News - Volkswagen
Opinion: Cheats never prosper
John Mellor’s take: VW’s latest emissions control device.
Volkswagen’s incomprehensible decision to deceive buyers
24 September 2015
THE worst example of corporate malfeasance in history was the Ford Motor
Company and its 1970s decision that repositioning the fuel tank in the Ford
Pinto to prevent fatal fires on impact would be more expensive than paying out
legal damages over time to families for the loss of, or injury to, their loved
Ford chose the low road. They decided not to fix the tank.
In 2008, when 2009 model year VW diesel cars were launched in the United
States, Volkswagen AG followed Ford down that road into infamy.
Someone at Volkswagen, and we may never really find out who it was or who knew
and when, signed off on a course of action that could lead to the unravelling
of what was so far this year the world’s biggest car-maker.
The ramifications will shake the financial structure of Volkswagen to its
foundations and are going to be far bigger than anyone has yet imagined because
so many people, governments and organisations worldwide are going to want a
piece of the company for what they did.
By now you will all know the story.
VW rigged the engine control units in these diesel engines to sense that they
were being tested for emissions. The engine would recalibrate to give a
favourable emissions test result – especially for nitrogen oxide (NOx)
emissions – which are a particular challenge in diesels.
But once disconnected from the test rig and in the hands of motorists, the
engines reset themselves to run on entirely different settings producing far
more competitive fuel economy and engine performance than if the “defeat
devices” were in place.
In fact it is claimed by the US government that these cars were putting out up
to 40 times more NOx than was seen in the test data.
Now the fact is that no-one died or was injured – unless you draw a very long
bow and claim that people die or are adversely affected by excessive NOx in the
atmosphere. But the calculated and deliberate programming of vehicle control
systems by people inside VW to deceive owners and regulators into thinking
these cars were compliant is breathtaking.
In effect all those clever engineers at Wolfsburg could not bend the laws of
physics to produce from the engine the fuel economy and performance that had
been demanded from on high to be competitive in the US market without
over-cooking the NOx – by a country mile. So they cheated, thus saving a
mountain of R&D cash and getting a competitive advantage over rivals at a huge
This was palpable stupidity. It is not as though they inadvertently signed off
on misleading documents or, over time, the cars started falling short of the
test results. What makes it so jaw-dropping is that these people deliberately
constructed the code and deliberately laid out circuits in the engine control
units to achieve their deception. And then they installed them in 11 million
At this early stage of unfolding events, the list of the potential
ramifications for Volkswagen worldwide is quite frightening.
Volkswagen chief, Martin Winterkorn has fallen on his sword leaving the company
with a new leader at the time when a leader is most needed. Matthias Mueller
been taken out the relative comfort of Porsche and parachuted into VW in what
will be a career-defining move for him.
The share price is now 50 per cent of where it was in July. Half of that loss
was in the past week since the balloon went up. This is a loss of market value
of $25 billion since the scandal broke and $50 billion since July. With that
kind of loss in the share price before last week, the regulators might well
investigate how many shares changed hands and who was selling them in the
lead-up to the announcement of the scandal.
VW has already posted an $8 billion charge against the third quarter to start
addressing the problem. This is just the first instalment on many allocations
The US regulators will want blood and plenty of it. Apparently US regulators
can levy a charge of $40,000 per car penalty for the 480,000 cars affected in
the US. There is $20 billion if they take a hard line.
The owners will want full restitution for the lost value of their cars and the
class actions are already underway. The problem looks to be that if they obey
the recall to have the cars made to comply, their cars will be down on power
and use more fuel. And the word is that the EPA might force owners to have the
But that does not solve the problem that the buyers were sold cars, not just
under false pretences, but under a deliberate deception and they will, under
consumer laws, be entitled to get their money back. The deliberate nature of
the deception gives much rigour to legal actions mounted on behalf of the
owners. There is just nowhere for VW to go on this.
Could it be that VW will be forced to buy the cars back, make the change to the
ECU and then sell the cars as second hand back into the market with full
disclosure about the new, worse levels of performance? Any idea what that would
cost? There are 480,000 of them and no owner will want to be out of pocket by
one cent on this.
Worse for the company would be if the US regulators decided to withdraw the
import licenses under which any of the offending 480,000 cars were brought into
America. The cars imported were not the cars approved and the government would
be within its rights to seek to have them re-exported. And what country and
where do you park 480,000 non-compliant new and used cars?
Volkswagen’s brand image is trashed for now. Particularly in the US, where the
company has struggled to gain a foothold in recent years against American and
Few will believe what VW says about the prowess of their vehicles for years to
come. This was the lie of lies. All that good work and brilliant advertising
over the years is undermined. The future cost to rebuild the brand through
sustained brand advertising and customer programs will be in billions worldwide
over the many years it will take to fully turn the damage around. The Audi
brand has been roped in too. Just when it was travelling so well.
Expect also that VW personnel will be taking heat from their friends and
families about their employment choice. Being in management at VW may be no
longer be the prestigious position it was until a week or so ago. Talent might
stay away for now. Public figures with VW sponsorships may question if they
want to be associated with the brand and may even claim that VW has damaged
their public image.
The US dealers are going to be incandescent. Having invested in the growth of
the VW and Audi brands (dealers typically spend millions on branding their
showrooms) they now find sales of the affected new and used diesel cars
suspended. Expect a class action from US dealers on this.
Dealers will be paid $70 for September and October for each ground vehicle in
stock and $50 for each grounded used car. It will take a genius to contain
dealer claims for full compensation.
All VW advertising in the US has been suspended for now – not just diesel ads –
because the negative media coverage is drowning out anything VW might say in
its commercials. The dealers will love that. Some in-place media/sports
sponsorships will continue because they cannot be unravelled at short notice.
Dealers in other markets can only but wait to assess the damage to their sales
Certain jurisdictions across the world are already asking for confirmation of
VW emissions data. And many of those countries, which use design and emissions
regulations as a blind for restricting car imports, will be especially harsh on
any discrepancies. They will relish inconsistencies. Some may even order the
cars out of the country. It has happened before in Japan, for example.
Australia, South Korea, France, Italy, Germany, Switzerland, Britain and the
European Commission are the first of what will be many to jump on this issue.
Some countries want all the models in the VW Group re-tested. The mere
logistical cost to the company will be huge let alone the flow-on cost if
something untoward is found.
And how do you test the cars? Can the testers turn off the cheating software in
the ECU if it is a wired-in default when a test is being conducted?
In the litigious US market, for starters, VW and Audi’s competitors will be
calling their lawyers about the fact that the car-maker falsely represented the
cars and therefore took sales from other brands; sales to which they were not
entitled. We know that 480,000 cars were sold in the US under false pretences
that would not have had the competitive edge they did had the true emissions
levels been met.
The German car-makers will now have to reassess their diesel sales strategies
in the US. They have been beating the diesel drum across America as a way of
getting in pole position for upcoming fuel economy standards and now this
scandal has stalled their plans. Fellow German car-makers Mercedes-Benz and BMW
are already distancing themselves from VW.
Possibly the biggest danger to the Volkswagen Group will be the extent of the
financial damage and its effect on forward model investment. When a company
takes a hit like VW should expect there will have to be massive belt tightening
– not just at VW but right across all the brands in the group.
That means that forward model development will either the pared back, delayed
or cancelled and the development engine that has been driving the company to
worldwide leadership, just from the point of view of desirable products
fielded, will take a very big hit.
In Australia, it is not be surprising to see the ACCC launching action to see
if VW here has been using kosher data in its performance and emissions claims.
Will they have to order tests of all models sold in Australia from the VW Group
because no-one can take VW’s word that the cars comply. If there are
discrepancies, the ACCC has the power to impose huge penalties for each
occasion in which incorrect data was presented to the public in PR material,
advertising or used to any competitive advantage.
What is so wrong about this scandal is there are a lot of livelihoods and a lot
of investments by dealers and others who are dependent on the Volkswagen Group
worldwide. Through no fault of their own, these livelihoods and investments
have been put under a cloud corporate recklessness.
And for Toyota and GM, yes, there is a Santa Claus.
VW should expect more of this: Page One pointer on The Australian Business