Euro VW Diesel Values Will Limit Any Dieselgate Payouts

When the Dieselgate scandal broke wide open last year, many people started making demands of the automaker, some court-related and others issues related. In the United States, Volkswagen's self-inflicted emissions scandal is on its way to final settlement as negotiators work out what to do with 80,000 3.0-liter, V-6 engines. In Europe, things are still up in the air and circumstances seem to be working against the 8.5 million owners who may have thought they were going to receive settlements similar to those in the United States because their vehicles are holding their value.

VW Apologizes For Scandal

In the United States, the settlement efforts began with the automaker apologizing for its admitted diesel emissions scandal. Within months, VW offered owners $1,000 debit cards and vouchers for other goods and services. Then came the lawsuits and the court's action merging them into one class-action lawsuit in U.S District Court in San Francisco. Negotiations began last year over a final settlement for owners of 2.0-liter powerplants, the so-called EA189 engine, that was at the heart of much of the scandal.

The EA189 was the engine that was supposedly developed to meet with at-the-time-new oxides of nitrogen (N0x) standards that were to have been placed on diesel engines in 2008. The EA189, when it was first proposed and undergoing development, was supposed to use Blue doping (urea formaldehyde) a proprietary Mercedes-Benz product. VW's engineering team leader, at that time, determined that the automaker was going to license the technology – a technology that requires a refill every month. It is sprayed into the exhaust stream before it is catalyzed and sent down the tailpipe.

The licensing never happened as the engineering manager left VW and the team that took over the project decided they would use high-temperature oxygen reburn (trap) technology to meet the toughened standards. To enable this technology, performance and fuel economy would have suffered drastically.

The engineering team couldn't let this happen as the EA189 was supposed to be the engine that would revolutionize diesel tech United States car fleet and which would lead to supposedly “clean diesel” cars and a bigger VW market share. Ultimately, the EA189 did just that, but with a huge twist. The engineering team realized that lean burn/reburn technology didn't work very well. They also knew that if they implemented it, VW would be losing what they believed would be significant market share because their turbodiesels would suffer from the lousy performance.

The engineers could let this happen, and so they joined forces with others who could supply the necessary software to turn down emissions software when not needed so the vehicles could perform well and with excellent fuel economy. The engineers also realized they needed a way to make it appear as if the EA189 met the standards so the software they used enabled a “defeat switch” that would turn on the diesel emissions software when needed during testing and then switch it off on test completion. When the engines reverted to standard run mode, emitting massive amounts of NOx, up to 40 times the limits, while performing well.

Crux Of Dieselgate Scandal

That was the crux of the scandal for which the automaker has paid out $16.5 billion so far in settlement payments to 475,000 U.S. turbodiesel owners and others. The agreement spelled out buybacks at the September 2015 value of their vehicles, as laid out in the National Auto Dealers Assn. guide – an industry-leading standard for used car pricing – as well as offering the owners between $5,100 and $10,000 in compensation. Further, VW agreed to pay $2 billion to fund infrastructure improvements, including zero emissions vehicles, as well as $2.5 billion in remediation funds. The states also received an added bit of about $800 million while dealers received compensation of $1.2 billion.

Seeing the settlement, European consumer groups and lawmakers demanded the same type of results for their constituents. However, their requests have not been met. Indeed, there have been many lawsuits filed by both consumers and shareholders. There are some significant differences between U.S. and German courts, not the least of which is the fact that American suits can be folded into class actions, while in Germany they cannot.

In a surprising development that has a direct impact on consumers, residual values of VW Group diesel cars, equipped with emissions rigging devices, are holding up. And, according to a story in Automotive News Europe Friday, because values are holding, the consumer arguments that customers should receive compensation from the automaker, similar to that agreed to in the US, may be undermined.

European Union Commissioner Elzbieta Bienkowska has demanded the same kind of deal for the 8.5 million Europeans that Americans have received. If VW were to settle similarly to the way it settled in the US, it would cost the automaker hundreds of billions of euros, a figure that is “a terrifying thought for the company,” Automotive News Europe said.

A core argument put forth by consumer advocates is that consumers are losing value for their vehicles through sinking residual values. That is not the case, says VW Financial Services (VWFS), the automaker's financial division. VWFS, citing data from Schwacke, an independent market tracker, says used-car values for Volkswagen diesels are better than VWFS had assumed. VWFS had initially written down its portfolio of leased VW vehicles by 570 million euros -- about a three percentage point drop in residual values. VWFS also figured its gasoline models would feel about a one percentage point drop. That scenario has not played out Schwacke data shows. VW's used-car values have consistently been better.

VW Values Appear To Be Holding

VWFS believes that since it is in better shape than it had thought it would have been, at this point, it may ultimately be relatively unscathed by Dieselgate. If so, VFWS believes it will be able to restore the 570 million to the books over the next couple of years as realized profits. This assumes that diesel residuals continue to hold.

Basing an analysis on these assumptions, it is logical to suggest that VW customers should be able to realize the same kinds of results as VWFS. “The data suggests VW diesel owners should be able to sell their fraudulent cars without incurring a material financial penalty so long as they are brought into compliance (with all approved repairs),” Automotive News Europe said. The newspaper, in its analysis, noted that since VW customers have suffered no financial disadvantages prior to any recall or after, “it's hard to make the legal case that VW owes them compensation.”