Slowly, Volkswagen's (NASDAQOTH:VLKAY) plans for fixing millions of cars with illegal emissions-control "defeat devices" are coming to light.
And -- at least in Europe -- the costs may not be as much as some analysts have feared. But U.S. regulators may force VW to buy back some of the affected cars, and that won't be cheap.
In the U.S., two types of diesel engines are affected
VW has admitted to selling millions of diesel-powered vehicles with a software "defeat device" that engages some of the engines' emissions-control systems only when it determines that a government test is being run. In ordinary driving, the systems are turned off, presumably to enhance performance and fuel economy. But with the systems on, the engines emit far more toxic pollutants than allowed by U.S. and European laws.
The U.S. Environmental Protection Agency (EPA) and the powerful California Air Resources Board (CARB) have demanded that the company fix the offending engines. Two of those engines were sold in the U.S., both turbocharged diesels: a 2.0 liter four-cylinder, and a 3.0 liter six-cylinder.
Every diesel-powered VW, Audi, and Porsche sold in the U.S. since the 2009 model year had one of those two engines. Now, it appears that all of them will need to be recalled and modified to meet U.S. (and for cars in California, that state's) emissions standards.
Some fix will also be required to the millions of affected cars in Europe. But Europe's emissions rules are less strict, and VW's fixes for those cars appear relatively simple.
A fix for the European cars is "manageable," but the U.S. may require more extensive (and expensive) work
VW disclosed details of its plans to recall and fix the affected four-cylinder diesels in Europe on Wednesday. The changes needed to meet European standards are not extensive; VW said it expected the recall repairs to take less than an hour per car. Earlier this week, Reuters reported that VW CEO Matthias Mueller told VW managers that the steps to fix the 8.5 million affected cars in Europe will not strain the company's resources. "The efforts (needed) to carry out the refits are technically, mechanically and financially manageable," he said, according to the report.
It will almost certainly be a different story in the United States, where the emissions limits are tighter. Last Friday, VW submitted a plan to U.S. regulators, who have until December 21 to review it. We don't yet know the details of the plan, but we do have a sense of what the regulators are thinking. Consider what CARB chief Mary Nichols said last week in an interview with the German business newspaper Handelsblatt (emphasis added):
There are three different generations of vehicles we are talking about here. It appears as though the newer vehicles can be brought back into proper emissions levels with a software fix. The middle generation may require some hardware in addition to the software. And the oldest vehicles, the so-called Gen1 vehicles, they may require a retro fit. And we are quite concerned about that because of our experience with retro fits in general. We have seen in the past that retrofit devices just don't work as well as they are intended to, even it is being done by the original manufacturer. So I think it is quite likely that they will end up buying back at least some portion of the fleet from the current owners.
Long story short: For at least some of the 482,000 vehicles in the U.S. with the 2.0 liter TDI engines in question, there isn't going to be a cheap way out.
The 3.0 liter engines may be a simpler fix
It could be a different story with he 3.0 liter V6 TDI engines. Those engines were developed by VW subsidiary Audi. They have been used in several Audi models, as well as the Volkswagen Touareg and Porsche Cayenne SUVs. (The two are mechanically related to Audi's Q7 SUV.)
Audi said in a statement on Monday that it is working with the U.S. Environmental Protection Agency (EPA) and the California Air Resources Board (CARB) on a solution for those engines. Audi said that under its agreement with EPA and CARB officials, it will revise the engines' software to meet U.S. standards and submit it for reapproval. It admitted that one of the systems in the engines' software is a "defeat device" as defined by U.S. law, and that it will continue to voluntarily hold off on selling it.
That fix will allow the VW brands to resume selling new models with the 3.0 liter diesel engine in the U.S. It may also be enough to fix the older engines. If so, the cost may be relatively modest: Audi said, "the related expense will be in the mid-double-digit millions of euros."
Fixing the cars is just a small part of the cost
The costs of recalling and fixing the affected vehicles is just one small part of VW's potential exposure, of course. It still faces billions in potential fines in the U.S. and Europe, as well as lawsuits by outraged owners and dealers and possibly even criminal charges.
A workable, affordable plan for fixing the cars would be a big step forward for VW, which has so far not seemed to make any progress in getting ahead of the scandal.
John Rosevear has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.