its brands, spinning off the heavy trucks marques or a capital increase. A share sale is currently not on the table, said a person familiar with the matter, who asked not to be identified discussing private deliberations.
VW shares closed up 3.4 percent to 103.8 euros ($115.60) in Frankfurt.
Retrofit Required
Michael Horn, VW’s U.S. chief, told Congress in testimony on Oct. 8 that the company is considering a combination of software and hardware repairs. Many of the older cars may require a retrofit with technology VW once eschewed but is used in most other diesels cars sold in the U.S., a system known as urea-based selective catalytic reduction.
That kind of exhaust treatment involves spritzing a chemical into the exhaust to reduce harmful emissions, and would require a major re-engineering. Horn said a rear tank for the urea mix and an additional catalytic converter might have to be added. Because of the complexity, Horn said, there is no definite timetable to complete the repairs but it could take more than a year.
The company won’t comment on specific plans yet as they need to be approved by government agencies, Jeannine Ginivan, a VW spokeswoman, said in an e-mail. “Volkswagen is working as quickly as possible to develop a remedy for the affected vehicles,” she said.
Hardware Fixes
About 325,000 of the 482,000 affected cars in the U.S. are expected to need the hardware fix. In Europe, about 3 million cars also will need a hardware remedy. Cars featuring a 1.6-liter engine will require the technical tweaks, while software updates are sufficient to make the other affected engines compliant, according to VW.
The company reaffirmed on Thursday that its latest diesel engine complies with European regulations and an investigation into other motors for older standards also has shown that they don’t have the cheating software.
Fisher said the only comparably complex recalls involved replacing an entire engine or a structural frame in older pickup trucks. Even then, automakers in those recalls were replacing a defective part with a new part of a similar size in the same place.
Volkswagen will have to find a place for a multigallon urea tank. They may have to drill through sheet metal to create a filler neck that’s convenient for consumers who would need to replenish the liquid every three or four months. It may cost thousands of dollars per car, he said.
The urea technology has been used by most other automakers to meet ever-stricter pollution standards by the U.S. Environmental Protection Agency and the California Air Resources Board. Volkswagen itself has been using it in the U.S. since introducing a reworked EA 288 engine on models like the Passat, Golf, Beetle and Jetta in the 2015 model year.
Not Pretty
The EA 288 was designed to accommodate a modular exhaust-gas treatment system. That could help, too. Volkswagen may have parts made for other vehicles that can be used for the older models needing new hardware, which would reduce the costs.
“It’s going to require an uncomfortable amount of hacking at the car,” said Bill Visnic, an independent automotive analyst based in Weirton, West Virginia. “There’s no real pretty way to put it. You’re going to have to drill some holes and run some lines under the car. You’ve got to find someplace to put the tank. It’s going to add up pretty quickly.”
Visnic estimates the per-car costs will be conservatively “at least several hundreds of dollars per car, maybe higher.”
Linford Berry, owner of Mountain Valley Motors, a Volkswagen specialist in Dayton, Virginia, said adding a urea tank system to a customer’s Volkswagen TDI could cost more than $3,500 in his shop.
Special Shops
There would be the tank, a heater to keep it from freezing, a pump and injectors to shoot a mist of urea-based fluid into an exhaust chamber to enable the chemical reaction that breaks nitrogen oxide into nitrogen and oxygen. There would also be wiring from the engine computer back to the tank. There also might need to be reprogramming of the computer, or a new computer if the existing unit doesn’t have circuits that could control the new equipment.
Volkswagen’s costs would be less because of economies of scale, but it’s hard to say how much lower they would be, Berry said.
CEO Matthias Mueller told Frankfurter Allgemeine Zeitung newspaper on Oct. 7 he was considering setting up specialized repair shops temporarily in every market where there’s a recall.
Asked about trying to fit new parts like a catalytic converter into an engine where there’s no space, he said:
“Then we will just have to make space, to rebuild it if need be. Of course at no cost to the consumer.”
You can return to the main Market News page, or press the Back button on your browser.
