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Volkswagen's Biggest Challenge Right Now: Fixing the Cars

By John Rosevear - Sep 28, 2015 at 6:30PM

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VW has to repair millions of diesel-powered cars that don't comply with emissions regulations. But fixing them was a problem it couldn't solve back in 2007. That's why it cheated. How quickly will it be able to solve that problem now -- and at what cost?

Millions of diesel-powered cars built by Volkswagen don't comply with emissions regulations. Fixing that problem could turn into a nightmare for VW. Source: Volkswagen.

Shares of Volkswagen (VWAGY 2.01%) fell over 7% in European trading on Monday, as investors struggled to come to terms with a scandal over emissions testing that is still unfolding.

The company has now lost almost 39% of its value in just six trading days since the EPA's initial allegations that Volkswagen equipped thousands of cars with software that cheated emissions tests.

Volkswagen has since admitted that "thousands" was really millions. The cars were sold all over the world -- and for starters, Volkswagen has to figure out how to fix them all.

Intense pressure to solve a problem that couldn't be solved in 2007
There are a lot of huge questions arising from this scandal. But right now, the most urgent ones are these: When will VW be able to fix all of the affected cars? And how much will it cost?

Volkswagen stands accused of selling millions of cars equipped with software that switches on certain parts of the cars' emission-control systems only when it determines that an emissions test is under way. Under normal conditions, the cars run with those systems switched off -- and emit exhaust far dirtier than is allowed in the United States.

It's believed that VW's engineers, under intense pressure to meet mileage and performance targets, chose to rig the software because they couldn't hit those targets while keeping the emissions below legal levels. Certain types of emission controls impede both performance and fuel economy.

One of the challenges facing new VW CEO Matthias Mueller is that all of those cars must now be fixed. They must be made to comply with emissions regulations in the countries where they were sold at all times. Until that happens, VW may not be allowed to sell any new diesel-powered cars in many countries -- and diesels are a significant portion of its business.

In other words, there's a lot of pressure to get those 11 million affected cars fixed as soon as possible. But fixing the cars -- without hurting the performance or fuel economy that VW has promised its customers -- was apparently a problem that the company's engineers couldn't solve back in 2007. That's why VW cheated.

Can the company solve it now?  

"Working at full speed" on a solution -- but what kind of solution?
Volkswagen brand chief Herbert Diess issued a statement on Friday promising that the company was "working at full speed on a technical solution." That technical solution will have to satisfy regulators: It will have to keep the cars' exhaust clean enough to pass regulatory tests under all conditions. 

But if it hurts the cars' performance or fuel economy, then VW will have two other problems. First, owners may simply refuse to bring their cars in to have the "technical solution" installed. Owners aren't legally required to get recall services done in the United States, and simply getting all the cars repaired may be an expensive, time-consuming headache for VW.

Second, owners -- whether they bring their cars in for the repair or not -- will surely be looking to VW for some compensation. A massive class action suit on behalf of outraged owners is nearly certain, and VW may have to pay a big sum to settle it.

Things will only get worse if VW can't fix the cars quickly
VW is in a difficult spot. The pressure is only increasing with time. On Monday, German prosecutors launched an investigation into fraud allegations against former CEO Martin Winterkorn, who was ousted last week

Criminal investigations are also under way in the U.S., and it's likely that other countries will pursue criminal charges. It'll be hard for VW to dodge them: It's not rare for corporations to be caught up in criminal investigations related to cover-ups of blunders, but it is rare to see a giant global corporation stand formally accused of deliberately breaking laws in such a major way.

Long story short: Right now, there are more questions than answers. When will VW get the cars fixed? How will that fix affect the cars' drivability and value? Who is responsible and what will the consequences be? What will it all cost?

We still don't know yet. With the stock down almost 40%, it's tempting to grab some. But until at least some of those questions are answered, I'd steer clear. We don't yet have any idea what the "new normal" will be for Volkswagen.

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