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VW Faces Billions in Fines as U.S. Sues for Environmental Violations

The U.S. Justice Department has sued Volkswagen for up to $48 billion for allegedly violating environmental laws – a reminder of the carmaker’s problems nearly four months after its emissions scandal broke.

Although such U.S. lawsuits are typically settled at a fraction of the theoretical maximum penalty, analysts said the size of the claim meant Volkswagen (VW) could face a larger bill than previously anticipated.

“The announcement serves as a reminder/reality check of VW’s still unresolved emissions issues,” Goldman Sachs analysts wrote in a note, maintaining their “sell” recommendation on the stock.

VW shares fell as much as 6 percent to a six-week low on Tuesday, the biggest drop on Germany’s blue-chip DAX index.

The civil lawsuit, announced on Monday, reflects the growing number of allegations against VW since the German company admitted in September to installing devices to cheat emissions tests in several 2.0 liter diesel vehicle models.

According to a Reuters review of the U.S. complaint, VW could in theory face fines of as much as $37,500 per vehicle for each of two violations of the law; up to $3,750 per “defeat device”; and another $37,500 for each day of violation.

The complaint says illegal devices to impair emission control systems were installed in nearly 600,000 vehicles in the United States.

In September, U.S. regulators initially said Europe’s biggest carmaker could face fines in excess of $18 billion.

The lawsuit had been expected, and analysts believe any fine will be far below the theoretical maximum. Although U.S. authorities sued Toyota for up to $58 billion for environmental violations around the turn of the century, they agreed a settlement that cost the Japanese carmaker about $34 million.

“We have not enumerated a maximum possible penalty, and will decline to speculate on what the court may ultimately choose to do,” said U.S. Justice Department spokesman Wyn Hornbuckle.

Equinet analyst Holger Schmidt cut his rating on VW shares to “reduce” from “neutral”.

“We continue to believe that no one is able to make anything else than a wild guess on potential fines,” he said.

During December, VW’s shares had been recovering as the carmaker announced incrementally positive news such as simple fixes for about 8.5 million affected cars in Europe.

The stock fell on Tuesday 22 percent below pre-scandal levels, with analysts particularly concerned about the impact on VW in the United States, where the firm has long struggled to make inroads and tougher regulations mean it faces bigger potential fines.

The lawsuit, filed on behalf of the U.S. Environmental Protection Agency (EPA), accuses VW of four counts of violating the U.S. Clean Air Act, including tampering with the emissions control system and failing to report violations.

“The United States will pursue all appropriate remedies against Volkswagen to redress the violations of our nation’s clean air laws,” said Assistant Attorney General John Cruden, head of the Justice Department’s environment and natural resources division.

The lawsuit is being filed in the Eastern District of Michigan and then transferred to northern California, where class-action lawsuits against VW are pending.

“We’re alleging that they knew what they were doing, they intentionally violated the law and that the consequences were significant to health,” said a senior Justice Department official.

VW’s cheating of diesel emissions tests allowed it to avoid a costly revamp of engines to meet new U.S. standards.

The Justice Department has also been investigating criminal fraud allegations against VW for misleading U.S. consumers and regulators. Criminal charges would require a higher burden of proof than the civil lawsuit.

The U.S. lawsuit also alleges VW gamed emissions controls in many of its 3.0 liter diesel models, including the Audi Q7, and the Porsche Cayenne.

VW’s earlier admissions eliminate almost any possibility that the automaker could defend itself in court, Daniel Riesel of Sive, Paget & Riesel P.C, who defends companies accused of environmental crimes, said.

To win the civil case, the government does not need to prove the degree of intentional deception at VW – just that the cheating occurred, Riesel said. “I don’t think there is any defense in a civil suit,” he said.

Instead, the automaker will seek to negotiate a lower penalty by arguing that the maximum would be “crippling to the company and lead to massive layoffs”, Riesel said.

Even after VW first admitted to using cheat devices in certain models, the automaker “failed to come forward and reveal” that other vehicles contained such devices, the government said.

To cheat the emissions controls, VW installed software that allowed the vehicles to detect when they were being tested on a flatbed. When the vehicles detected they were actually on the road, the software caused the emissions control systems to underperform or shutdown, the government said, allowing the cars to emit dangerous levels of air pollution.

The civil lawsuit does not preclude the Justice Department from pursuing criminal charges against VW, said the Justice Department official.

VW said in a statement: “Volkswagen will continue to work cooperatively with the EPA on developing remedies.”

“We will continue to cooperate with all government agencies investigating these matters.”

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VW Will Cut Spending By $1 Billion, Launch All-Electric Phaeton in EV push

MUNICH — Volkswagen Group said it will reduce investment spending at the VW brand by 1 billion euros ($1.1 billion) a year, as well as switch to a different diesel emissions treatment technology and launch an all-electric Phaeton sedan as the flagship for a new focus on electrification, reports Automotive News.

VW will increase its focus on long range plug-in hybrids and high-volume electric vehicles with a range of up to 300 km (186 miles), the company said in a statement today. The automaker also said it will speed up cost cuts and will overhaul the VW brand model strategy.

“The Volkswagen brand is repositioning itself for the future. We are becoming more efficient. We are giving our product range and our core technologies a new focus,” VW brand chief Herbert Diess said in the statement.

Diess said the brand will create room for forward-looking technologies by speeding up an efficiency program that targeted 5 billion euros in savings and operational improvements by 2017.

VW will cut spending on models, technology and production facilities at the VW brand by 1 billion euros a year through 2019 from its previous plans, a spokesman said. He declined to say what those investment plans had been.

Audi, Porsche to seek savings

In November, VW announced 85.6 billion euros of investments across the group between 2015 and 2019, with half earmarked for modernizing and expanding the model range.

Other brands in the group, which includes Audi, Porsche, Seat and Skoda, are working on similar efficiency-boosting programs, the spokesman said, without giving details.

Audi, the biggest earnings contributor at VW Group, is continuing an efficiency program that started before the diesel scandal hit, spokesman Juergen de Graeve said. The luxury-car unit planned last year to rein in annual costs by about 2 billion euros to offset spending on new technology, according to people familiar with the matter.

Pushed by Diess, who joined in July from BMW, VW will adopt diesel technology it previously eschewed for smaller models. The brand is now moving to the “best environmental technology” for its diesel cars, the statement said.

VW said it has decided to switch over to installing only diesel drivetrains with selective catalytic reduction (SCR) and AdBlue technology in Europe and North America “as soon as possible.”

VW engines affected by the diesel emissions rigging scandal used lean NOx traps to reduce nitrogen oxides emissions rather than the more expensive urea-based SCR and AdBlue systems. The tanks make diesel models heavier and more expensive, and they also must be refilled, making the cars less convenient to own.

Electric architecture

With diesel technology under pressure, VW plans to develop standardized components for electric vehicles with ranges as far as 500 km (310 miles).

VW said it will develop a new modular electric architecture dubbed MEB for compact vehicles for all group brands. The architecture will be designed for all body structures and vehicle types. It would allow the development of “particularly emotional vehicle concepts” and an all-electric range of 250 km to 500 km, the statement said.

At the Frankfurt auto show last month, VW said it would launch 20 battery-powered and plug-in hybrid vehicles by the end of the decade, including the first all-electric Porsche based on the Mission E concept and a production version of Audi’s e-tron Quattro concept.

The shift includes redesigning the Phaeton as an all-electric model. The current model’s gasoline and diesel versions will be axed. The next-generation Phaeton is due to hit showrooms by about 2019-2020.

“There is a real chance for VW to even extract something positive from the diesel fiasco,” said Stefan Bratzel, head of the Center of Automotive Management near Cologne. “Funneling more resources into electric mobility gives them a credible future perspective to try to overcome this crisis.”

The VW brand is likely to slump to a loss this year as it will shoulder the bulk of costs from the diesel emissions cheating that also affected the Audi, Skoda, Seat and light commercial vehicle brands, Reuters reported on Friday.

Supplier cuts

VW wants to extract 3 billion euros ($3.41 billion) in price cuts from its suppliers to help mitigate the costs of the emissions scandal, German newspaper Handelsblatt reported.

The measure would be part of a broader cost-cutting program including pay, marketing and sponsoring activities to help VW bear an estimated 40 billion euros in costs of the scandal, the paper reported, citing company sources.

The cuts come amid renewed criticism for Volkswagen’s handling of the scandal, which affects some 11 million cars worldwide. The company was far too slow to disclose its use of software to enable its diesel cars to pass U.S. laboratory emissions tests despite far higher on-road pollution, said Stephan Weil, prime minister of the German state of Lower Saxony and a VW board member.

“This admission should clearly have come much sooner — a further serious mistake,” Weil told the Lower Saxony parliament today. “Who decided this course of action and when is also something that’s being investigated.”

A VW supervisory board committee charged with overseeing the external investigation into the emissions cheating was meeting today in Wolfsburg.

VW presented German authorities with a plan last week for fixing affected cars in its home market. Regulators are still reviewing the proposals, which range from a software update to new parts for diesel engines.

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Suzuki’s Divorce From VW to Cost It Up to $3.9 Billion

TOKYO – Suzuki says it will buy back the 19.9 percent stake held by top shareholder Volkswagen Group after an international arbitration court last month ordered the German automaker to sell its holding, reports Automotive News.

The Japanese automaker said it would repurchase on Thursday as many as 122.77 million shares at today’s closing price of 3,842.50 yen, for up to 471.74 billion yen ($3.9 billion).

Suzuki did not say what it planned to do with the stock.

Rather than pursue other partnerships, Suzuki has been urged to focus on its dominant India operations and Maruti subsidiary by Daniel Loeb, whose hedge fund Third Point holds a stake in the automaker.

Loeb has urged the company to cancel the shares that it repurchases and focus on improving value for existing shareholders.

Suzuki and Volkswagen agreed to tie up in December 2009, pledging to cooperate on technology and on expanding in emerging economies, but the alliance soon faltered. Suzuki filed for arbitration in November 2011.

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VW Spent Two Years Trying to Hide a Security Flaw

LONDON (Bloomberg) – Thousands of cars from a host of manufacturers have spent years at risk of electronic car-hacking, according to expert research that Volkswagen has spent two years trying to suppress in the courts, reports Automotive News.

“Keyless” car theft, which sees hackers target vulnerabilities in electronic locks and immobilizers, now accounts for 42 percent of stolen vehicles in London. BMWs and Range Rovers are particularly at-risk, police say, and can be in the hands of a technically minded criminal within 60 seconds.

Security researchers have now discovered a similar vulnerability in keyless vehicles made by several carmakers. The weakness — which affects the Radio-Frequency Identification (RFID) transponder chip used in immobilizers — was discovered in 2012, but carmakers sued the researchers to prevent them from publishing their findings.

This week the paper, by Roel Verdult and Baris Ege from Radboud University in the Netherlands and Flavio Garcia from the University of Birmingham, U.K., is being presented at the USENIX security conference in Washington, D.C. The authors detail how the cryptography and authentication protocol used in the Megamos Crypto transponder can be targeted by malicious hackers looking to steal luxury vehicles.

The Megamos is one of the most common immobilizer transponders, used in Volkswagen-owned luxury brands including Audi, Porsche, Bentley and Lamborghini, as well as Fiats, Hondas, Volvos and some Maserati models.

‘Serious flaw’

“This is a serious flaw and it’s not very easy to quickly correct,” explained Tim Watson, Director of Cyber Security at the University of Warwick. “It isn’t a theoretical weakness, it’s an actual one and it doesn’t cost theoretical dollars to fix, it costs actual dollars.”

Immobilizers are electronic security devices that stop a car’s engine from running unless the correct key fob (containing the RFID chip) is in close proximity to the car. They are supposed to prevent traditional theft techniques like hot-wiring, but can be bypassed, for example by amplifying the signal.

In this case, however, researchers broke the transponder’s 96-bit cryptographic system, by listening in twice to the radio communication between the key and the transponder. This reduced the pool of potential secret key matches, and opened up the “brute force” option: running through 196,607 options of secret keys until they found the one that could start the car. It took less than half an hour.

“The attack is quite advanced, but VW produces a lot of very high-end vehicles that get stolen to order. The criminals involved are more sophisticated than the sorts who just steal your keys and drive off with your car,” said security researcher Andrew Tierney.

There’s no quick fix for the problem — the RFID chips in the keys and transponders inside the cars must be replaced, incurring significant labor costs.

One sentence removed

The research team first took its findings to the manufacturer of the affected chip in February 2012 and then to Volkswagen in May 2013. The car-maker filed a lawsuit to block the publication of the paper, arguing that it would put the security of winning an injunction in the U.K.’s High Court. Now, after lengthy negotiations, the paper is finally in the public domain — with just one sentence redacted.

“This single sentence contains an explicit description of a component of the calculations on the chip,” Verdult said, adding that by removing the sentence it was much more difficult to recreate the attack.

While challenging, determined “organized gangs” may persevere, said Watson.

“If you’re a maker of high-end cars I would suggest that the onus is on you to look after your customers’ purchases after they’ve bought them to make sure your systems are resistant to attack,” he added.

A VW spokesman responded: “Volkswagen maintains its electronic as well as mechanical security measures technologically up-to-date and also offers innovative technologies in this sector.”

Anti-theft protection is generally still ensured, he added, even for older models, because criminals need access to the key signal to hack the immobilizer. “Current models, including the current Passat and Golf, don’t allow this type of attack at all,” he said.

The Megamos Crypto is not the only immobilizer to have been targeted in this way – other popular products including the DST transponder and KeeLoq have both been reverse-engineered and attacked by security researchers.

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VW Does Not Need Chairman Until New Structure in Place – Labour Chief

WOLFSBURG, Germany – Volkswagen needs to come up with a new structure before thinking about appointing a permanent chairman, the powerful labour chief at Europe’s biggest carmaker said in an interview, reported Reuters.

For the first time in more than two decades, Volkswagen no longer has Ferdinand Piech at the helm, a corporate scion who controlled the balance of power between the interests of shareholders and workers representatives.

Analysts and investors had hoped for the appointment of a strong chairman to work with Chief Executive Martin Winterkorn to tackle some of the company’s problems, such as a low profitability at the core VW brand, which posted an operating margin of 2 percent in the first quarter.

Since Piech was ousted in April, Volkswagen’s workers representatives have sought to exert more influence over strategy, to strengthen the focus on raising production efficiency without cutting jobs.

“We want to first have a debate about the company structure, then we can talk about a supervisory board chair,” Bernd Osterloh, who is head of VW’s works council, told Reuters.

Winterkorn promised to present a new company structure by October after surviving a showdown with Piech in April, thanks to support from Osterloh and the State of Lower Saxony.

Workers representatives control half the seats on VW’s supervisory board while Lower Saxony, which owns 20 percent of the company, has another two seats, meaning they could potentially veto any candidate for chairman.

The power vacuum at the top comes at a crucial time for Volkswagen. The company wants to raise profits and boost sales in the United States in a bid to overtake rivals such as Toyota and become the best selling carmaker in the world.


In the past, Piech played a key role helping to chart the carmaker’s strategic direction, first as chief executive and then as chairman of Volkswagen.

Piech masterminded a push into so-called modular construction techniques and bought truckmakers MAN and Scania, as well as Bentley, Bugatti, Lamborghini and Porsche and took the Audi brand upmarket.

In a bid to improve profitability, the company has long faced calls to cut fixed costs in Germany and improve production efficiency at its factory in Wolfsburg, where 50,000 of its nearly 600,000 employees around the world work.

Osterloh and representatives from Lower Saxony, where Wolfsburg is based, have been opponents of any such cuts and are now in a stronger position, since Winterkorn relied on their backing to fend off Piech’s challenge.

Rather than opening the door to deeper cuts in Wolfsburg and other German VW plants, Osterloh’s proposals for a new structure would further centralise power at the company’s headquarters in Lower Saxony.

For example, he wants the company’s 12 brands to stick to specifications set out by headquarters so VW can benefit from economies of scale across the board, rather than making costly modifications to suit the needs of individual brands.

“Corporate headquarters needs to be able to supervise whether the technical specifications of the modular platforms have been adhered to,” Osterloh said.

He is also demanding the management board be reduced and the corporate structure be adjusted to reflect the company’s various modular production platforms: MQB for small to mid-sized cars, MLB for larger vehicles and MSB for sports cars.

At the moment, Volkswagen Group’s structure is devolved and based around its various brands such as Audi, Lamborghini, Bentley, Bugatti, Skoda, Seat, Ducati, MAN and Scania.

“The company needs to be able to take decisions quicker, and a smaller management board. Regions need more competence to take decisions,” Osterloh said.

Volkswagen’s management board is made up of nine members and includes positions responsible for procurement, China, commercial vehicles, production, sales and Audi.

Osterloh declined to elaborate on how the board should be reduced, but said the company should think about whether the board needs members for production and sales.


Osterloh said a new company structure should be ready to be presented in September, including a strategy that goes beyond 2018. He is against the idea of raising profits by selling off some of the company assets, such as MAN Diesel & Turbo.

“Before we sell anything we will make acquisitions in this area,” Osterloh said.

Expansion is also his preferred strategy for fixing problems in the United States. He said that to succeed going forward, the company should think about making large pick-up trucks.

“We want to accelerate efforts to catch up with rivals. To do this, a pick-up is needed in the medium term,” Osterloh said.

As a stop-gap solution, VW has appointed Berthold Huber, a former boss of the IG Metall labour union as interim chair, pledging to find a permanent chairman quickly.

Asked whether Wolfgang Porsche, head of the family which controls Volkswagen, could become chairman, Osterloh said:

“I value and respect Mr. Porsche, we worked together in a confidential and close manner in the past weeks, but the structure has to take precedent. The question of the supervisory board chairman still has some time to be resolved.”

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VW’s Audi Sales Up 2.5 Percent in April to 152,850 Cars

Volkswagen’s Audi luxury division said on Friday sales increased 2.5 percent in April to 152,850 cars and sport-utility vehicles, the highest-ever level recorded for any month in the carmaker’s history, reported Reuters.

Sales in Europe edged up 0.9 percent as gains in Italy and Spain offset a 42 percent slump in deliveries in Russia to 2,116 vehicles, Ingolstadt-based Audi said.

In the Americas, sales were up 12.7 percent, bolstered by a two-thirds increase in Brazil to 1,856 cars and a 37 percent jump to 3,219 cars in Canada.

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