Volkswagen sets aside $7.3 bn over emissions scandal

Last Friday, the US's Environmental Protection Agency said VW rigged nearly half a million cars to defeat US smog tests

The crisis enveloping Volkswagen AG, the world's top-selling carmaker, escalated today as the company issued a profit warning following a stunning admission that some 11 million of its diesel vehicles worldwide were fitted with software at the centre of a US emissions scandal.

In a statement, the German company said it was setting aside around 6.5 billion euros ($7.3 billion) to cover the fallout from the scandal that is tarnishing VW's reputation for probity, raised questions over the future of its CEO Martin Winterkorn and seriously undermining its share price.

In the wake of its statement, VW's share price was down another 18.7 per cent at 108.75 euros and near a four-year low. The fall comes on top of yesterday's hefty 17 per cent decline and means the company has lost an eye-watering 25 billion euros or so in just two days of frenzied trading.

The trigger to the company's market woes was last Friday's revelation from the US's Environmental Protection Agency that VW rigged nearly half a million cars to defeat US smog tests.

The company then admitted that it intentionally installed software programmed to switch engines to a cleaner mode during official emissions testing, and apologized for it. The software then switches off again, enabling cars to drive more powerfully on the road while emitting as much as 40 times the legal pollution limit.

In its statement today, Volkswagen gave more details, admitting that "discrepancies" related to vehicles with Type EA 189 engines and involved some 11 million vehicles worldwide.

"A noticeable deviation between bench test results and actual road use was established solely for this type of engine," it said. "Volkswagen is working intensely to eliminate these deviations through technical measures."

To cover the necessary service measures and what it says are "other efforts to win back the trust of our customers," VW said is setting aside some 6.5 billion euros in the current quarter. There was no mention of any fines or penalties. The EPA has indicated that it could, in theory, fine VW up to $18 billion.

The costs, VW conceded, may be subject to revaluation in the light of ongoing investigations. As a result, it said 2015 earnings targets will be adjusted but it didn't specify by how much.

The company added that the software is also installed in other vehicles with diesel engines but that that for the "majority of these engines the software does not have any effect."

Volkswagen said that new vehicles with EU 6 diesel engines currently on sale in the European Union comply with legal requirements and environmental standards.