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Volkswagen’s Failed American Gamble

Volkswagen has always been the German “people’s car,” not just by being affordable for the volk but also by being the Deutschland’s largest employer, representing almost 300,000 jobs in a country of 80 million. The automotive titan’s sudden and surprising fall from grace into scandal [1] over the past week, then, is an economic event potentially on par with or even greater than [2] the Greek debt crisis.

How did the economic face of such a famously rule-following people slide into one of the most brazen corporate cheating scandals of recent memory? The answer appears to be an unhealthy mixture of bad bets, worse timing, and an ill-fated attempt to export Germany’s favorite car onto American roads.

On September 18, the EPA announced [3] that Volkswagen had been employing a “defeat device” to cheat its emission tests on the widely admired 2.0L four-cylinder TurboDiesel engines deployed in many of its smaller cars. This was the culmination of a year-long investigation after a few curious academics [4] attempting to use VW’s cars as models for what clean diesel can achieve inadvertently found their real-world emissions to be astronomically higher than what the cars put out in the testing facility. VW’s explanations for this discrepancy gradually unraveled until the company revealed, under threat, that their cars had been cheating the entire time. The devices used to reduce emissions were turned off at all times except when the cars detected they were being tested.

Volkswagen CEO Martin Winterkorn resigned [5] yesterday even as he insisted that he had no knowledge of the cheating. VW’s board promises [6] that many more heads may roll, but that has not kept the company’s share prices from plummeting as regulators and criminal investigators around the world are just beginning to put the company’s practices under the microscope.

While Volkswagens have always been a significant presence in German markets, and have enjoyed relative success around the world, for decades the company has been unable to make strong inroads into the biggest, most car-mad auto market in the world: the United States of America. The now-departed CEO Winterkorn aimed to turn that trend around with a European solution to skyrocketing gas prices: clean diesel.

As demand for economical vehicles surged along with the price at the pump in the 2000s, Japanese and, to a lesser extent, American automakers were investing in hybrid technologies that allowed traditionally-fueled gasoline engines to burn less gas per mile by supplementing with electric power. The Toyota Prius became the face of hybrid automobiles and quickly spurred imitators.

VW, on the other hand, already had decades of experience making fuel-sipping diesel engines for expensive European markets, even if they hadn’t caught on in cheap-gas America. And their engineers had been hard at work on a new engine that would be coming online just in time. An apparent new era of $100-a-barrel oil and $4.00-a-gallon gasoline seemed the perfect disruptive opportunity to finally get Americans on board with diesel. The only hitch was emissions.

Diesel is a dirty fuel, which doesn’t have to be as refined as gasoline in order to compress and combust. The upside is a strong advantage in torque and fuel economy. The downside is that the burned gas contains much more particulate pollution that tends to settle near the earth, causing air pollution and asthma. European particulate emission standards are much laxer and more diesel-friendly than those in the United States, resulting in more air pollution, higher fuel economy, and lower carbon dioxide emissions. While the diesels of a decade ago were much cleaner than the black smoke-belching engines of yesteryear, the EPA imposed (possibly unreasonably) stringent new air-pollution standards in 2007, just as VW was hoping to make its diesel engines the centerpiece of its American push.

Most manufacturers responded to the new standards by equipping their vehicles with a tank of a urea solution that could be sprayed on the exhaust in order to clean it. That system took up too much space and was too expensive for the smaller, cheaper cars like the Golf and Jetta that VW was hoping to popularize, however. So they turned to a much less complicated, less expensive system: a loudly publicized NOx trap combined with exhaust gas recirculation. The first uses unburned fuel to clean its filter, worsening fuel economy, and the latter degrades engine performance, worsening power. VW’s TDI engines have been cherished for providing ample amounts of both economy and power, and now it appears we know why.

When it came time to hit the U.S. market with its new engines, VW seemed to have trouble delivering [7], announcing instead that the Jetta TDI would be delayed six months after encountering what was widely rumored and reported to be emissions issues. They soon hit the market, however, and for several years the company enjoyed [8] surging success selling VW’s as a hip Euro alternative car that was clean-diesel green to boot. Until it wasn’t.

It appears that Volkswagen took a gamble on its ability to produce an economical, powerful, clean diesel engine via technology that just couldn’t deliver by the time the EPA’s deadline arrived. Too much money, publicity, and planning had been invested in the “blue” diesel engines to abandon them, but rolling out a fleet of new diesel cars with the mediocre fuel economy and/or the exhaust-choked engines it would take to meet the EPA’s demands could have been even more embarrassing for proud German engineering.

And so, under the pressure to produce an engine that could be all things to all people without compromises, someone along the highly centralized Volkswagen production line cracked. Maybe VW’s engineers were just buying time to rush a urea-based system and were hoping no one would notice their hack-job in the interim. Perhaps significantly, in retrospect, VW had already begun implementing the more common urea-based system when the cheating scandal came to light. But whether it was one engineer taking a shortcut with programming, or, what seems more likely, an entire team out of answers and desperate to meet their goals, Volkswagen’s fleet of nimble TDI’s were programmed to monitor themselves and detect an emissions testing-like situation; only then were the cars to switch on their “clean diesel” facade.

With the few lines of engine management software coding that it took to program the Volkswagen EPA “defeat device,” then, Germany’s iconic national brand [9], the largest company of its largest industry, a company whose largest shareholder is still the regional government of Lower Saxony, has now been laid low. What’s more, when Martin Winterkorn looks back on the scandal that felled him as CEO mere weeks after he had beaten back [10] an internal coup attempt from the chairman of the board, he will see the bitter truth that, even if VW had never been caught, their U.S. gambit was already failing.

A few years ago the strategy was seemingly peaking in success, as “[b]rand-wide volume in 2012 improved to the highest level since 1973, when Type 1 Beetles filled the driveways of America.” VW’s growth almost immediately hit the skids, however, and hobbled for years with outdated models, the company saw double-digit declines [8] quarter after quarter.

What’s more, the seeming new normal of $4.00 gas as far as the eye could see that was so evident as 2012 set American gas price records, proved to be a high-water mark. Global oil prices have been falling thanks to booms in domestic American production via shale gas extraction and fracking techniques. The shifts in American sentiment towards small, fuel-efficient cars to which VW offered a new lease on diesel life soon tracked back to the bigger cars, trucks, and SUVs the country famously preferred. Belatedly, Winterkorn announced [11] this year that VW would be trying to play catch-up and aggressively enter the SUV and crossover market.

Ironically, diesels are a natural fit for SUVs, where their “torquiness” and fuel-economy can both be put to good use. Volkswagen’s reputation will presumably be shot for years to come, however, especially if they start “fixing” people’s cars by turning the emissions traps on all the time, draining the vehicles of fuel economy and power. And the slowly recovering reputation of diesel fuel in the U.S. may have been set back by another 10 to 20 years [12].

Volkswagen itself will be beset by criminal investigations, angry regulators, and opportunistic class-action lawsuits the world over. The company has already set aside [13] $7.3 billion to address those claims. Only time will tell if it will be enough. Already there is sweeping fear in Germany of potential layoffs as the industrial icon of Europe’s steadiest and strongest economy suddenly finds itself under peril.

Angela Merkel presides over a country that has girded itself against the Greek economic crisis, promised that it could absorb [14] vast numbers of refugees from that current crisis, withstood the economic disruptions resulting from Russia’s invasion of Ukraine, and prepared to weather the presumed depressed demand to result from China’s stock collapse. Yet for all the world has thrown at it, Germany finds itself economically rocked by a few lines of car software code thrown in by panicked engineers trying to satisfy the EPA and California Air Resources Board.

Jonathan Coppage is an associate editor at The American Conservative.

18 Comments (Open | Close)

18 Comments To "Volkswagen’s Failed American Gamble"

#1 Comment By Fran Macadam On September 25, 2015 @ 2:23 am

I suspect German workers won’t be in favor of cooperation with destructive U.S. war policies as their government has been.

#2 Comment By Philip Giraldi On September 25, 2015 @ 8:06 am

I own a Beetle turbodiesel and my particular nightmare is that the emission problem might not actually be fixable. That would leave 500,000 VW owners in the US with relatively expensive cars that cannot be driven legally in many states and cannot be sold.

I bought the diesel largely for “green” reasons but it’s excellent performance was a pleasant surprise and a major incentive. At a minimum, if the problem can indeed be solved with a software upgrade that performance will undoubtedly be considerably degraded. Both the notoriety of the VW diesel problem in general and the poor performance will no doubt drastically effect resale value, which is the fault of VW but which will impact on me the owner directly. Will VW pick up the difference? I look forward to many, many class action suits.

It is astonishing to learn that a company like VW would actually cheat on emissions and think that it would get away with it forever. Some managers surely must have realized that when the reckoning would come it would be catastrophic. And I also find it hard to believe that the company’s senior management did not know about the ruse! I hope some of them wind up in jail.

#3 Comment By Dennis On September 25, 2015 @ 11:53 am

Sounds like the real story is overzealous US regulators (as is the case in so many areas – EPA, USDA, etc.) imposing too strict emissions standards to begin with. If “green-mad” Europe has lower emissions standards and no problem with VW’s standard turbo-diesels, then it seems the US needs to ask why it is the extreme outlier. Lang lebe KdF Wagen!

#4 Comment By JohnG On September 25, 2015 @ 3:00 pm

Forgive me for being less surprised here, I’ve heard from many friends in Europe how the German-owned AutoBild car magazine more or less openly promotes German manufacturers all the while running supposedly impartial tests and comparisons of all brands. Add to this stock manipulations in the Porsche merger, and it’s been a very dirty game all along, so I am so not surprised.

One can only wonder why the oh-so-environmentally-sensitive EU has less demanding regulations on diesel engines than the US? Any coincidence that Germany is the most powerful member? And how come every once in a while EU regulators set their sights on a major US (typically software) firm and EU and especially German giants can be held accountable only in the US?

Questions, questions… but VW could indeed be done as far as the US and yes, this will have major economic implications for Europe. But it could be a good thing too to have a more level playing field. At least the Pope seems to think so with his little Fiat 500L 🙂

#5 Comment By Mark On September 25, 2015 @ 3:54 pm

I own two VW diesels although only one if affected by this. We love both but are concerned about what this means to their future use and possible resale value. I certainly hope this doesn’t result in thief being sidelined as I’m not looking to replace either.

#6 Comment By bt On September 25, 2015 @ 4:00 pm

Hat’s off to the Author. This is a really great analysis of the technical side, really good stuff.

On the policy side, the standards were written to deal with the serious hazards of diesel exhaust. In particular the particulates. It is generally accepted that it is carcinogenic. As well, the high NOx is somewhat intrinsic to the diesel engine as well, and difficult to lower.

Sometimes a standard is set to push the market to different solutions. As the author pointed out, electric / hybrid was perhaps the better response. And maybe the standards were written with that in mind.

#7 Comment By JR On September 25, 2015 @ 4:15 pm

“…the EPA imposed (possibly unreasonably) stringent new air-pollution standards in 2007, just as VW was hoping to make its diesel engines the centerpiece of its American push.”

I have no doubt this piece will receive its share of knee-jerk anti-government bile to the effect that the nasty EPA somehow “forced” Germany to cheat the emissions tests.

How much better it would have been for the Germans to be frankly honest and say “it can’t be done” if indeed that was the case. Typically, it can be done, and in fact usually isn’t done without the EPA or some similar agency drawing a line.

The EPA is tasked with establishing emission standards through the authority of our elected officials. Such standards revolutionized the home heating market by allowing newer players with new ideas to make an end-run around calcified players who preferred the old way of doing things.

It never ceases to amaze how some can acknowledge a universal fallen nature of Man, yet fall effortlessly into a mental groove that damns any governmental activity as uniquely more fallen that a private one.

It is also important to remember that the variables the US must contend with such as population and population density are quite different from Europe.

#8 Comment By Student On September 26, 2015 @ 11:01 am

As I understand it, diesel fuel is more refined and cleaner in Europe. Amazingly, unlike here, it is also cheaper than gasoline.

#9 Comment By bt On September 27, 2015 @ 1:22 pm

I think the the US and European diesel standards are quite similar at this point. They are all low sulfur. These standards were all phased in the last 10 years or so.

The Sulphur is one of the building blocks of the particulate emissions I believe.

And if Diesel is cheaper in Europe you might want to look at taxation of the various fuels. They tax fuel tons over there.

#10 Comment By AJ On September 27, 2015 @ 10:35 pm

Collapse of VW. Just in time for the arrival of the Syrian refugee deluge. The German economy must be groaning.

#11 Comment By Myron Hudson On September 28, 2015 @ 6:50 pm

“I have no doubt this piece will receive its share of knee-jerk anti-government bile to the effect that the nasty EPA somehow “forced” Germany to cheat the emissions tests.”

I’ve already read some of that bile. One fellow thinks VW did the right thing. Well, if he think’s its OK to promise one thing and deliver something else, good luck to him.

a few years ago we narrowly avoided buying a VW TD, having found something else even more fun to drive albeit with slightly lower fuel economy. Now, with somewhat higher fuel economy, apparently. Whew!

#12 Comment By Argon On September 29, 2015 @ 12:22 pm

Three things:
Mercedes still appears to have a ‘clean’ diesel. It can certainly be done. VW chose to opt out of that technology.

It appears that VW cheated in the EU as well, so this is not an EPA-centric issue. In the EU, manufactures also have more control over how their cars are tested. Expect that in the coming months, the EU is going to clamp down on manufacturers’ ability to shop around for the most lenient testing companies.

People seem to forget how bad smog and pollution were in the 60’s. We’ve beaten back a lot of polluting activities and the fact that we don’t often encounter problems today is a success of regulation and innovation. It’s almost like the anti-vaccine crowd who never experienced whooping cough or polio. They can’t see the good that’s being done and forget that what we see as normal today takes continuous effort.

#13 Comment By John D. R. On October 1, 2015 @ 4:35 pm

VW is a criminal enterprise and will pay the price. Their engines produced 4000% the cancer causing pollutions, like smoking a pack a day of cancer sticks. The class action lawsuits will bankrupt VW as they should. Crime does not pay in California.

#14 Comment By Henry Hornstein On October 2, 2015 @ 12:48 pm

Ferdinand Piech, the chairman of VW’s Board, is a tyrannical demanding leader who threatens to dismiss anyone who does not perform up to his standards, and/or who fails to deliver what he/she has been tasked to deliver. People up and down the VW hierarchy (not just the engineers) were in fear of their work lives as a consequence of the failure of the small VW diesel to deliver on its performance and gas consumption promise. Consequently, as Bob Lutz, the former chairman of GM, said, people resorted to lying, cheating and stealing in order to achieve the financial benefits that they were supposed to deliver. The result is the implosion of VW!

#15 Comment By John D. R. On October 4, 2015 @ 6:19 pm

Credit Suisse analysts believe the Volkswagen emissions scandal will cost 87 billion. VW’s survival will cost them the selloff of all the brands it owns.

#16 Comment By G E Hoeflinger On March 19, 2016 @ 4:09 am

Amazingly the CARB has determined that most of the older engine (pre 2014) cannot be fixed at all. It is now five days away from the deadline for federal briefs in this case. It hs further come out that VW had been stonewalling the EPA for a year before they released this cheating scandal. In full disclosure i have one of the older dirtier cars, and I can only say that VW should refund 3X what I paid for their fraudulent promotion. I paid a premium, and i expect to be made whole. I’ll also never purchase another VW product, no matter how it is branded.

#17 Comment By Panda On March 29, 2016 @ 5:53 pm

Boy – that’s a shocker, a most blatant and deliberate circumvention of the law. I’m disappointed as I own an Audi and have owned VW’s in the past. This is so blatant that criminal prosecutions of the individuals involved, no matter how high it goes, should follow. The fact that GM employees got away without criminal liability is itself a crime.

#18 Comment By G E Hoeflinger On November 6, 2016 @ 5:21 am

Time to dust this post off. There is an additional “Defeat Device” found in the Audi 3 liter diesels. I’m selling my Jetta Sportwagen back to VW ASAP. I think the whole rotten ediface is going to go down.