For quite some time now, government regulators have been concerned about the difference in Volkswagen AG 's VLKAY vehicles emission levels in the laboratory and on road. In its defense, the automaker had stated that the issue was technical and could be taken care of.
Under mounting regulatory pressure, in Apr 2015, Volkswagen informed owners of its diesel-powered Audis and other vehicles in California about an emissions service action. The company further stated that the vehicles require a software upgrade in order to offer better emission levels.
However, the company did not inform the owners that the software update was being made to satisfy government regulations. In Dec 2014, the officials at the California Air Resources Board and the Environmental Protection Agency (EPA) had demanded a recall covering 2010-2014 Volkswagen vehicles integrated with 2-liter diesel engines. However, the recall did not fix the problem.
Last week, the EPA revealed that the company had developed a software algorithm to deceive U.S. emission tests. Meanwhile, Volkswagen accepted that its diesel vehicles in the U.S. are installed with software which makes the engines appear to have low emission levels. The software switches on pollution controls during emission tests and then switches it off to power the engine, once the vehicle is on road. The automaker has been resorting to such practices for almost seven years.
According to the EPA, Volkswagen vehicles emit nitrogen oxides, or NOx, at almost 40 times the standard amount. Although the cars do not pose safety risks, public health is at stake.
Consequently, Volkswagen has been ordered to halt the sale of its diesel vehicles in the U.S. Almost 11 million vehicles around the world are equipped with this software. The vehicles in concern include Jetta, Beetle, Audi A3 and Golf from model years 2009-2015 and Passat of model years 2014 and 2015. The company has also halted the production of 2015 and 2016 Volkswagen and Audi models powered with four-cylinder turbo diesel engines. Sale of used vehicles with these engines will also be stopped.
Meanwhile, Volkswagen may incur a fine of $37,500 per vehicle for the violation. The automaker will also have to fix the problem free of cost as soon as it develops a solution. In addition, Volkswagen expects to record a $7.3 billion charge for the fraud which has severely tarnished its reputation, clearly reflected by its declining share price. It is also expected to affect the company's global sales. In addition, CEO Martin Winterkorn resigned on Sep 23.
Volkswagen currently carries a Zacks Rank #4 (Sell). Better-ranked stocks in the same industry include Pep Boys - Manny, Moe & Jack PBY , Meritor, Inc. MTOR and U.S. Auto Parts Network, Inc. PRTS . Pep Boys sports a Zacks Rank #1 (Strong Buy) while U.S. Auto Parts and Meritor hold a Zacks Rank #2 (Buy).
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