Volkswagen agrees to US$1b settlement in cheating-scandal recovery

[SAN FRANCISCO] Volkswagen AG took an important step in digging out from its emissions-cheating scandal by reaching a US$1 billion agreement to settle lawsuits over tainted 3.0-litre diesel engines.

The preliminary accord calls for the German automaker to fix or buy back 83,000 Audi, VW and Porsche vehicles equipped with a so-called defeat device.

The deal includes pledges by Volkswagen to spend US$225 million to mitigate environmental damage the autos caused and US$25 million to support the use of zero-emission models, the California Air Resources Board and the US Department of Justice said in statements following a US federal court hearing in San Francisco.

Resolving the issue with the 3-litre vehicles has proven to be sticky as Volkswagen insisted the engines were fixable and balked at agreeing to buy back all of the affected cars, in contrast to an October deal covering 480,000 rigged 2-litre autos in the US.

While the settlement is a step forward, it will potentially add to the 18.2 billion euros (S$27.22 billion) Volkswagen has so far set aside to cover the damages from years of duping consumers and regulators by manipulating emissions tests in a scandal involving 11 million diesel vehicles worldwide.

Volkswagen is still under criminal investigation in the US and on the hook for outstanding civil claims from several states. It also faces hundreds of investor lawsuits in Germany and is the subject of a criminal probe there as well as in South Korea.

The Justice Department said the settlement reached Tuesday "does not resolve any pending claims for civil penalties, nor does it address any potential criminal liability", nor does the deal "resolve any consumer claims, claims by the Federal Trade Commission or claims by individual owners or lessees who may have asserted claims in the ongoing multidistrict litigation".

The US Environmental Protection Agency estimated that the accord reached Tuesday will cost Volkswagen US$1 billion, which would increase the amount it has agreed to pay to resolve claims in the US and Canada to more than US$19 billion. Jeannine Ginivan, a spokeswoman for VW's US unit, declined to comment on any dollar figure until a final agreement has been reached with car owners.

Details of the agreement with car owners were still being worked out, and US District Judge Charles Breyer, who's overseeing the case in San Francisco, ordered lawyers to report back to him Thursday.

The settlement marks "an important step in the right direction to get the DOJ criminal fine out of the way, which we expect under the Obama administration," Arndt Ellinghorst, a London-based analyst at Evercore ISI, said in a note to clients. He estimates the financial hit from that penalty to be US$3 billion.

Volkswagen is "committed to earning back the trust of all our stakeholders and thank our customers and dealers for their patience as the process moves forward," the carmaker said in a statement.

VW shares rose 0.4 per cent to 136.85 euros as of 10.15am Wednesday in Frankfurt. The stock has fallen 16 per cent since the revelation of the scandal in Sept 2015.

The settlement provides for repairing the cars if a fix is approved by the government. It also covers claims against VW supplier Robert Bosch GmbH, which said specific terms may not be disclosed until a definitive agreement is reached and presented to the judge.

"Bosch neither acknowledges the facts as alleged by the plaintiffs nor does Bosch accept any liability," the component maker said in a statement.

Vehicles covered by the 3-litre settlement include the 2014 Volkswagen Touareg, some 2015 Porsche vehicles and some 2016 Audi models.

Recall plans for most 3-litre vehicles involve a simple software update, people familiar with the matter have said. Avoiding a full buyback of all the cars would save the company about US$4 billion, the people said.

BLOOMBERG