Volkswagen Shares Drops 17% in One Day Following Emissions Revelation

Shares of Volkswagen, Germany’s largest auto manufacturer and the world’s second largest behind Toyota, plummeted on Monday following accusations from the United States Environmental Protection Agency that the company had cheated on emissions tests. Shares prices lost 17% of total value to close at $131.90, down from $162.20 at close on Friday. On Tuesday morning, the firm revealed that nearly 11 million of its vehicles worldwide are, indeed, non compliant with environmental regulations. The defect is found in the Type EA 189 diesel engine.

The circumstances surrounding these allegations are, to say the least, unusual. Monday’s accusation from the EPA stated the Volkswagen’s 189 engines had been equipped with a specialized “test defeat device” that was programmed to detect when the engines were being tested. Under the conditions of a normal environmental test, this engine management system would regulate fuel and air input to the engine so as to greatly reduce emissions, making it appear compliant. Under non-testing conditions, the engine management system returns to its normal operating parameters, creating emissions up to 40 times greater than allowable under US law.

In addition to a loss of nearly one fifth of its market value and a possibility for further declines as more facts come to light, Volkswagen is also under the threat of large financial and criminal penalties stemming from the attempt to deceive regulatory agencies. On Tuesday, German chancellor Angela Merkel called for complete transparency on Volkswagen’s part, advising that they reveal all of the facts in the matter quickly and without reservation. German Transportation Minister Alexander Dobrindt is said to be working closely with the automaker’s executives to speed up the process of making information about the scandal and how it occurred public.

In the meantime, Volkswagen has taken what measures it can to restore investor confidence and manage the fallout. Along with the admission that 11 million vehicles were affected on Tuesday, the company also announced that it will be setting aside $7.2 billion in the third quarter for management of the crisis. It is likely that this sum and more will be eaten up in legal fees as the scandal progresses, as multiple countries are now investigating Volkswagen’s actions with the possibility of criminal prosecution. Current estimates regarding the number of affected vehicles suggest that Volkswagen could also face regulatory financial penalties of up to $18 billion in the US alone, more than twice what the company has already set aside.

Speculation has been widespread that this scandal will not only severely damage Volkswagen, but also be the beginning of the end for diesel engine cars in general. It is not yet clear precisely what the financial and legal ramifications of the revelation will be, but it is clear the Volkswagen share prices are in for a rocky period. As of the writing of this article on Tuesday morning of September 22nd, Volkswagen’s shares have dropped to a price of $107.80 following the admission by the company that 11 million vehicles were equipped with this type of management system.