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Emissions scandal: Will VW’s proposals satisfy regulators?

2016-03-22 08:25

Egmont Sippel

DEADLINE LOOMS: Volkswagen will have to convince US regulators of its plan to resolve its ongoing emissions scandal. Image: AP / Markus Schreiber

Germany - It’s winter in Wolfsburg. Temperatures struggle to rise above 10C . The mood index, however, is lower still.

Volkswagen headquarters is a toxic place right now. Suspicion, distrust, disappointment, the blame game and fear of what will happen next poison the air.

And understandably so. In a first wave of cleansing former CEO Martin Winterkorn plus top engineers Ulrich Hackenberg, Wolfgang Hatz and Heinz-Jakob Neusser have already vacated their offices, but the after-shock of such a massive bomb in the VW ocean will continue for quite a while yet.

Stock crash

Stock prices, for example, have not significantly recovered after September’s admission of cheating unleashed an instantaneous plunge of more than 45%.

From 170 euro per share in middle September 2015, stock crashed to a badly mangled 92 euro in a matter of days.

An initial rally briefly hoisted it back to 135 euro on New Year’s eve, but since then VW shares have dropped below 100 euro twice, whilst it is currently hovering around 115 euro, exactly where it was in December 2011.

Read: VW sued for €3.3bn in Germany over diesel scandal

Take into account that all of this transpired on the back of an already alarming depreciation that eroded value from 253 euro per VW stock in early April, 2015, and it’s clear why shareholders are livid.

What will it take to recover?

Well, the operatives here are trust and respect. There is a lot of common ground amongst Germany’s industrial giants, integrity of engineering being one of them. But there are massive differences amongst auto makers as well, like target markets.
BMW and Mercedes cater for the elite.

Volkswagen, on the other hand, builds Wagen für das Volk.

In this respect, VW represents and embodies the very soul of a people that has now been betrayed, and badly so. Every single German citizen is, after all, a spiritual stakeholder in the good name of the VW concern.

Some stakeholders, however, are more equal than others, in the sense that they plug directly into the process. In this respect it is also shareholders – as much as board members – who will determine VW’s future.

A misstep by either can have cataclysmic consequences for the company. It is time to rebuild and that can only happen if investors have enough trust again to buy into VW.

And short-cuts won’t do. It was a short-cut in the first place – that unfathomable, unthinkable defeat device on the EA189 diesel engine – that heaped so much ignominy on the mighty VW.

How was it possible in the first place?

Almost a decade ago, in 2007, Martin Winterkorn replaced Bernd Pischetsrieder as Wolfsburg’s Big Chief Sitting Bull. Winterkorn thus presided over the whole group, VW AG (Volkswagen Aktiengesellschaft). His main lieutenants were Ulrich Hackenberg and Wolfgang Hatz, two enormously talented engineers.

Also in the mix was Wolfgang Bernhard, a young and upcoming industry star who had turned the ailing Chrysler around in the early part of the new century. He defected from Daimler-Benz after he was passed over for the top job in 2004, two days before he was about to take office.

Bernhard’s thinking was along the lines harboured by Jose Ignacio Lopez, the GM cost-cutting wizard who defected to VW a decade earlier, and also Nissan’s saviour and Renault’s CEO, Carlos Ghosn, who became known as “le cost cutter”.

Bernhard’s uncompromising style, backed by Pischetrieder’s whole-hearted support, was not universally appreciated. And when he suggested that VW’s iconic Golf would no longer be built in Wolfsburg if the company continued to lose money on every unit sold, he soon followed in Pischetrieder’s tracks, after the latter had been ousted by arch VW guru Ferdinand Piëch – but not before Bernhard had created another problem for Winterkorn and his lieutenants.

In considering how best to exploit the American market – where VW was for all practical purposes a perennial underachiever – Wolfsburg and Ingolstadt had taken a decision in the early-2000’s to market diesel with more verve and greater conviction across the pond.

Diesel dilemma in the USA

In terms of oil burners, the US was, after all, virgin territory with boundless potential. Where better to extoll the virtues of 5 liter/100 km – or almost 50 miles to the gallon – than in a country with lots of wheels, vast open spaces and only 5% of cars running on black gold?
There were obstacles to overcome, though.

The Yanks, firstly, thought of diesel as slow. To counter this view, VW showcased oil burning technology by entering the American Le Mans racing series with an Audi R10 TDI.

The car won its maiden race at the 2006 12 Hours of Sebring and after that everything in sight, including one victory after another in the 24 Hours of Le Mans.

Thus, on to the second and more serious perception deficit in Yankee land, that diesel was dirty.

In reality, common rail injection – introduced on passenger cars in the latter half of the 1990’s – had changed most of this. Extremely high injection pressures were suddenly available without interruption (for instance, during gear changes), and because these intense pressures atomized fuel extremely well, ignition and therefore consumption and emissions had all been improved beyond recognition.

On the downside, unburned hydrocarbons (HC), carbon monoxide (CO), particulate matter (PM) and nitrogen oxides (NOx) still spoiled the party, even though the total concentration of pollutants in diesel exhaust gases amounted only to some tenths of a percent.

Yet, low and behold, the Yanks would allow only one-eighth of the European Union’s NOx limit, which was a problem for VW and their newly developed EA189 diesel mill.

Entered Bernhard and his Mercedes connections, to facilitate an agreement between VW and Benz to share the latter’s BlueTec system, including an urea solution injected into the exhaust gas stream to convert NOx to nitrogen and water.

Problems 1 to 3

Problem No.1: BlueTec’s top-up costs were outrageous. In 2009 a Merc owner in the US infamously received a bill of almost $300 after having had his AdBlue tank filled up with 7.5 gallons (28.5 liters) of the necessary urea solution.

Problem No.2: VW baulked at the prospect of running a competitor’s branding on their diesel engines which, known as TDI in VW parlance, had already secured a stronghold in the mass market mind.

Problem No.3: Bernhard and his thinking were alien to VW culture. Wolfsburg therefore rather chose to continue with expensive labour costs, counterweighted by a cheap solution to their NOx problem: a defeat device.

Simply put, the device is programmed to recognise laboratory conditions (like certain steady temperatures and barometric pressures, the rolling speed of the driven wheels, the steering wheel of a car never being turned, a static rear axle on a front wheel drive vehicle, etc.)
Once identified, the software would choose a new programme to activate NOx-reducing processes. These processes, however, reduced performance and fuel efficiency as well.

It was thus in VW’s interest to have these programmes de-activated, once vehicles were back in the real world, where they espoused 5 to 40 times the permissible amount of NOx, which is dangerous to everybody’s health.

So, out went Bernhard, BlueTec and urea, and in came Winterkorn, Hackenberg, Hatz and later also Neusser, to present “clean diesel” to the planet in their efforts to capture virgin territory in the world’s second biggest automotive market.

No other manufacturer at the time even thought of going big with diesel in the US, except Mercedes, perhaps.

So, the Audi race car showed that diesel could be quick. And TDI – through a barrage of clever marketing and false emission figures – “proved” that diesel was clean.

But still VW couldn’t attain the desired American sales successes.

That, then, was setback number one: the failure of the initial diesel campaign.

Infographic: Volkswagen emissions scandal

Another setback

Setback number two arrived in the shape of ever declining US sales figures. This prompted an early 2015 showdown between the 78-year old Piëch, as chairman of the VW Group’s supervisory board, and the much younger Winterkorn.

As a proper Piëch protégé, Winterkorn was widely expected to be the old man’s successor as Group chairman.

Yet, the latter had been disillusioned and blamed Winterkorn, not entirely unjustly, for a lack of competitive US product, both in terms of price and niche.

Now, the Yanks operate an entirely different culture to the Europeans. They’re quite a utilitarian lot. VW’s premium model placement does little to attract them. Relatively high ticket prices do a lot to repel them.

And they love SUV’s, of which VW had few to offer.

It is therefore patently obvious that VW’s US ills could not exclusively be blamed on the American consumer’s disinterest in diesel. VW struggled to make its mark in Yankee stadium, in any case.

Yet, the company’s battle then was nothing compared to the fight they have on their hands now, after setback number three: the emissions scandal.

And all because of a short-cut which, some would argue, was pursued because the pressure to deliver results under Piëch was unbearable.

The lesson VW should have learned from all of this, is obviously to cut out short-cuts. Don’t ever take another abbreviated route which could potentially lead to even more contamination of an already toxic environment.

'You can't be serious!'

Which is exactly what they’ve done just the other day by axing Michael Horn, the Hamburg born CEO of VW USA.

If Michael H was John M (meaning: McEnroe), he probably would have shouted “You can’t be serious!”, too.

There he is, Herr Horn, out on his striped American pants, after reassurances by VW in 2015, in the immediate aftermath of the scandal, that his position was safe.

Horn, by the way, became CEO in 2013, after his predecessor, Jonathan Browning, abruptly resigned after the brand’s US sales took a dip in 2013.

So, analyse the above carefully, and you’ll find “US sales” coming up over and over again.  It’s at the very core of the defeat device scandal. Because VW didn’t sell well enough in the US, Wolfsburg focussed their strategy on diesel. Because Yanks wouldn’t buy diesel, Wolfsburg had to change the perceptions preventing them from doing so. Because Wolfsburg wouldn’t use urea and wanted to bolster sales in the US by staying semi-affordable, they cheated.

Then, when they got caught, they denied culpability for a year, blaming everything else from the weather to testers’ methods and equipment to quirks in the system and even the law.

'They had simply cheated'

Yet, in truth, they had simply cheated. Or “screwed up”, as Horn memorably put it on the night when he became the first VW official to apologise to the public for the company’s devious actions.

“Let’s be honest,” Horn said, “our company was dishonest, with the EPA (Environmental Protection Agency), with the California Air Resources Board and with all of you.”

In a US House of Representatives subcommittee hearing, he went one step further and admitted that it was “hard to believe” that VW could have let this happen without the top guys knowing.
So, was it this kind of frank, honest candour that got Horn dismissed?

If it was, VW is deeper in the mire than we would have thought, for one simple reason: They’re not willing to own up.

Think about it: Wolfsburg initially denied foul play for a full year. After the admission of having installed a defeat device on 11 million cars world-wide, Winterkorn temporarily refused to resign. Hackenberg was even more resolute in trying to hang on, getting himself legal representation in preparation of court proceedings.

Now Horn has been released because . . . he did some straight talking, or what?

Here’s what VW’s dealer council had to say about the affair: “There is no sense of a resolution to the diesel scandal. We are troubled watching the mismanagement of this scandal from Germany, and how it may impact the ultimate decisions by US authorities. This change in management (of removing the much-respected Horn) can only serve to put the company at more risk, not less.”

Strong words from the horse’s mouth: “We are troubled watching the mismanagement of this scandal from Germany...”

Granted, that VW can turn around and claim ever-decreasing US sales as justification for the move on Horn. Last year, the company dropped almost 5% in sales amid record industry volume.

In 2016, they are 14% down on last year’s figures.

But what else would you expect? Getting rid of Horn on a pretext of declining sales would be like holding the Enola Gay pilot responsible for the nuclear devastation in Hiroshima.

Horn had nothing but trouble to work with, in the first place.

To top all of this, the new VW AG CEO, Matthias Mueller, flew off to America in January this year and reaffirmed the company’s initial position that the issue (of unacceptably high NOx emissions in real life testing) was caused, not by VW’s deceit, but by a “technical problem” which stemmed from a “misinterpretation of US law”!

Insult to injury

To add insult to injury, Mueller then asked for a follow-up interview in which he apologized for his statements the previous day, citing “noisy surroundings” in the first conversation!!

Important American figures have rightly criticised the comments as “disturbing”, whilst claiming that VW is not cooperating with the probe into the scandal.

All of this, while it is of cardinal importance that VW rebuilds the trust and respect of everybody concerned. The best way to get back to where they were, would be to present a future that people can believe in, as they once did.

A critical moment in this process will arrive on the day after tomorrow, by which date VW has been ordered by a federal judge to present an acceptable solution to US and California regulators, in terms of fixes for or buybacks of affected VW diesel vehicles.

If the proposals find favour, there will still be the small matter of a myriad claims plus heavy fines levied at VW, but at least the ball will be rolling in the right direction.

If Volkswagen, however, fail to sharpen up their crisis responses, leaving regulators disenchanted, the Wolfsburg winter will drag on and on.

Having Wolfsburg Football Club in the quarter finals of soccer’s Champion’s League is not enough sunshine für ein Volk deserving so much better.

Read more on:    volkswagen  |  egmont sippel  |  usa  |  emissions scandal

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