Shares of Volkswagen Group (OTC:VLKA.Y) fell over 17% in European trading on Monday, after U.S. authorities charged that the company deliberately evaded air-pollution rules on about 482,000 Volkswagens sold since 2008.
The U.S. Environmental Protection Agency and the California Air Resources Board alleged on Friday that the German auto giant modified the software in some models to make the cars appear cleaner on government emissions tests.
If the allegations are proven, Volkswagen could face penalties of up to $37,500 per car, or over $18 billion.
The Feds say VW programmed its cars to cheat on emissions tests
This is very serious stuff that goes far beyond typical automaker recalls. The U.S. government is alleging that Volkswagen essentially conspired to break U.S. emissions laws. The fines could deplete much of VW's cash hoard, leaving the company deeply vulnerable to a future economic downturn.
And the damage to VW's reputation with U.S. consumers could be deep and lasting, because the cars affected have been marketed as some of VW's greenest models.
The gist of the allegations is that the software in some diesel-powered Volkswagens and Audis activates the engine's full emissions controls only during testing. The software reduces the emission control's effectiveness during normal driving. That likely improves performance and fuel economy -- but the result is that in ordinary driving, the cars emit smog-producing nitrogen oxides at up to 40 times the legal limit.
The vehicles affected are 2008 and newer models equipped with VW's 2.0-liter turbo direct injection ("TDI") diesel engine, including VW's Passat, Jetta, Golf, and Beetle, and the Audi A3.
As of right now, no recalls have been ordered, though that could change. The EPA said that there is no danger to drivers and the affected models remain safe to drive.
VW didn't admit to the allegations, but it isn't denying them, either
Volkswagen officials scrambled to respond to the allegations over the weekend. The company said on Sunday that it would immediately halt the sale of all 2015 and 2016 models equipped with the 2.0-liter TDI engine. Officially, VW would neither confirm nor deny the EPA's allegations. But VW CEO Martin Winterkorn issued a statement on Sunday in which he apologized for breaking "the trust of our customers and the public."
Winterkorn said that VW is cooperating with authorities and is arranging for an outside investigation. Those authorities aren't just in the United States. Officials with the German Environment Ministry, the German government's equivalent of the U.S. EPA, demanded over the weekend that VW provide proof that it hadn't manipulated emissions tests in its home country. European Union officials have also made demands for information, according to a report in the Wall Street Journal.
The upshot: This will be a huge, expensive, global mess for VW
It's likely that this case will take a year or more to play out. But to be very clear: VW is in a lot of hot water here. Winterkorn, who is already in trouble with his board, may well lose his job -- and it's possible that criminal charges will be brought against VW executives directly involved in the decision to program these cars to cheat on emissions tests.
If VW cooperates and ends up admitting guilt, the fines will likely be considerably less than the $18 billion-plus allowed under U.S. law. But they'll still be well into the billions -- and if VW is found to have sold cars with cheating software in other markets, it may face huge penalties elsewhere as well.
For investors, at least for the moment, these allegations throw the investment case for VW into serious doubt. VW shares may look like a bargain after the walloping they took on Monday. But it's possible that this is just the beginning of what will turn out to be a massive sell-off. At least for now, think very carefully before buying this particular dip.