Switzerland Suspends Sales of Volkswagen Diesel Vehicles

27 Sep 2015 | Author: | No comments yet »

As Volkswagen Pushed to Be No. 1, Ambitions Fueled a Scandal.

If ever there were an object lesson on the dangers of investing in very large companies with flawed corporate governance operating in industries with a high political profile, Volkswagen may well prove a textbook case. A recap for those who haven’t been following the story: The Environmental Protection Agency accused VW of setting certain diesel cars to cheat on emissions tests.

Martin Winterkorn, Volkswagen’s chief executive, took the stage four years ago at the automaker’s new plant in Chattanooga, Tenn., and outlined a bold strategy.Volkswagen’s new boss began trying to pull the embattled carmaker out of the wreckage of a pollution test rigging scandal Saturday, as the United States and Switzerland banned the sale of the group’s new diesel cars.Washington/Brussels: Government regulators on both sides of the Atlantic vowed on Friday to toughen auto emissions tests in the wake of Volkswagen’s admission it cheated on diesel emissions, but some officials and environmentalists doubted the pledges would be easily achieved.

Thomas Rohrbach, spokesman for the Swiss federal office of roadways, said the ban applied to all cars with diesel engines in the Euro 5 emissions category. His speech at Fishbone’s, a Cajun restaurant near the Chrysler Freeway and the riverfront GM headquarters, was halting, uneven, and read from a script. The 62-year-old former Porsche chief Matthias Mueller was tapped Friday to replace Martin Winterkorn, who resigned over stunning revelations by US environmental authorities that the German carmaker had fitted some of its diesel cars with software capable of cheating environmental tests. One way Volkswagen aimed to achieve its lofty goal was by betting on diesel-powered cars — instead of hybrid-electric vehicles like the Toyota Prius — promising high mileage and low emissions without sacrificing performance.

Any changes could mean higher costs for automakers, particularly any that become subject to recalls or production changes, as well as bigger regulatory hurdles in obtaining certifications. Then, when the owner was back on the road, it went back to normal, spewing up to 40 times more pollution than is legally allowed but also getting more miles per gallon and power.

Ray LaHood, the transportation secretary, endorsed the company’s commitment to diesel that day, calling it an “ingredient in the recipe for our long-term energy security.” Volkswagen’s unbridled ambition is suddenly central to what is shaping up as one of the great corporate scandals of the age. The scam could lead to fines worth more than $18 billion (16.1 billion euros), while the German giant has already seen billions of euros wiped off its stocks this week. “We will overcome this crisis,” he said Friday, adding that the carmaker could “emerge stronger from the crisis in the long term” if it learned from its mistakes. Across the Atlantic, Elzbieta Bienkowska, the EU commissioner responsible for industry, said: “Our message is clear: zero tolerance on fraud and rigorous compliance with EU rules. Like Volkswagen, BP works in a highly politicised industry and, at the time of the oil spill, concerns about the company’s corporate governance were raised. On Tuesday, Volkswagen said it had installed software in 11 million diesel cars that cheated on emissions tests, allowing the vehicles to spew far more deadly pollutants than regulations allowed.

The VW brand had just over 2 percent of U.S. car sales — a fraction of what Nissan and Toyota have, let alone Ford or GM. “We are — and I am — fully committed to the United States,” Winterkorn, 68, said at the show. “We are putting the Volkswagen brand on track.” Yet even as Winterkorn spoke, the crisis that would be his undoing was starting to surface. Volkswagen has said the 11 million vehicles worldwide that contain software involved in the emissions-rigging scandal include some five million cars made by its core VW brand. While VW will doubtless become another saga in the demonisation of business, the reality is more complex and one in which the European political establishment must take its share of the blame.

American environmental officials had begun investigating why emissions from VW diesels were many times higher in road tests than levels measured in labs — which ultimately led to revelations that the company’s cars had software intended to fool regulators. Volkswagen introduced its new 2016 Passat — which includes a diesel version — in New York on Monday just as the scandal over cheating on pollution controls broke. Disabling the emissions controls brought major advantages, including much better mileage — a big selling point in Volkswagen’s push to dominate in America.

To regain relevance Volkswagen hadn’t enjoyed in the U.S. since hippies painted flowers on their microbuses and “The Love Bug” was playing at the local drive-in, Winterkorn had bet that Americans, who were rapidly shifting to Japanese-made hybrids, could be persuaded to try diesel. Some 180,000 vehicles on Swiss roads made by Volkswagen’s Audi, Seat, Skoda and VW brands between 2009 and 2014 could be affected by the scandal, the Federal Roads Office said in a statement. The company has said it would set aside $7.3 billion (€6.5 billion) in its third-quarter accounts to help cover the costs of the biggest scandal in its 78-year history, blowing a hole in analysts’ profit forecasts.

A Volkswagen statement said some diesel models and model years – such as the sixth-generation Golf, seventh-generation Passat and first-generation Tiguan – are equipped exclusively with the EA 189 engines in which it says there are “discrepancies”. Because diesel cars are more fuel efficient, CO2 emissions are lower, giving hope to the car industry that it would be able to meet the new emission standards mandated by the political establishment across Europe since the 1990s as part of the policy to combat global warming. The gamble seemed to pay off — until last week. “They were under a great deal of internal pressure to ‘do something’ in America,” said Stefan Bratzel, a former product manager with Daimler AG who now teaches at the University of Applied Sciences, near Cologne. “They wanted to deploy diesel in America as a way of differentiating themselves from Toyota.” The scale of the diesel scandal, which has now claimed Winterkorn’s job and wiped about $25 billion off of Volkswagen’s market value, has stunned industry veterans, lawyers and regulators. France and Britain have announced new checks and the European Union has urged its 28 member states to investigate whether vehicles in their countries complied with pollution rules.

The EPA’s Grundler said Volkswagen embedded a sophisticated algorithm within 100 million lines of software code to defeat current emissions test procedures and that regulators aim to root out any so-called “defeat devices.” But an EU source said there could still be difficulties in introducing new test procedures that match real-world driving conditions after years of official inertia and industry resistance to change. Volkswagen brand chief Herbert Diess said: “we are working at full speed on a technical solution that we will present to partners, to our customers and to the public as swiftly as possible.” Meanwhile, Volkswagen says it is reorganising its North American business under Winfried Vahland, until now chairman of the board of directors at Skoda. How could the German powerhouse do something so wrong, for so long, at such risk?The answer has a lot to do with Winterkorn’s goal of overtaking Toyota, producer of the Prius hybrid, as the world’s No. 1 carmaker.

VW’s main shareholder said Saturday it was buying the 1.5 percent of Volkswagen held by Japanese carmaker Suzuki to show its “faith” in the group. Some auto companies have used strategies to pass tests in lab conditions, such as using lighter materials in cars, and that is why real-world driving tests are being rolled out in the EU. Michael Horn will remain as president and chief executive of Volkswagen Group of America, but its US, Canada and Mexico markets will be “combined and significantly strengthened” to form a new “North America region”.

The Japanese corporation’s decision to sell up in the midst of the scandal came as a new sign of distrust in VW after it lost a third of its market capitalisation — over 20 billion euros — this week. Lucia Caudet, a Commission spokeswoman, said the Commission only sets the regulatory framework. “Let me be very clear: the Commission does not itself do the policing. Research from Redburn Partners shows that diesel may be better on CO2 emissions than petrol but it does have higher concentrations of harmful Nitrogen Oxides (NOX). Volkswagen’s shareholders, dominated by the Porsche SE holding company — a separate entity to the luxury brand car — are expected to hold emergency talks in Berlin on November 9. “Europe’s most important automobile group faces a new beginning” while “the scandal is growing bigger and bigger,” German FAZ daily wrote Saturday. This is done on the ground by Member State authorities.” Germany faces resistance to any toughening of the test regime from its powerful motor industry.

He said after being appointed to the job that “we stand by our responsibility”, but added that “carefulness is even more important than speed”. Volkswagen CEO Matthias Mueller, who was appointed on Friday after the previous chief resigned due to the scandal, has pledged to do everything possible to win back the trust of consumers and the general public.

Late in the 2000s, the company always had a chart on hand that looked like a hockey stick, with sales going up sharply the next year, the people said, asking not to be identified discussing internal matters. In an interview with FAZ that will be published in full on Sunday, Daimler’s CEO Dieter Zetsche expressed “compassion” for his former VW opposite number Winterkorn, who was forced to quit Wednesday over the scandal. It markets its cars on a promise of clean performance, but tells the Commission its engines take years to design and new pollution standards should not be rushed.

In Europe 180 milligrams of NOX per kilometre were permitted; recently this has come down to 80mg/km but is still higher than the long-standing US standard of 53mg/km. More recently, EU officials, speaking on condition of anonymity, said Germany had been lobbying for flexibility to soften a proposed new law to supplement laboratory testing with driving new cars on real roads. Having pointed the manufacturers down the wrong track, European governments had to tolerate health damaging high NOX emissions or bust the local car industry. Other challenges VW faces include competition in the fast-growing car market in China, where the German carmaker’s sales have dropped by 5.8 percent this year. My personal bet is that Volkswagen chief executive Martin Winterkorn may well not have known what was happening until quite late on and is unlikely to have been a party to the decision to use the “defeat device” software.

A cynic might invoke that old idiom, “If it sounds too good to be true, it probably is.” But car buyers don’t have the wherewithal to conduct their own independent tests of emissions and mileage. Diesel, though, was always going to be a difficult sell to American car buyers, who mostly associate it with smoke-belching buses and roaring 18-wheelers. But diesel engines, while offering better mileage, also emit more smog-forming pollutants than conventional engines, so Volkswagen’s strategy ran head-on into American air pollution standards, which are stricter than those in Europe. More likely, the decision was taken, in my view, much further down the chain of responsibility – for instance, one could imagine that a group within the company, when they realised their cars could not match petrol cars on either cost or NOX emissions, decided to use a device that has only been outlawed in Europe since 2007.

Not only were drivers rewarded with better mileage and performance, but the automaker also avoided more expensive and cumbersome pollution-control systems. From 2010 to 2014, VW’s U.S. diesel sales climbed 35 percent to almost 80,000 vehicles, growth that helped the company meet Winterkorn’s long-cherished goal. One conclusion I draw from this situation, is that the notion that the CEO often does not know what is going on remains an under-utilised tool of investment analysis. When I invest, I seek to buy shares in companies where the management can easily “get their arms round the business”, by which I mean having a real grasp of the minute detail that drives their business.

Regulators and the company must have tools in place to detect those people the next time they go for an emissions test, at least in the states that have such requirements. The diesel Passat and Jetta they tested had emissions 35 times higher than standards in the lab; a diesel BMW X5 was at or below the standards.The researchers published the findings in May 2014 without naming the vehicles, though they were identifiable by engine specifications that were reported.

It was fined $120,000 in 1973 for installing what became known as a “defeat device,” technology to shut down a vehicle’s pollution control systems. This time, it equipped its vehicles with software that was programmed to fake test results, an action the E.P.A. rebuked in 1998, when it reached a $1 billion settlement with truck-engine manufacturers for doing the same thing.

Economies of scale are critical in the auto industry but I believe there are significant diseconomies of scale in terms of management information from the globalisation. Over the last year, when confronted with evidence that its system was not performing as promised, Volkswagen aggressively pushed back, saying that regulators were not doing the testing properly. The German corporate model, with its focus on long-term outcomes, has frequently been held up as a better model than the alternative, described as the “Anglo-Saxon” model, with its supposed focus on short-term results. In July 2014 in Wolfsburg, the company town west of Berlin where Volkswagen has its headquarters, Winterkorn had spoken at length — in German — about his ambitions for the U.S. The occasion was the announcement of a new SUV to be built in Tennessee, “a true American car, big, attractive, and with lots of high-tech,” as Winterkorn put it, that would capture the country’s attention.

Looking back, investors should have taken real note of the frequent battles over the years that most recently saw the departure of the chair Ferdinand Piech in April of this year. The trade publication Automotive News quoted an Audi executive saying Volkswagen’s own technology was strong enough. “We don’t need BlueTec,” the executive said. DeLorenzo said, when automakers all switched to catalytic converters to meet American emissions standards, Honda developed an engine technology that it claimed would run clean without the converters. In fact, it assumed that American diesel cars would run much cleaner than their European counterparts, thanks to stricter United States emissions rules.

The researchers already had a BMW X5 and a Volkswagen Jetta — and then a Passat owner happened to see an ad seeking cars for the project and offered up his. Almost immediately, the two Volkswagens set themselves apart from the BMW. “If you’re idling in traffic for three hours in L.A. traffic, we know a car is not in its sweet spot for good emissions results,” said Arvind Thiruvengadam, a research professor at West Virginia University, which was hired to conduct the tests. “But when you’re going at highway speed at 70 miles an hour, everything should really work properly. In a presentation, they admitted that the software subroutine had been added to vehicles going back to the 2009 model year, when Volkswagen’s “clean diesel” arrived in America with promises of an environmentally friendly future. “It was the repeated answers that did not add up that really led to the discovery of the problem in the first place,” Mr. This month, Volkswagen and Audi executives in Herndon, Va., began pressing executives in Germany for information about the delay in certifying the 2016 models for sale. He resigned on Wednesday, saying that he had no knowledge of the trickery. “I am not aware of any wrongdoing on my part,” he said, adding, “Volkswagen needs a fresh start.”

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