Volkswagen diesel owners now may have a sense of what their cars are worth in the wake of the diesel Volkswagen cheating scandal. As information emerges about an agreement in principle between the automaker and the U.S. Environmental Protection Agency, it appears that owners will have the option to have their TDI-equipped Volkswagen and Audi models either purchased back or modified by the company. Those with leases could terminate their contract without penalty.
“It means that you now have a sense of what your options are going to be, whether it’s turn in your lease, sell your car back to VW, or take a check from VW and let your car be modified,” Kelley Blue Book senior analyst Karl Brauer tells U.S. News & World Report.
Details have not been officially released, and many aspects of the plan are still unknown, including which of the three generations of engines will be included in the program. The bulk of the TDIs involved in the Volkswagen scandal are “Gen 1” models that may be very expensive to modify to meet standards, if altering the cars comply is even technically possible. More details are expected to be released following a June 21 hearing.
The plan submitted to the regulators appears to only address the 482,000 four-cylinder diesels found to have software that cheats emissions tests, not the 85,000 six-cylinder VW, Audi, and Porsche models also suspected of deliberately violating emissions standards.
Values of the affected cars have been dropping at a precipitous rate since the scandal broke on September 18, 2015. According to auction data from Kelley Blue book, the values of VW and Audi diesels plummeted 29.8 percent from June 2015 through February 2016, compared to 12.9 percent for their gasoline-powered VW and Audi counterparts. March numbers show only a 26.5 percent overall decline for the TDIs, but the rebound is probably due to seasonal variances and some anticipation of a pending deal, according to Brauer.
It’s expected that the agreement between Volkswagen and its regulators will include a buyback program based on the vehicles’ values before the emissions scandal broke. With the substantial difference in values between then and now, it would be advisable to wait to sell your TDI until more is known about the agreement.
“I don’t think you’re going to lose money waiting, and you might gain money waiting,” says Brauer. “So I probably would wait.”
The most likely scenario, according to Brauer, is that VW offers to buy the first generation of the diesels back, while the second and third generations receive modifications to bring them into compliance. It’s estimated that 325,000 of the 482,000 affected cars are Gen 1 models.
“If that’s what ends up happening, that does somewhat elevate the market value of the cars,” Brauer says. “But because we’re not sure that that’s the scenario, it’s still a little too foggy to know for sure that they’re going to be somehow desirable, and whatever value they’ve lost will be regained through this repair or resolution process.
How did we get here?
Volkswagen was under tremendous pressure by management to increase sales as it strived to become the world’s No. 1 automaker. One approach they pursued was to become the market leader in diesel vehicle sales around the world. America was a prime target of the strategy, where the turbodiesels were seen as significantly more efficient than their gasoline counterparts and loved by their buyers.
While every other major seller of diesel vehicles used selective catalyst reduction (SCR, or urea injection) to help manage the emissions of their vehicles, VW did not. SCR is expensive, and the urea tank takes up valuable space in the car’s design. Selective catalyst reduction systems spray a urea solution (sometimes called AdBlue or diesel exhaust fluid) into the exhaust stream. A chemical reaction in a catalyst chamber then reduces the level of nitrogen oxide by converting it into nitrogen and water, with just a bit of carbon dioxide.
Current VW diesel designs do use the technology, but even those vehicles were found to have cheated the emissions tests.
Between 2009 and 2015, about 482,000 vehicles were sold in the U.S. with VW and Audi four-cylinder TDI engines, and another approximately 85,000 VWs, Porsches, and Audis were sold with V6 TDIs. The term “Clean Diesel” was used to describe the technology that allowed the vehicles to achieve impressive efficiency with the promise of low emissions.
In 2014, the cracks in VW’s facade of cleanliness began to appear. During May 2014, the powerful California Air Resources Board (CARB) that regulates emissions in California (and sets the tone for regulators across the country) received an independent report questioning VW’s reported exhaust emissions.
The International Council on Clean Transportation presented CARB with a study showing substantial differences between how VW diesels performed on emissions tests inside the lab and how they performed during on-road testing. Specifically, nitrogen oxide levels were much higher in the tests done on the road.
In December 2014, Volkswagen offered to recalibrate the engines on first and second generation 2.0-liter four-cylinder engines through a recall effort, but by July 2015, CARB’s follow-up studies showed that these fixes did not bring the engines into compliance.
In August 2015, the EPA announced that they were withholding certifications on VW’s 2016 diesels until differences in the testing results could be explained.
September 18, 2015 was earth-shattering for Volkswagen, its dealers, and owners of TDI models across the country. As the diesel emissions cheating scandal broke wide open, the EPA announced that Volkswagen intentionally installed software in the computers of their diesel models to cheat U.S. emissions tests. Volkswagen violated the Clean Air Act and was ordered to recall 482,000 cars in the U.S.
Volkswagen admitted that it installed a “defeat device” in the software that controlled the emissions systems in the cars. When it recognized that the engine was being tested, all of the emissions systems were employed at peak performance. When the system determined that the car was being driven on the road, it dialed back the emissions controls to increase efficiency and performance.
Unfortunately, reducing the effectiveness of the emissions controls directly increases the amount of pollutants leaving the tailpipe. Nitrogen oxide emissions could be as high as 40 times the amount allowed by regulators.
By September 21, dealers were ordered to stop selling the affected cars, whether new or used. On September 22, Volkswagen announced that the scandal involved 11 million cars worldwide, including 8.5 million in Europe. America’s emissions standards are stricter than Europe’s, and any fix here is expected to be significantly more complex.
In November, Volkswagen began to offer U.S. customers $1,000 gift cards as a show of goodwill. With class action lawyers descending on the company and barraging its customers with offers of representation, Volkswagen was feeling increasing pressure to find a quick, equitable fix.
Meanwhile, the value of customers’ cars plummeted, right along with Volkswagen’s sales. While the rest of the industry achieved record sales, Volkswagen’s languished, dragged down by the diesel scandal.
So, where do we go from here?
As reported by several outlets, VW’s plan is expected to include an offer to buy back at least some of the affected cars, an opportunity to return leased vehicles with no penalty, modifications to certain vehicles to bring them into compliance, and compensation to owners in return for a promise not to pursue further legal action.
In addition, Volkswagen will reportedly set up a fund to offset the environmental damage done by its over-polluting diesels.
If the plan is approved by regulators, VW TDI customers will have tough choices to make: Do I return my leased car or sell one that’s functioning fine for me, with no safety concerns, and one that’s allowing me to save money on fuel? Do I allow my car to be modified in such a way that my fuel economy is potentially reduced or the driving characteristics that I enjoy are changed?
The announced agreement in principle creates almost as many questions as it answers. Will, for instance, customers be required to take one of the offers? Will regulators demand that modifications be made in order for the vehicles to gain renewed registrations?
If the regulators in states that require periodic emissions testing (such as California, Oregon, and New York) require modifications, but others with less stringent regulations do not, will the dirty TDIs just migrate to those less stringent states? Or will federal regulators ban reregistration nationwide?
Will Volkswagen be able to survive the scandal from a business standpoint or remain viable in the U.S.? The buybacks alone will cost billions. Kelley Blue Book estimates that a buyback of Gen 1 cars would cost $4.4 billion, or $7.3 billion if all of the affected 2.0-liter vehicles are bought back. There’s also a potential fine of $37,500 per noncompliant car sold. That’s $18 billion, though the final number is expected to be much less. Finally, Volkswagen is under attack from the Federal Trade Commission for falsely advertising that their diesels were “clean.”
Multiple class-action lawsuits have been filed on behalf of customers, and the cases have been consolidated in eco-friendly San Francisco, rather than Volkswagen’s preferred Detroit.
“I still am fascinated by the potential contingent of Volkswagen and Audi diesel owners who don’t want to do anything to their cars,” says Kelley Blue Book’s Brauer. “They don’t want to sell it back to Volkswagen, they don’t want it modified by Volkswagen, and they might not even want a check cut to them if it means doing one of those things, getting it back unsure of what they’re going to get back.
“There are 483,000 of these things, give or take,” Brauer says. “It wouldn’t surprise me if 400,000 plus feel the way that I just described. That will make things really challenging for Volkswagen and for the government. What if customers say ‘I love my car, and my biggest concern is that it’s going to be changed in a way that makes me not love it anymore’?”
2009-14 VW Jetta TDI
2009-14 Jetta SportWagen TDI
2010-14 VW Golf TDI
2012-14 VW Beetle TDI
2009-13 Audi A3 TDI
2012-14 Volkswagen Passat TDI
2015 Volkswagen Golf TDI
2015 Golf SportWagen TDI
2015 Jetta TDI
2015 Passat TDI
2015 Beetle TDI
2015 Audi A3 TDI
(Source: Green Car Reports)
Porsche, Audi, and Volkswagen V6 TDI models are also affected by the scandal, but no agreement has been announced about a proposed fix or compensation.