Volkswagen to refit cars affected by emissions scandal

New Chief Executive Matthias Mueller said the German carmaker would tell customers in the coming days they would need to have diesel vehicles with illegal software refitted, a move which some analysts have said could cost more than $6.5 billion.

In Washington, U.S. lawmakers asked the automaker to turn over documents related to the scandal, including records concerning the development of a software program intended to defeat regulatory emissions tests.

In separate letters, leading Republicans and Democrats on the House Energy and Commerce Committee requested information from both Volkswagen and the U.S. Environmental Protection Agency as part of an investigation into the controversy.

Europe's biggest carmaker has admitted cheating in diesel emissions tests in the United States and Germany's transport minister says it also manipulated them in Europe, where Volkswagen sells about 40 percent of its vehicles.

The company is under huge pressure to address a crisis that has wiped more than a third off its market value, sent shock waves through the global car market and could harm Germany's economy.

"We are facing a long trudge and a lot of hard work," Mueller told a closed-door gathering of about 1,000 top managers at Volkswagen's Wolfsburg headquarters late on Monday.

"We will only be able to make progress in steps and there will be setbacks," he said, according to a text seen by Reuters.

Volkswagen did not say how the planned refit would make cars with the "cheat" software comply with regulations, or how this might affect vehicles' mileage or efficiency, which are important considerations for customers. It said it would submit the details to Germany's KBA watchdog next month.

Manipulating emissions results allowed Volkswagen to keep down engine costs in a "clean diesel" strategy that was popular in Europe and at the heart of a drive to improve U.S. results.

Mueller was appointed CEO on Friday to replace Martin Winterkorn. German prosecutors said on Monday they were investigating Winterkorn over allegations of fraud.

The crisis is an embarrassment for Germany, which has for years held up Volkswagen as a model of its engineering prowess and has lobbied against some tighter regulations on automakers. The German car industry employs more than 750,000 people and is a major source of export income.

Economy Minister Sigmar Gabriel told reporters he was not worried about damage to the economy from Volkswagen's problems, "at least, not if we deal with it sensibly."

There must be no "soft pedalling, no obfuscation and no covering-up" by Volkswagen, he added.

The KBA had set Volkswagen an Oct. 7 deadline for a plan to bring diesel emissions into line with the law.

Investors are impatient for answers too.

A survey of 62 institutions by investment banking advisory firm Evercore ISI found around two-thirds said it would not be possible to invest in Volkswagen over the next six months if costs, fines, legal and criminal proceedings were outstanding or inadequately quantified.

VW's brand image has also slumped this month, market researchers YouGov said, citing a survey of about 2,000 consumers.

Volkswagen said previously about 11 million vehicles were fitted with software capable of cheating emissions tests, including 5 million at its VW brand, 2.1 million at luxury brand Audi, 1.2 million at Skoda and 1.8 million light commercial vehicles.

Refitting 11 million cars would be among the biggest recalls in history by a single automaker, similar in scale to Toyota Motor Corp's <7203.T> 2009-2010 recall of more than 10 million vehicles over acceleration problems, though dwarfed by the number recalled by multiple carmakers due to faulty Takata Corp <7312.T> air bags.

Volkswagen sold 10.1 million vehicles in the whole of 2014.

The company said last week it would set aside 6.5 billion euros ($7.3 billion) to help cover the cost of the crisis.

But analysts think that may not be enough, as it faces potential fines from regulators and prosecutors, as well as lawsuits from cheated customers.

Spain's industry ministry said on Tuesday Volkswagen's local business had agreed to return fuel-efficiency subsidies on vehicles that had broken rules. It said Spain, which offered subsidies of 1,000 euros for energy-efficient car purchases, would ask for the money back from the car manufacturer and not consumers.

Volkswagen shares dropped 4.1 percent to close at 95.20 euros ($107.09) in European trading on Tuesday.

Mueller also said Volkswagen's core VW division, struggling with high-fixed costs and low profit margins, would be given more autonomy, akin to the independence enjoyed by premium flagship brands Audi and Porsche.

Analysts have long urged the company to tackle underperformance at its core mass-market brand, and to dilute control from the center which has been blamed for product delays and problems adapting to local markets.

A source familiar with the matter also said the executive committee of Volkswagen's supervisory board would meet on Wednesday to discuss progress with the company's investigations and engaging U.S. law firm Jones Day to lead an external probe.

Klaus Mohrs, mayor of Wolfsburg where Volkswagen employs around 70,000 people, said on Monday he expected a sharp decline in business taxes due to the crisis, and announced an immediate budget freeze and hiring ban.

The emissions scandal has sent ripples through the global car market too, with manufacturers fearing more costly regulations and a drop in diesel car sales.