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Volkswagen’s efforts to clear diesel cloud sputter

For Volkswagen, the new year already is shaping up as a lost year. A full four months into a crisis that has cast it as a cheater, polluter and corporate villain, the German automaker appears to be backsliding in its stated aim of regaining trust and credibility with consumers, dealers and regulators. One ominous sign was the wide disparity in how VW and regulators have characterized the company’s proposals to fix its noncompliant diesel vehicles — proposals that were roundly rejected last week by California’s air-quality agency, a decision seconded by the EPA. The rejection prolongs VW’s struggle to get out from under a cloud of suspicion and to regain traction in a market that is critical to its growth strategy. As they wait for a resolution, U.S. Volkswagen dealers — roughly 40 percent of whom lost money on their VW franchises last year — are still barred from selling new diesels, which accounted for more than 20 percent of their sales before the crisis surfaced last year. Until a proposed remedy is approved and put into place, VW’s U.S. officials acknowledge, they have few options to try to rehabilitate the brand or engineer a sales recovery.

Dealers had already been looking at 2016 as a challenging year but one with some light at the end of the tunnel. A new midsize crossover, which dealers have been clamoring for, arrives early next year, and a redesigned Tiguan compact crossover, with more U.S.-friendly proportions, is due in mid-2017. For now, though, they are stuck with the diesel stop-sale, an image problem and an unfavorable product mix. The current environment of cheap gasoline fueling heady light-truck sales is “already the worst-case scenario” for VW, said AutoPacific analyst Dave Sullivan, because of its limited truck lineup. “It’s going to be a difficult year to be a VW dealer or a supplier to their plant in Chattanooga,” he said. “Even if all of this never happened, VW doesn’t have the product breadth that lines up with what consumers are buying today.” VW’s credibility problems broke into the open last week, right under the spotlights of the Detroit auto show, where a new executive team led by Volkswagen AG CEO Matthias Mueller and brand boss Herbert Diess vowed to dedicate the year to rebuilding trust in the company.

The effort stumbled out of the gate as Mueller botched an explanation for the scandal in an NPR interview, dismissing it as “technical problem” and a misinterpretation of U.S. law. He quickly recanted. California regulators further derailed the publicity tour by rejecting VW’s proposal to fix the 2.0-liter diesels with illegal emissions software. While there were early signs of difficulty with the plan — VW submitted it to the California Air Resources Board less than an hour before the deadline in November and had to make several updates in subsequent weeks — VW executives had expressed confidence that it would prevail. Mueller characterized the plans as “appropriate technical solutions” while touting the “huge progress” that VW has made through “constructive dialogue” with the EPA and CARB. Now it appears VW wasn’t even close. CARB emissions compliance chief Annette Hebert cited 14 ways in which VW’s recall and repair plan fell short, calling it “incomplete” and “substantially deficient.” CARB also said the proposal lacked the detail needed for the board to evaluate whether the fixes “could be successful or are even technically feasible.” Mueller met with top EPA officials last week; both sides said only that they would continue to work together.

Christopher Grundler, director of the EPA’s Office of Transportation and Air Quality, said his agency agreed with CARB’s assessment and called the inadequacy of VW’s submission “a serious matter.” “The deficiencies cover a range of areas,” he said. “I would not characterize it as dotting i’s or crossing t’s.” Michael Horn, CEO of Volkswagen of America, said VW would continue with the generous financial aid programs it extended to dealers, as long as the new diesel sales freeze remained in place. But speaking to reporters last week, he dismissed the possibility of seeing U.S. sales growth this year. “TDI was 25 percent of our business, and even if it comes back … it will take us some time,” Horn said. “Size always matters in the U.S., but it’s not the biggest priority for us right now.”