“Millions of people all over the world trust our brands, our cars and our technology. I am deeply sorry we have broken this trust,” said CEO Martin Winterkorn. “I would like to make a formal apology to our customers, to the authorities, and to the general public for this misconduct.”
The scandal broke Friday when U.S. regulators said the German company had programmed some 500,000 vehicles to emit lower levels of harmful emissions in official tests than on the roads thereby violating the Clean Air Act. During normal driving situations, the controls are turned off, allowing the cars to spew as much as 40 times as allowed under the Clean Air Act. The Environmental Protection Agency (EPA) ordered VW to fix the affected vehicles, which include diesel TDI versions of the Golf, Jetta, Beetle and Passat – but the agency could end up levying fines as high as $18bn. The Department of Justice is also opening an investigation into the matter. The Obama administration on Friday directed VW to recall nearly a half-million cars saying that the automaker illegally installed software in its diesel-powered cars.
In response to the scandal, Volkswagen said it would set aside $7.3bn - the equivalent of half a year’s profits - to cover the cost of the recalls and take other efforts to limit the damage. The company’s stock plunged 17% Tuesday, following a similar crash on Monday. About a third of the value of the group has been wiped out in the last two days, causing big losses for major shareholders such as Qatar. But the story is far from over – VW may suffer even more financial damage, considering its regulatory fine alone total up to $18bn. Compare that to the fines of $900 million for GM and $1.2bn for Toyota, both negotiated through settlements.
There’s surely no easy way out of this especially when it has become a global issue. Well, it’s hard to overstate the significance of the crisis in its home territory where making quality cars is central to the country’s reputation as a manufacturing and export powerhouse. Not to mention, Volkswagen is the dominant manufacturer in Europe with more than double the market share of any competitor and where diesel accounts for more than half of all vehicles sold. The company has halted U.S. sales of its 2015 and 2016 clean diesel vehicles and now has to fix millions of existing cars. Dealers are also banned from selling 2.0-liter TDIs, which make up about a quarter of the company’s U.S. sales. The United States, as the second-largest car market after China, plays a key part in VW’s long term strategy.
But the question is how VW managed to evade the regulators for so many years? And how the discrepancy was only discovered by an independent group, the International Council on Clean Transportation? The ICCT figured performing some tests on U.S. soil would provide them with a good control model. So with the help of the researchers at West Virginia University, they began investigation into ‘defeat device’ allegedly used to circumvent emission tests on in-use emissions from diesel passenger cars. What they found was shocking. Something was terribly wrong – VW’s Jetta exceeded the U.S. nitrogen-oxide emissions standard by 15 to 35 times, and the Passat by 5 to 20 times. The X5 passed the test. The cars were emitting way more pollution than they had in the labs.
In May 2014, both California’s air-pollution regulator and the EPA opened an investigation into VW and ordered to fix the problem. In December 2014, VW confirmed a fix and recalled nearly 500,000 diesel cars in the U.S. for a software patch. The cars performed well in testing, but real-world performance still didn’t match up. But CARB continued to test Volkswagen diesels on a regular basis and found that the cars were still exceeding the state’s nitrous-oxide emissions limits. After weeks of grilling over the discrepancy, the agencies at question threatened not to approve the company’s 2016 line of clean diesel cars. VW finally cracked and admitted it had knowingly installed a “sophisticated software algorithm” that permitted the diesels to reduce the amount of nitrous-oxide emissions while undergoing testing.
Meanwhile, the company could face criminal prosecution – not to mention billions of dollars in fines. Putting aside the inevitable fines, criminal charges and massive public disgrace, there are half a million cars running on emissions setup that never should’ve left the factory. This deceit also raises questions about the future of clean diesel vehicles, which appears to be genuinely promising technology of the future. But after the straight-up lies, it would very unlikely consumer confidence will ever be able to return to VW. At this point, confidence in the brand is all but destroyed, as enthusiasts who oversee clean-burning diesel as the possible future have become disillusioned. Incompetence is one thing, but taking advantage of some engine management software and in the process violating the Clean Air Act is simply an act of fraudulence.