Diesel Scandal Deepens as German Authorities Target Audi Chief and Daimler

FRANKFURT, Germany — Germany’s car industry, already under scrutiny for concealing excess diesel pollution, suffered fresh damage to its reputation Monday after prosecutors said a top Volkswagen manager was a suspect in a criminal inquiry and authorities in Berlin ordered Daimler to recall hundreds of thousands of vehicles equipped with illegal emissions-cheating software.

Volkswagen, where the emissions cheating first emerged more than 2 1/2 years ago, was punished for hesitating to overhaul its management ranks when Munich prosecutors said they had opened a fraud investigation into Rupert Stadler, leader of the carmaker’s highly profitable Audi division and a member of the Volkswagen management board.

Stadler, whose home was raided by investigators Monday, is the first active member of Volkswagen’s upper echelon to be identified as a suspect in the inquiry, which has broadened over time to include dozens of current and former managers and engineers.

Later in the day, the German Transport Ministry ordered Daimler to recall 774,000 vehicles in Europe because of “inadmissible” software that shut down or reduced the effectiveness of equipment designed to control diesel emissions.

Andreas Scheuer, Germany’s transport minister, said in a statement that the government ordered the recall after “intensive” talks Monday with Dieter Zetsche, Daimler’s chief executive.

Although not directly related, the two episodes illustrated the German car industry’s continuing inability to overcome a scandal that began in September 2015 when the U.S. Environmental Protection Agency accused Volkswagen of equipping diesel cars with software that hid excess diesel emissions from examiners.

Motor vehicles are Germany’s main export, earning handsome profits in China, the United States and other markets because of their sterling reputation. That reputation, however, has become increasingly tarnished.

The city of Hamburg has banned older diesel cars from a high-traffic area because of health concerns, and other cities like Aachen are preparing similar bans. Sales of diesel cars are plummeting, a development that threatens the prospects for a technology that carmakers once promoted as a solution to climate change.

Daimler previously disclosed that it was being scrutinized by the Justice Department and other U.S. authorities over possible emissions violations. The company is also one of the carmakers being investigated by European Union antitrust enforcers about possible collusion to limit antipollution equipment’s effectiveness to reduce costs.

Stuttgart prosecutors have searched Daimler’s offices on several occasions amid a criminal investigation into suspected fraud and false advertising related to emissions, the company said in its most recent financial report.

The recall announced Monday, which covers diesel Mercedes Vito vans, GLC midsize SUVs and C Class passenger cars, raises the stakes for Daimler significantly. In a statement, the company acknowledged the recall and said that “open legal questions will be clarified.” Daimler has previously denied that its engine software violated regulations.

As for Volkswagen, the disclosure by Munich prosecutors that Stadler, Audi’s chief executive, had been targeted was certain to intensify criticism that the company had been slow to distance itself from executives whose subordinates devised software designed to dupe environmental authorities.

The diesel-cheating scandal has already cost Volkswagen tens of billions of dollars and has led to the arrest or imprisonment of several key executives. But the company has only gradually replaced people who held high-ranking positions while the illegal software was being devised and deployed.

As a result, new revelations continue to undermine Volkswagen’s stature.

The focus on Stadler also threatens one of the company’s most profitable units. Audi’s luxury cars, which compete with offerings from BMW and Mercedes, accounted for just 14 percent of the vehicles Volkswagen sold in the first quarter of 2018 but 28 percent of Volkswagen’s operating profit.

Stadler has denied wrongdoing while resisting shareholders’ calls that he resign, despite evidence that the illegal software originated in his unit and that people who reported directly to him were involved. There was no indication from Audi or Volkswagen on Monday that he would resign or be forced out.

Volkswagen has admitted that the software used to conceal excess diesel emissions was first developed at Audi, which Stadler has run since 2007. Audi diesel models were among some 11 million vehicles equipped with the software, which was designed to ensure that lower levels of emissions were released in laboratory tests than under normal driving conditions.

Investigators have carried out several raids at Audi offices and employees’ homes in recent months. They have also said former members of the management board were suspects, although they had excluded Stadler until Monday. He is suspected of fraud in connection with the sale of Audis in Europe that were equipped with the illegal software, as well as false advertising, prosecutors said in a statement.

The prosecutors said they were also investigating another top Audi manager. They did not identify the person, in line with German rules designed to shield people who are not considered public figures. But two people with direct knowledge of the investigation confirmed a report in the Bild newspaper that the second suspect was Bernd Martens, Audi’s head of purchasing.

Audi said it was cooperating fully with investigators but declined to comment further. Volkswagen also declined to comment. Days after the diesel-cheating at Volkswagen first same to light in September 2015, Martin Winterkorn resigned as the company’s chief executive. Last month, the Justice Department indicted Winterkorn on fraud charges in connection with the emissions deception.

But Volkswagen has retained many of Winterkorn’s close associates, including Stadler. The company, which has insisted that the wrongdoing was confined to a small group of engineers, has been reluctant to clean house.

Hans Dieter Pötsch, Volkswagen’s chief financial officer throughout the time the software was in use, is now chairman of the company’s supervisory board. Prosecutors have said that Pötsch is under investigation for failing to fulfill his duty to inform shareholders of the risks Volkswagen was taking, but he has not been accused of taking part in the diesel fraud.

Winterkorn was succeeded by Matthias Müller, another longtime insider who had worked at Audi under Stadler. Müller resigned under pressure in April in part because he was having trouble moving Volkswagen past the scandal.

The new chief executive, Herbert Diess, is a former BMW manager who joined Volkswagen a few months before regulators in the United States discovered the cheating. Diess is an outsider by Volkswagen standards, but it is probably too early to judge whether he can shake the scandal’s stigma more effectively than his predecessor.

Stadler, 55, joined Audi in 1990 and was later chief of staff for Ferdinand Piëch, an outsize but feared former Volkswagen chief executive. Piëch was credited with building the company into one of the world’s largest carmakers, but he was also blamed for creating a win-at-all-costs culture that nurtured the deception.

Piëch, who no longer exerts any direct influence at Volkswagen, is a grandson of Ferdinand Porsche, the designer of the Volkswagen Beetle. Stadler’s close connection with the Porsche family, which owns a majority of Volkswagen’s voting shares, may have helped him keep his position despite increasing pressure from prosecutors.

The Porsche family is known for prizing loyalty. Volkswagen’s attachment to long-serving managers contrasts with the approach taken by the electronics and engineering giant Siemens, another German corporate icon engulfed by scandal that recovered much more quickly.

In 2006, Siemens was accused of bribing officials around the world to win government contracts. After initially dawdling, the company pushed out its chief executive and fired or disciplined hundreds of managers. Siemens paid $1.6 billion to settle charges in the United States and Germany, but was later praised by federal prosecutors for “exemplary” cooperation.