How Volkswagen duped the world

DIESELGATE

WHEELS STAFF

World’s #1 carmaker in turmoil: • Admits cheating emissions tests • 11 million cars affected • CEO Winterkorn quits • Vehicles withdrawn from sale • Massive fi nes, class-action lawsuits

VOLKSWAGEN has been caught cheating on the US emissions test, and the impact could spread far beyond potentially bankrupting the world’s biggest car company.

The German car giant has been ordered to recall 482,000 Golfs, Jettas, Passats, Beetles and Audi A3s in the US built between 2009 and 2014 after researchers discovered ‘defeat’ software built into four-cylinder diesel engines. The coding activated full exhaust emissions controls when it detected the car undergoing regulatory emissions tests.

The defeat software is not active during real-world driving, resulting in nitrogen oxide emissions up to 35 times higher, alleges the US Environmental Protection Agency.

Exposure to NOx (especially nitrogen dioxide) can cause severe lung and heart disease, as well as an increased susceptibility to asthma, allergies and airborne infections. The toxic gas is also linked to SIDS, miscarriages and birth defects. Experts say it is a factor in thousands of deaths a year in Europe, where almost half of all cars sold are diesels.

In the days immediately following the EPA’s September 18 emissions cheating revelation, VW’s market capitalisation fell $42 billion, wiping a third off the company’s value. Sales of all VW diesels in the US were suspended.

Canada, Switzerland, Italy and VW’s home market of Germany quickly followed suit.

“Discrepancies relate to vehicles with EA189 engines, involving some 11 million vehicles worldwide,” VW announced.

VW announced.

“A noticeable deviation between bench test results and actual road use was established solely for this type of engine.”

The vehicle total includes 2.1m Audis and 1.2m Skodas. All brands have sold cars in Australia fitted with the offending EA189 turbo-diesel engine, though neither VW, Skoda nor Audi have yet revealed how many Australian cars are affected, or what steps will be taken locally to address the deception.

The scandal’s toll on executives has been heavy, and shows no sign of abating 11 days in as Wheels goes to print. VW Group CEO Martin Winterkorn has been removed, and press agency Reuters reported that German prosecutors are investigating him over “allegations of fraud in the sale of cars with manipulated emissions data”.

Reuters also reported that a number of R&D chiefs have been suspended, including VW Group technical development boss Ulrich Hackenberg, VW brand development brand development chief Heinz-Jakob Neusser, and Porsche head of drivetrain development Wolfgang Hatz.

The day before he resigned, Winterkorn said he was stunned at the scale of misconduct. “I personally am deeply sorry that we have broken the trust of our customers and the public,” he said.

Porsche CEO and VW Group veteran Matthias Muller was confirmed as his successor, vowing to restore trust.

Dieselgate also hit the German parliament, with allegations that Angela Merkel’s government knew about serious discrepancies and acted to protect one of its biggest employers. Germany’s auto industry employs 750,000 workers and exported 4.1 million vehicles in 2014 worth an estimated ¤322b.

Other German manufacturers, including BMW and Mercedes- Benz, have been forced to defend their own diesel models and deny they too falsified test results.

The EPA has flagged its intention to investigate other VW Group diesel engines.

Whether the EA189 diesels also effectively bypass less severe emissions regulations in Europe and Australia was unclear as Wheels went to press.

Investment bank JP Morgan says the potential $25.8b fine VW faces in the US – almost $54,000 per vehicle affected – is just the start of a crippling financial toll on the world’s biggest carmaker that it predicts will hit $72.5b.

VW faces multi-million-dollar legal bills defending itself against civil lawsuits – 25 class actions were reportedly initiated in the first three days on behalf of disgruntled customers, VW dealers and investment funds seeking damages. It may also

Fines in the US would exceed $25 billion if VW is hit with the maximum penalties

have to buy back affected cars.

Volkswagen has earmarked $10.4b to fund the US recall.

While some commentary argued that Germany would defend its biggest company as it prepared to quadruple its refugee intake, other voices said leniency could not be allowed.

“The US government must show that it will not tolerate systematic and brazen lawbreaking. It can – and should – pursue heavy fines against the company and criminal charges against individual executives,” The Washington Post newspaper thundered.

Amid all the Dieselgate invective and speculation, one point is clear: It was no accident. Winterkorn referred to misconduct – adding that he was not aware he had personally offended – while VW’s top man in the US, Michael Horn, said: “Our company was dishonest … we have totally screwed up.”

The frank admissions are refreshing – and in line with PR 101 on handling a crisis – but their necessity undercuts most possible defences VW might offer, while leaving it vulnerable as a target for public disgust.

Ramifications for the VW brand could be enormous, branding expert Mark Ritson told Wheels.

“It is a gigantic cluster-f--k of all proportions,” Ritson said.

“This is going to be bigger than ExxonMobil.”

Ritson, an associate professor of marketing with Melbourne Business School, and with a history of consulting to brands such as Adidas and Pepsi, agrees that financial liabilities for VW will easily dwarf the $US4.3b the oil company says it spent on the 1989 Exxon Valdez spill disaster.

Fines in the US alone would exceed $25b if Volkswagen were hit with the maximum penalties prescribed by the Clean Air Act.

Given the surge of class actions, and the likelihood of draining demands from regulators and consumers elsewhere, might the industry leader collapse altogether? Ritson observed that VW faced not only fines, the cost of recalls and actions from angry customers, but also lawsuits mounted on health grounds and potentially even claims from rival car companies for deceptive market behaviour.

“The idea that VW as a brand will fold is unlikely,” Ritson said.

“But I can’t imagine the VW Group will stay in one piece, because of the financial whirlwind that is about to hit them.”

The 12-brand VW Group includes Volkswagen, Audi, Bentley, Lamborghini, Porsche, Seat and Skoda, as well as Scania and MAN trucks. Its profit last year of $17b was driven primarily by Audi and Porsche.

Early divestments in a sell-off could include the presently very profitable Porsche, for which VW paid ¤4.5b for the remaining half in 2012.

While it might also sell Audi, that could be troublesome because the luxury brand shares so many platforms with more utilitarian Volkswagens. A mooted foray into F1 racing could be canned, an outcome with unknown consequences for the Red Bull

team (said to be Audi’s target) and Aussie Daniel Ricciardo.

Ritson said one thing that could rescue the group would be a successful argument that its intentions had been better than they looked on the surface.

“If they can show that they weren’t engaging in a massive fraud of emissions standards, that will allow them to make a case and defend some problems that are coming,” he said. “But I’d be very surprised if it isn’t what it appears to be, which is criminal malfeasance on a global level.”

How could such an innovative and successful carmaker, which this year overtook Toyota as the world’s biggest by volume, have reached such a point?

Former Toyota Australia marketing boss Bob Miller, now a business lecturer at Macquarie University, offered a hypothetical scenario that many would find disturbingly plausible.

“Let me tell you what my guess is,” he said – while emphasising that he had no knowledge of the internal workings of Volkswagen.

“In a corporation like that, there would be people – senior people – whose specific task was to provide a range of engines that matched the various emissions standards in the world. There would have been a timetable for the launch of the next model. And that brings certain pressures.

“I can certainly imagine the scenario where a chief engineer towers over his executives at the conference table, smacks his hand on the table and frightens the hell out of everybody, and says the magic words: ‘Whatever it takes.’

“It seems a pretty likely circumstance to me, [as someone] who has survived many tablethumping meetings.”

Part of the reason for the sharp backlash in the US is the suspicion from customers that VW took them for fools, with advertising there having specifically lauded its clean diesel cars.

Miller said the biggest challenge for VW – here and overseas – would be to handle the social media response to the scandal.

An attack on VW’s honesty would corrode customer loyalty, because people would not remain loyal to a brand they felt had betrayed them.

Melbourne radio host and newspaper columnist Tom Elliott captured that sentiment neatly, saying he doubted he would replace his own petrol-powered Tiguan with another VW.

“As an owner, I’m pretty shocked; you accept that companies often make mistakes with cars but this one was intentional and that’s what worries me,” he told Wheels.

Miller pointed to the sharp fall in VW share prices in the first days of the affair as driven not only by the direct costs confronting VW but also by investors predicting a falling away of respect for the brand.

“It’s going to be a fantastic case study for decades to come. How these guys handle themselves internationally and locally is going to be very significant.

“The brand as it is presented in Australia is Das Auto. That means: The Car. This is the car. In other words, we’re the leader and you’re all inferior. That’s great, so long as everyone trusts you. But if your word has proven to be unreliable, you’re going to have to change your branding.”

Miller said the silence from VW Australia in the first days after the news broke was understandable, as they would have been told by head office to “shut up and let us handle it”. That reticence, however, left owners wondering if their cars were affected and, if so, what to expect. A possible recall program would probably result in your diesel VW not driving as well.

It remains unclear whether VW would offer to buy back affected vehicles – a decision that, if extended worldwide, would cost it more than the $10b set aside to deal with the issue.

Miller expects other manufacturers will be dragged into the mess, not because they had done the same thing necessarily but because a spotlight has been thrown on the inadequacy of current testing regimes, where most of the testing is done by the manufacturer.

Meanwhile, as the Australian Competition and Consumer Commission announced a probe into VW, Ritson suggests the only thing the local importer can do at this point “is pray”.

Many others in the industry will be doing likewise because the furore has the potential to affect not only VW but also diesel in general, and possibly even petrolengined cars if testing regimes are changed significantly.