Emission Scandal Leads to VW Recall of 8.5M Diesel Vehicles

Volkswagen AG will embark on one of the biggest recalls in European automotive history, affecting 8.5 million diesel vehicles, after German authorities threw out the carmaker’s proposal for voluntary repairs.

The Federal Motor Transport Authority, or KBA, demanded a recall of 2.4 million cars in Germany after reviewing proposals Volkswagen filed last week to fix vehicles fitted with software designed to cheat on pollution tests, German Transport Minister Alexander Dobrindt said Thursday in Berlin. The mandatory recall is the basis for callbacks throughout Europe, where diesel accounts for more than half the market.

Germany’s rare public snub of its biggest carmaker came after Volkswagen circumvented diesel emissions regulations starting in 2008. The country’s demands will speed a process that Volkswagen said will last beyond 2016, and give authorities more control.

“It’s an unusual measure to be ordering a mandatory recall,” said Arndt Ellinghorst, a London-based analyst with Evercore ISI. “It shows to me that the KBA is losing patience with VW’s slow response on what to do to fix the engines so far. Customers have been left unsettled.”

Biggest Recall

The 8.5 million affected cars represent slightly less than one-third of Volkswagen’s auto deliveries in the region from 2009 through August, based on sales figures the company published for the five divisions involved. The recall is also Germany’s biggest since its current rules took effect in 1997, more than the record 1.9 million cars the entire auto industry brought back in under repair programs last year, according to data from the Center for Automotive Management in Bergisch Gladbach, Germany.

The mandatory recall will be more expensive for Volkswagen because the company will need to work on the cars more quickly, Evercore’s Ellinghorst said. The manufacturer has yet to specify exactly how it will fix the cars, though it has said some will require only a software update while others will need new or rebuilt engine parts.

“The KBA’s decision opens up the possibility of a common and coordinated response in all European Union states,” Volkswagen Chief Executive Officer Matthias Mueller wrote Dobrindt on Thursday in a letter obtained by Bloomberg. “Such a unified procedure would be in the European spirit as well as in the interests of customers.”

Mid-November

Volkswagen must share technical details of its fix with authorities by mid-November, and the recall will begin in January. The KBA will test vehicles to ensure the repairs were successful, Dobrindt said. New parts necessary to fix some vehicles will probably be ready by next September, he said. Throughout Europe, Dobrindt has estimated that Volkswagen will probably need to exchange or rebuild parts for about 3.6 million engines.

For the sake of customers and the image of the automobile, “we will clear up what happened at Volkswagen,” Enak Ferlemann, state secretary in Germany’s Transport Ministry, said in a speech in the lower house of parliament. “Germany will stay the No. 1 auto country.”

U.S. Remedies

Regulators in the U.S. haven’t announced a recall yet. The U.S. Environmental Protection Agency, which has jurisdiction over compliance with emission standards, said it will have to evaluate whatever repairs Volkswagen proposes before it’s made part of a recall.

“EPA will order a recall in the future, but will not do so until we are confident that VW’s fix will work,” said Laura Allen, an agency spokeswoman. “EPA will conduct our own testing to confirm this. Then we will order a recall.”

The agency expects to receive information on Volkswagen’s proposed remedy for diesel vehicles with so-called Gen 2 emissions controls this week, Allen said. There’s no timeline for when EPA will order the recalls, she said.

The agency is still waiting on Volkswagen to provide information on vehicles with Gen 1 emissions controls, Allen said. According to VW, there are approximately 325,000 of those models – about two-thirds of the U.S. cars under investigation.

Leipzig Meeting

As Volkswagen grapples internally with the crisis, about 400 of its top executives met in Leipzig on Thursday. Another of the company’s top engineers, Falko Rudolph, chief of a parts factory near Kassel, was suspended as part of the investigation, a person familiar with the situation said, asking not to be named because the suspension is private. Rudolph couldn’t be reached for comment.

The carmaker admitted in September to designing software so that 482,000 of its diesel cars in the U.S. would turn on full pollution controls only when undergoing laboratory emissions testing, not on the road. Since then the deception has been shown to be far broader, affecting about 11 million cars worldwide. The software was also active in diesels VW sold with the same EA189 engine in Germany, Dobrindt said Thursday.

“The KBA is under pressure to show to the public they’re on top of this and that they’re in the driver’s seat,” said Stefan Bratzel, head of auto research at the University of Applied Sciences. “Recalls to fix key safety issues that go to the core of a vehicle’s operation almost always occur voluntarily, with the KBA monitoring. So making this fix – while the cars are running safely – a mandatory one shows the political pressure.”

The diesel crisis has wiped 21.5 billion euros ($24.5 billion) off Volkswagen’s market value.

VW faces a “large need for change,” Mueller told his top executives in Leipzig, according to a transcript of his speech. “I don’t think much of revolution. And the Volkswagen group doesn’t need one. What we need is courage to act consequently, the will to change.”

(With assistance from Tommaso Ebhardt and Sergio Di Pasquale in Milan, Alexander Weber in Vienna, Alice Baghdjian in Zurich, Tom Lavell in Frankfurt and Jeff Plungis in Washington.)