Volkswagen Drops 22% After Admitting Diesel Emissions Cheat in U.S. 

Volkswagen AG dropped the most in almost seven years after it admitted to cheating on U.S. air pollution tests for years, risking billions in potential fines and a backlash from consumers in the world’s second-biggest car market.

The shares plunged as much as 22 percent to 126.40 euros, the steepest intraday decline since Oct. 24, 2008, extending the stock’s slump for the year to 32 percent. The drop wiped out about 16 billion euros ($18 billion) in value, making the Wolfsburg, Germany-based company worth 60.4 billion euros.

Volkswagen Chief Executive Officer Martin Winterkorn said on Sunday that the company is cooperating with the probe and ordered its own external investigation into the issue. The CEO said he was “deeply sorry” for breaking the public’s trust and that VW would do “everything necessary in order to reverse the damage this has caused.”

Winterkorn, whose contract renewal is scheduled for a supervisory board vote on Friday, now faces a serious challenge to his leadership, said Arndt Ellinghorst, a London-based analyst for Evercore ISI.

“This latest saga may help catalyze further management changes at VW,” Ellinghorst wrote in a note Monday.

Sales Halted

VW has halted sales of the models involved, which were a cornerstone of Winterkorn’s effort to catch up in the U.S. market. The violations, which affect nearly half a million vehicles, could result in as much as $18 billion in fines, based on the cost per violation and the number of cars. Criminal prosecution is also possible.

“If this ends up having been structural fraud, the top management in Wolfsburg may have to bear the consequences,” said Sascha Gommel, a Frankfurt-based analyst for Commerzbank AG, whose share rating is under review.

The German carmaker admitted to fitting its U.S. diesel vehicles with software that turns on full pollution controls only when the car is undergoing official emissions testing, the Environmental Protection Agency said Friday.

Analysts at Kepler Cheuvreux cut their recommendation on Volkswagen stock to hold from buy, reducing their target price 27 percent to 185 euros. Volkswagen faces not only a short-term drop in sales and a hit to its reputation but also the longer-term risk of litigation in the U.S., the analysts wrote in a note on Monday.

40-Fold Excess

During normal driving, the cars with the software — known as a “defeat device” — would pollute 10 times to 40 times the legal limits, the EPA estimated. The discrepancy emerged after the International Council on Clean Transportation commissioned real-world emissions tests of diesel vehicles including a Jetta and Passat, then compared them to lab results.

Volkswagen had counted on clean, powerful diesel cars to help it build its sales in the U.S., where it has struggled for years. Sales of VW-brand cars in the country dropped 10 percent last year to 366,970; Volkswagen aimed to almost double annual Audi and VW brand sales to 1 million vehicles by 2018.

“VW’s U.S. sales target for 2018 had been ambitious as is,” said Klaus Breitenbach, a Frankfurt-based analyst for Baader Bank AG. “Now I believe it is no longer reachable.”