Volkswagen sinks further into crisis

You get the feeling Volkswagen Group wishes the rest of the world just left it alone while it soul-searched its way out of its self-made emissions crisis.

After initially blaming the nitrogen oxide (NOx) emissions-cheating scandal on a handful of diesel engineers gone rogue, Volkswagen has yet to publicly or incontrovertibly identify even one of them. (German investigators admit the circle of interest has expanded from six people to 17.)

It has been the subject of more than 100 class-action lawsuits globally, its chief executive has told customers they would be compensated, which was quickly countered by individual European Volkswagen national offices saying they would not be and the hits keep coming. Several affected Irish owners have instigated legal action, though these have yet to reach the courts.

In the last two weeks, its respected North American boss, Michael Horn, exited the stage, much to the chagrin of its struggling US dealer network. VW Group tried to dump Horn once before, not long after the crisis began, when he said the company had messed up badly (it had), an admission, which did not go over well in Wolfsburg.

A dealer group submission forced a u-turn on his removal last year but it seems to have only been a temporary reversal.

Meanwhile, a former employee is suing Volkswagen in North America for its alleged destruction of documents related to the investigation into what has been inevitably christened by the US media as "dieselgate".

As if to show that crisis seems to become contagious, tennis player Maria Sharapova, one of the Volkswagen Group's highest paid and highest profile brand ambassadors via her Porsche deal, admitted she had tested positive for a banned drug.

Then on the weekend, the Volkswagen-supported Abt team was stripped of its win in the Mexican round of the all-electric racing championship, Formula E, because its car was lighter than the rules allowed. It never rains, but it pours at Volkswagen.

Among its litany of lawsuits, the big dog in the room is a suit by the US department of justice alleging it violated the Clean Air Act, all while arguing that not enough progress is being made to fix the cars fitted with cheat devices.

For those who missed the early parts of it, independent testing in 2014 found that Volkswagen’s EA 189 four-cylinder turbo-diesel engines delivered vastly inflated NOx emissions in on-road testing than they did in the lab. Further research found the engine, built from 2008 to 2014, used a “defeat” device, or a special software code to switch on its maximum NOx-cleaning protocols only when it identified the cars were being tested in laboratories.

The University of West Virginia found the cars emitted up to 35 times the legally allowable level of NOx in the US when tested on the road but were compliant in the lab. Volkswagen denied, obfuscated, became hostile, negotiated and even attempted a software reflash (it failed) before the US Environmental Protection Agency (EPA) and the California Air Review Board (CARB) got fed up more than a year later and called them out publicly with a notice of violation.

That led to a publicity car crash, just days after a triumphant Frankfurt motor show. Denying he had any knowledge of the dieselgate crisis, chief executive Martin Winterkorn promised to lead VW Group through the crisis but succumbed to the inevitable and resigned.

Suspended

New chief executive Matthias Müller suspended 11 top executives, including

Audi

development boss

Ulrich Hackenberg

, his counterpart at Porsche,

Wolfgang Hatz

, and Volkswagen brand development head Heinz-Jakob Neusser.

Then Müller announced the legal team would not stop until they had found the culprits, and admitted a whistleblower had pointed out that the officially claimed CO2 emissions on the petrol-powered cars were implausible, too. And then the EPA (by now testing all Volkswagen Group models with unusual vigour) found the Audi-developed 3.0-litre V6 turbo-diesels to be dodgy, too, which implicated Porsche and Audi as well as Volkswagen.

Volkswagen itself has now admitted that Winterkorn did indeed receive two memos about the university’s investigations into the EA 189 motors, receiving the first on May 23th, 2014. It could not confirm whether he had read the emails.

“On 14 November 2014, Mr Winterkorn received another memo,” VW said in a statement. “According to current knowledge, the diesel matter, as it was treated as one of many product issues facing the company,... did not initially receive particular attention at the management levels of Volkswagen.

“Volkswagen expressly regrets that, looking back, the situation is different.”

And how different. It has confirmed that the diesel cheat was discussed on July 27th, 2015, in a regular product meeting in the presence of Winterkorn and incoming brand CEO Herbert Diess but it could not confirm whether they understood the implications of the discussion, especially as Diess had just arrived at the car-maker.

It insists, in an explanation of its timeline, that management board members did not realise the software breached US law until after engine technicians explained it all to the Volkswagen-hired legal team of Kirkland & Ellis in August last year. And then it decided to finally come clean with the EPA and CARB and to vindicate the previously maligned University of West Virginia testers.

And so it goes.

All the while, though, Volkswagen’s public face has been one of unhelpful bewilderment at why people are so perturbed and why they are not being allowed to work through the issues on their own.

After saying all the right things for the first few months of his tenure, Müller dropped a bombshell at January's Detroit motor show by claiming Volkswagen did not lie, then reacting in horror a day later and asking for an interview do-over.

All this after making billions of dollars selling cars around the world that did not comply with the laws governing which cars were and were not allowed to be driven on the roads of those countries. It has begun rolling through its fixes of European EA 189 four-cylinder 1.6- and 2.0-litre turbo-diesel cars to bring them into compliance, which is an easier job than it is in the US, as the NOx emissions target is easier to meet.

But it has not started the process in America yet. That is because it does not know what the process is for actually fixing the cars in the US.

And that’s critical, because while Volkswagen might only have half a million affected cars stateside, as opposed to 11 million in the rest of the world, the brand is most exposed in the US. Earlier this month CARB came out with the startling admission that Volkswagen may not physically be able to bring the cars up to the cleanliness standards they need to be legal on American roads.

Volkswagen has doubtless been working hard to get its cars cleared by CARB and the EPA in the US but so far it has not made it. It is not just engineering but an entire negotiating team working with both CARB and the EPA to find a way through the mess. They are not there yet.

Part of the negotiations has been to convince the Americans that a partial fix, one that forces Volkswagen to buy back the fewest number of cars possible, might have to do. The Americans have not reacted well to the suggestion. "We will have to decide what the best approach is to dealing with these vehicles, and one of the options potentially would be to accept something less than a full fix," CARB's Todd Sax said.

It seems Volkswagen will just have to offset the continued illegal, non-compliant emissions levels by the cars it cannot fix in the US by paying a hefty fine, which was something that seemed unavoidable as far back as September last year.

It is hard to judge what the fine might be. Volkswagen initially thought it would be about $100 million, based on fines levied to other car-makers.

Substantially deficient

VW set aside €7 billion to deal with the crisis (or just over a year’s worth of profit from its premium brand, Audi), but it’s likely to cost more than that in class-action lawsuits alone.

"We don't know yet until we understand what level of engineering and repair work needs to be done so we don't know yet what it will cost," Diess told The Irish Times in Detroit in January. "Something in the region of €20 billion, it looks like to me." Its first shot at meeting the US standards was rejected by CARB in January, and though it did not give a technical explanation as to why the cars had failed, it did give a pretty good indication of its mood.

"Volkswagen's submissions are incomplete, substantially deficient, and fall far short of meeting the legal requirements to return these vehicles to the claimed certified configuration," CARB's chair, Mary Nichols, wrote to Volkswagen.

“CARB received VW’s Dec 15, 2015, letter requesting substantial additional time to submit complete recall plans. However, California recall regulations require expeditious action, and VW’s proposed extension is not acceptable.

“Volkswagen made a decision to cheat on emissions tests and then tried to cover it up. They continued and compounded the lie, and when they were caught they tried to deny it.”

Volkswagen plans to announce its preliminary legal findings in mid-April but its investigators have been ploughing through 102 terabytes of data, or about 50 million books, worth of evidence. If recent form is any guide, expect it to be delayed.

Then there is another problem for them. Sources insist both Hackenberg and Hatz were cleared of any wrongdoing by the investigators. Hackenberg has since retired but Hatz is one of Germany’s leading engineers and has a decade left in an already illustrious career. And sources insist the Volkswagen Group board of management is pushing against allowing him to return to Porsche, which seems a denial of natural justice.

Meanwhile, Group sales fell 4.7 per cent in February, punished in China (where diesels are a rarity), and the US (down 13 per cent), though European customers appear to have forgiven and forgotten.

Volkswagen hopes America does, too, because it will keep offering diesels there, in spite of the sour taste in everybody’s mouth and the unwanted NOx in their nostrils. “We need diesel and the current systems are as clean and cleaner than the emissions regulations demand, so there is no reason not to have diesel,” Diess said.