Volkswagen (Other OTC: VLKAF – news) ‘s emissions cheating scandal escalated dramatically when the automaker revealed 11 million of its cars worldwide could be affected, wiping a third off the company’s market value and threatening to topple its chief executive.
As the United States opened a criminal investigation, chief executive Martin Winterkorn offered his “deepest apologies” for the scandal which threatens to tarnish Germany’s pristine industrial reputation.
“I am infinitely sorry that we have disappointed people’s trust. I offer my deepest apologies,” the 68-year-old executive said in a video statement, promising to be “ruthless” in getting to the bottom of the scandal.
The “irregularities… contradict everything that our company stands for,” Winterkorn said.
According to the US authorities, VW has admitted that it equipped about 482,000 cars in the United States with sophisticated software that covertly turns off pollution controls when the car is being driven.
It (Other OTC: ITGL – news) turns them on only when it detects that the vehicle is undergoing an emissions test.
With the so-called “defeat device” deactivated, the car can spew pollutant gases into the air, including nitrogen oxide in amounts as much as 40 times higher than emissions standards, said the US Environmental Protection Agency (EPA).
The EPA announced the allegations Friday along with California authorities.
The German automaker could face up to $18 billion in fines related to the EPA investigation.
Meanwhile the US Department of Justice has launched a criminal investigation led by its environment and natural resources division, a source told AFP, speaking on condition of anonymity.
The California Air Resources Board is also investigating Volkswagen’s violations.
VW has halted all diesel vehicles sales in the United States during the investigations.
Authorities from France to South Korea also said they would investigate the affair, prompting Volkswagen to announce that it was setting aside 6.5 billion euros ($7.3 billion) in provisions for the third quarter to cover the potential costs of the scandal.
VW shares, which dived 17 percent on Monday, closed down a further 19.8 percent on Tuesday at 106.00 euros, as the automaker’s new revelations, including a warning that it will have to lower its profit outlook, sent investors fleeing.
The shockwave of the scandal has slashed VW’s market capitalisation by about 25 billion euros to 51 billion euros in just two days.
– Winterkorn’s job at stake –
“Anomalies have shown up in around 11 million cars worldwide that are equipped with a specific engine type,” VW, the world’s biggest by sales in the first half of this year, said in a statement.
“In order to cover the necessary service and other measures to win back customer confidence, VW plans to set aside 6.5 billion euros in provisions in the third quarter. The group’s earnings targets for 2015 will be adjusted accordingly.”
The full impact on the reputation of Volkswagen, whose parent company also owns brands including Audi (Other OTC: AUDVF – news) , Skoda and Lamborghini, is hard to measure.
Volkswagen is likely to receive a tough once-over in the US House of Representatives energy and commerce committee, which announced plans for a hearing in the coming weeks.
Law firms are also lining up to take on the German company, with a class action suit already being filed by a Seattle law firm.
“I think there is a basic violation of trust here and a violation of trust for Volkswagen buyers who are basically very loyal here in the USA,” said Jack Nerad, analyst at Kelley Blue Book.
Industry experts believe Winterkorn’s job is on the line.
Senior (Other OTC: SNIRF – news) members of VW’s supervisory board met late Tuesday, the German news agency DPA said.
It said no information has emerged about any decisions taken at the talks, which are to continue on Wednesday.
The regional Hannoversche Allgemeine Zeitung earlier said that “Winterkorn has lost the confidence of the major shareholders”.
– Investigation spreads –
US auto giants Ford and General Motors (NYSE: GM – news) also saw their shares drop 2.8 percent and 1.9 percent respectively as the impact of the VW scandal hit other carmakers.
While the scandal has been restricted to Volkswagen so far, environment protection groups, particularly in Germany, suspect other carmakers may be using similar technology.
The EPA said Monday that it will screen for defeat devices in other manufacturers’ diesel vehicles now on the road, although it declined to identify the automakers whose vehicles will be tested.
German Transport Minister Alexander Dobrindt said there was no indication so far that others apart from Volkswagen were involved.
Dobrindt said a commission of inquiry would travel this week to VW Group headquarters in the northern city of Wolfsburg.
France called for a Europe-wide investigation and announced it would launch an “in-depth” probe, while Germany called for “full transparency” in the scandal.
South Korean officials summoned VW representatives for explanations on Tuesday, saying tests would be started by “no later than next month”.
Britain called on the European Commission to urgently investigate vehicle emissions tests, and the United Nations described Volkswagen’s admission as “extremely troubling”.
“Our company was dishonest… in my German words — we have totally screwed up,” the chief executive of Volkswagen America, Michael Horn, said at an event in New York late Monday, according to video posted by CNBC.