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Time Is Running Out for Volkswagen to Address the Diesel Scandal

By John Rosevear - Apr 20, 2016 at 4:20PM

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Key deadlines are approaching. Will VW finally tell us how it will settle charges that it cheated on emissions tests -- and how will it fix the cars?

Under pressure: VW CEO Matthias Mueller has many questions still to answer about his company's diesel-emissions cheating scandal -- and the answers are coming due. Image source: Volkswagen.

The pressure on Volkswagen (VWAGY -2.47%) to settle its diesel-cheating scandal is about to be stepped up once again. Several key deadlines related to the scandal are approaching, including a federal court date and a self-imposed deadline for releasing VW's long-overdue 2015 financial results.

Deadline one: Federal court in California
VW has been sued by the U.S. government and the powerful California Air Resources Board. That suit is being heard in a federal court in San Francisco. The judge in that case originally gave VW until March 24 to present its plan for fixing the roughly 580,000 vehicles in the U.S. that don't meet emissions standards because of the cheating software. That deadline was extended to tomorrow, April 21.

The judge agreed last month to extend the deadline after VW and regulators argued that they needed more time to get to a comprehensive settlement. Reports have suggested that beyond a plan to recall and repair the cars, VW may be forced to buy back some of the affected vehicles and to fund some sort of compensation for years of excess nitrogen oxide emissions. Nitrogen oxides are the compounds that cause smog; in normal driving, the affected VW engines emit them at many times the limit set by U.S. law under the Clean Air Act.

The good news: We might finally learn VW's plan for fixing the cars on Thursday. The bad news: There are hints that VW may ask for yet another extension.

Deadline two: VW has yet to report its 2015 earnings
How much money did VW earn in the fourth quarter of 2015? We still don't know, because the company has yet to report its fourth-quarter and full-year 2015 earnings. Those reports were postponed by CEO Matthias Mueller until April 28, so that the company could more accurately charge the costs of the scandal against its earnings. VW has already set aside 6.7 billion euros ($7.6 billion) to cover the costs of the scandal. Reuters reported on Wednesday that VW will substantially increase that reserve next week.

But there's another reason why that deadline is important: In addition to the earnings reports, Mueller has promised to provide investors with an update on the findings of an ongoing internal investigation into the diesel scandal.

Again, though, reports are suggesting that the investigation may be far from complete. Bloomberg reported that the outside investigators commissioned by VW's supervisory board have struggled to wade through the massive amount of information they have collected. It appears that the people responsible for the cheating software used a series of code words to discuss it in email and memos, and untangling those code words has proven to be a challenge. 

Meanwhile, German business newspaper Handelsblatt reported this week that the scandal may have roots in an Audi effort to evade emissions standards that goes all the way back to 1999. That report casts a shadow on now-departed VW CEO Martin Winterkorn, who ran Audi at the time. Winterkorn, who left the company days after the scandal first broke last September, has denied having any knowledge of the cheating software.

The upshot: These delays are hurting VW badly
At this point, I think most VW investors are resigned to the fact that this scandal is going to be expensive. I think even if VW had to pay as much $25 billion to settle outstanding charges and lawsuits, investors would be willing to take that with the knowledge that the scandal was now settled.

But this mess has now been dragging on for seven months, and we still don't know how VW is going to fix the affected cars -- much less have any idea how VW will settle the growing list of litigation related to the scandal (or importantly, how much it will cost).

In the meantime, rival automakers are moving ahead with radical efforts to embrace new technologies and confront "disruptive" new entrants. VW is trying to do that as well, but the longer it remains bogged down in this scandal, the harder it will be to move on.

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