23 September 2015 12:29:45 IST

Volkswagen chief faces grilling by board over diesel scandal

Expected to make recommendation on his future

Volkswagen Chief Executive Martin Winterkorn faces a reckoning with his board on Wednesday, summoned to explain the falsification of US emissions tests in the biggest scandal in the 78-year history of the world's largest carmaker.

A source close to the company said a five-member executive committee was grilling Winterkorn at the company's headquarters in Wolfsburg, Germany, and was likely to make a recommendation on his future ahead of a full board meeting on Friday.

Volkswagen is under huge pressure to act, with its shares down more than a third in value since the crisis broke. German Chancellor Angela Merkel has called for it to move "as quickly as possible" to restore confidence in a company held up for generations as a paragon of German engineering excellence.

But the board is in a tricky situation, with the 68-year-old CEO showing no sign of resigning after a hitherto highly successful eight year reign, in which the company doubled its sales and almost tripled its profits.

"VW needs a fresh start and in our view a new CEO," said Evercore ISI analyst Arndt Ellinghorst.

A story in the Tagesspiegel newspaper, denied by Volkswagen, said the board would replace him with Matthias Mueller, head of the automaker's Porsche sports car business.

Winterkorn, who was due to have his contract extended at Friday's board meeting, did not mention his future in a video message posted on the company's website on Tuesday, in which he repeated his apology for a scandal which has wiped out tens of billions of dollars from the company's value.

The US Environmental Protection Agency (EPA) said on Friday Volkswagen could face penalties of up to $18 billion for cheating emissions tests on some of its diesel cars.

The story has sent shockwaves through the car market, with dealers in the United States reporting people holding back from buying diesel cars and "#dieselgate" trending on Twitter.

The US Justice Department has launched a criminal probe, a source familiar with the matter said. New York and other state attorneys general are also forming a group to investigate, New York Attorney General Eric Schneiderman said.

"No company should be allowed to evade our environmental laws or promise consumers a fake bill of goods," Schneiderman said in a statement

Other countries in Europe and Asia have said they will also launch investigations into Volkswagens and other vehicles.

“Investors’ Nightmare”

Environmentalists have long complained that carmakers game the testing regime to exaggerate the fuel-efficiency and emissions readings of their vehicles. European politicians on Wednesday voted to speed up rules to tighten compliance with pollution limits on cars.

European car association ACEA said that so far there was "no evidence that this is an industry-wide issue".

But Societe Generale analysts said that while the uncertainty prevailed, the whole autos sector was likely to be "dead money" for a while.

As for Volkswagen, Deutsche Bank called the scandal an "investor's nightmare" and cut its recommendation to "hold" from "buy", predicting rising costs for making diesel cars would wipe out the company's cost-cutting programme.

A precipitous two-day collapse in the company's share price appeared to have stopped on Wednesday morning. At 1020 GMT, Volkswagen shares were up 2.8 per cent at 109 euros, after earlier touching a four year low of 95.51 euros.

Volkswagen was challenged by authorities as far back as 2014 over tests showing emissions exceeded California state and US federal limits, but held off admitting wrongdoing until regulators threatened to withhold certification for its 2016 diesel models.

Winterkorn is likely to come under pressure from the board for the time it took the company to respond to criticism.

In April this year, the CEO saw off a challenge to his leadership when the board ousted long-time chairman Ferdinand Piech.

There was no sign emissions testing was part of Piech's criticism of Winterkorn, although insiders say Piech was unhappy with Volkswagen's underperformance in the United States, where sales of VW-brand cars fell 10 per cent last year to less than half of their 2018 target of 800,000 deliveries.

Winterkorn has long been accused by critics of an excessively centralised and hands-on management style, which they say has led to production delays and hindered the company's ability to adapt to local market needs.

In 2012, the launch of the Lamborghini brand's Aventador got delayed by about six months after the CEO requested a different dashboard following a test drive, one company source said.