- Volkswagen shares tanked 22% in Franfurt.
- Volkswagen admitted to cheating on U.S. air pollution tests.
- Volkswagen shares (ADRs) could fall sharply in the U.S. today.
Volkswagen is in the news yet again, as the company’s shares have tanked in Frankfurt, a trend that is likely to continue with the company’s ADR in the U.S. when markets open. Volkswagen shares have fallen by over 21%, the biggest fall in over seven years, after the company admitted to cheating on U.S. air pollution tests for years. Apart from the loss of $18 billion worth in market cap in Germany, coincidentally, the company also risks being fined a similar amount.
Volkswagen’s CEO Martin Winterkorn indicated the company was co-operating with the probe and apologized for breaking the trust of the public and its customers. He also said that Volkswagen has ordered its own external investigation into the matter. Volkswagen's CEO could potentially have a tough time retaining his place, given that his contract is up for renewal following a supervisory board vote on Friday.
The EPA or Environmental Protection Agency has accused Volkwagen of developing software for diesel cars that deceives an emission test by turning on emission controls during a test, which it otherwise switches off when driving normally. The excess is huge, with cars believed to be causing 10 to 40 times the pollution that's legally permissible. The ramifications of what has transpired could be huge for Volkwagen. Apart from the obvious dent to the automaker's reputation, there's a huge financial implication, as the German company could be handed a fine of up to $18 billion. To put that into perspective, that's about 21% of Volkswagen's market cap.
Volkswagen also announced that it would stop selling, in the U.S., diesel cars with the type of engines that had led to the company being accused by the EPA. Obviously there's going to be a large number of vehicles that'd get stuck with dealers owing to the decision. Additionally, the EPA has ordered Volkswagen to recall nearly half a million vehicles.
The recall involves Volkswagen and Audi 4-cylinder vehicles from the model years 2009 to 2015. The affected models would include the Volkswagen Jetta, Golf (2014-2015), Beetle, Passat and the Audi A3. The fines could potentially be as high as $37,500 per vehicle, adding up to the potentially massive total outlined earlier in the post. Volkswagen, which recently surpassed Toyota in the number of cars sold, to become the world's biggest automaker, still lags the Japanese counterpart in the U.S. and the large scale recall with peg it back further.
This however, isn't the only bad news around the German automaker. Not more than a week ago, China's safety regulator announced that Volkswagen's China unit would recall 78,000 vehicles due to a potential defect that could come in the way of the driver's side airbag deploying properly. However, this isn't unique to Volkswagen alone, as most major automakers have recalled vehicles which had potentially defective airbags from Takata Corp.
Things just got worse for investors, as Volkswagen shares have been on a downward trend since April this year, even as the German automaker unveiled its plans to take on Tesla (NASDAQ:TSLA) at the Frankfurt auto show.
Volkswagen shares in the U.S. are already near their 52 week lows at $36.31 and could fall way lower when markets open today.