VW cheating upsets industry; puts diesels on trial

27 Sep 2015 | Author: | No comments yet »

Diesel scandal victims await villains.

As the owner of a 2014 Volkswagen diesel Jetta Sportwagen, I am plenty angry about the car giant’s pollution scam. Switzerland said Saturday that it was suspending the sale of Volkswagen diesel vehicles most likely equipped with software capable of cheating environmental tests.A team of British scientists repeatedly warned the Government that emissions of a deadly pollutant from diesel cars far exceeded official safety levels.

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.When Volkswagen’s low-priced Rabbit hatchbacks rolled off its Pennsylvania production line in April 1978, it was the first time since the Great Depression an overseas manufacturer had made a car on US soil.NEW YORK • Something was different in January when Volkswagen Chief Executive Martin Winterkorn took the stage for his annual speech at the Detroit auto show: He addressed the industry’s most important confab in English. The announcement followed the German automaker’s revelation that 11 million vehicles worldwide were fitted with the software, which can switch pollution controls on during emissions tests but shut them off during normal driving.

Having taken over a half-finished Chrysler factory a few years earlier, the move was part of a concerted effort by the German carmaker to “break” the United States, and its sizeable automobile-buying public who, at the time, remained fiercely loyal to domestic marques. 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 studies, funded by the Department for Environment, Food and Rural Affairs (Defra), showed that on average diesel cars emitted four times the legal limit of dangerous NOx gases. Mueller, 62, who headed Volkswagen’s Porsche subsidiary, pledged to help the automaker get through the biggest business crisis in its 78-year history.

Their findings appear to have been ignored by successive governments which have continued to offer generous tax subsidies to encourage people to buy diesel cars, which now account for half of new cars sold in the UK. 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. The modest popularity of its Rabbit – and later its Golf – models was soon supplanted by new production techniques and fierce competition from rival firms and larger cars that caught the eye when the price of gasoline fell.

The scam could lead to fines worth more than USD 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. The spotlight has fallen on diesel car emissions after Volkswagen, the world’s biggest car manufacturer, admitted that it had used a “defeat” device to beat the official tests and enable polluting cars to pass US regulations.

The Westmoreland plant closed in 1988, after five years of running at less than half-capacity, and it would take the German outfit almost a quarter of a century to return to US production. 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.

Still, we see far too little responsibility-taking in American business, where failed CEOs more often extort seven-figure payouts and go on to rule again. 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. Thomas Rohrbach, spokesman for the Swiss federal office of roadways, announced that the ban was being implemented on all cars with diesel engines in the “euro 5” emissions category. 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. 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.

The 2012 Passat, one of its first models, was described in one review as “an eight-year-old’s Crayola rendering of a car” and “almost patronising”, although later models began to win round US motorists. The ban does not apply to cars now in production with “euro 6” engines, which are supposed to be able to meet the latest and toughest emissions standards set by the European Union. 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.

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. 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. It came as a report out on Monday by Transport & Environment, the campaign group which first raised the spectre of “defeat” devices used in tests, will show that the gap between the true fuel economy for cars and the claims made by manufacturers in testing has grown in the past five years and the car industry is using more and more sophisticated methods to cheat tests. 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. The software tells a car when it is under an official test, triggering emissions control systems that do not seem to be operating under normal driving conditions.

No matter that perp walks were absent from far more serious scandals, ranging from incendiary gas tanks to rollover-prone designs to exploding air bags. 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). Later, he opened the company’s first U.S. factory since 1988, in Chattanooga, Tenn., and made the Passat sedan bigger and cheaper to appeal to American tastes.After Winterkorn outlined his goal in 2009, pressure to make sales targets intensified, two people familiar with the matter said. Given the ratcheting down of emissions over the years, nobody should pretend that even the tenfold increase in nitrogen oxide emissions discovered in some VW testing will directly kill anybody.

It stands accused of intentionally falsifying emission-test scores by installing “defeat device” software to make its cars seem cleaner when driving under laboratory conditions. 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.

There is a huge gap between what the manufacturers report and what is actually happening.” He added: “It has been known for some time and Defra are certainly aware that concentrations [of NOx] have not decreased.” The studies, which measured emissions from more than 100,000 cars, show that Oxford Street, London’s busiest shopping thoroughfare, is the most heavily polluted road in the world. 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. As a certified energy efficiency and environmental zealot, I passed up a hybrid to buy my first “clean diesel.” They also use less fuel, thus producing less carbon dioxide that causes climate change. Having pointed the manufacturers down the wrong track, European governments had to tolerate health damaging high NOX emissions or bust the local car industry.

The first steps to uncover VW’s scheme were made in an academic study carried out by a non-profit group, the International Council on Clean Transportation, in which it sent cars out on a loop through traffic-filled roads in downtown Los Angeles in 2013 and 2014. The US Justice Department has launched a criminal investigation while the UK has ordered the Vehicle Certification Agency to rerun lab tests on VWs and compare the results with “real-world” driving conditions.

Successive governments have deliberately made diesel cars more attractive and further subsidies, announced in this year’s budget, will be introduced next year although George Osborne, the Chancellor, will be under pressure to scrap them after the VW scandal. 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 the events of the last two weeks have been an almighty wake-up call.” Transport & Environment’s new report will claim that cheating by car manufacturers is not limited to diesel engines or to rigged air pollution tests. “Cheating goes on for all vehicle tests,” a spokesman said last night. “We are only just scratching the surface of this. After the federal watchdog was handed the ICCT data by the California Air Resources Board in early 2014, it set about poring over the data and opened talks with Volkswagen about its practices.

Diesels often have a tank of a urea-based solution that’s mixed with exhaust and binds with nitrogen oxides — a big component of smog — to reduce emissions. 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. Without an independent regulator in Europe cheating companies won’t be caught.” Suggestions of collusion between governments and the motoring industry have been bolstered by an allegation from a former transport minister that David Cameron agreed to delay imposing a new emissions limit after a personal request by Angela Merkel, the German chancellor, to protect her country’s motor industry. “Angela Merkel rang the Prime Minister and asked him effectively to defer the arrangements that had been carefully negotiated. For a long time, all car companies have used data for fuel consumption that I believe were at best flattering and the same may well apply on the subject of emissions. 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.

They demanded that Volkswagen tell them the reason for the emission problems, and on September 3 the company admitted that the cars were installed with defeat devices. 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.

Motor industry experts have told The Telegraph that problems with VW date back to about 2006 when the company switched over to a new kind of diesel engine. However, the announcement went mostly unnoticed, with most of that day’s news coverage around Volkswagen instead centred on a possible bid to take over the Red Bull Formula 1 team. Peter de Nayer, a former research engineer with the AA, said VW’s EA189 engine had possibly caused emissions problems that meant the car could not pass tests without cheating. 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. Mr Winterkorn apologised again, but it was not enough to keep his job, and he resigned on Wednesday evening saying that “this is the only way to win back trust”. Only two days before his eight years in charge came to an end, the board had been due to rubber-stamp a two-year extension to his contract, which would have taken his leadership through to 2018, by which time he would have been 71 years old. On Friday, Porsche boss Matthias Muller was named as his replacement, as the group changed its corporate structure and suspended some unnamed employees in a desperate attempt to save itself.

It’s probably not enough: The Obama administration has extracted $132 billion to punish financial institutions since the 2008 crisis, according to SNL Financial. 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. Fears that the rigged data would crop up outside of the US increased, and the German transport minister Alexander Dobrindt revealed that diesel vehicles with 1.6 and 2.0 litre engines were also affected. While European and UK emissions tests relied on government-supervised tests rather than the manufacturers’ own data, they too used laboratory readings instead of real-world driving.

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. Certainly, Volkswagen has admitted that for 11 million of its cars around the world, emissions of nitrogen oxide (NOx) can display “a noticeable deviation between bench test results and actual road use.” U.S. and California officials say this deviation was designed into software and amounts to a “defeat device” outlawed by the Clean Air Act.

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. The firm also generated 13pc of earnings per share for the entire DAX index of large-value German stocks, Deutsche Bank figures suggest, and its reputation is tied up with that of Germany’s manufacturing clout. The company also buys 12pc of the world’s semi-conductors, according to UBS, and even if the producers of this technology are not implicated in the scandal their sales could suffer as the market recalibrates. After Toyota’s massive recall in 2009-10, suppliers to Hyundai benefited. “As such, we think a switch to US/Japanese vendors needs to be monitored going forwards,” said the UBS analysts.

But we don’t know whether the EPA forced this confession by cranking up enforcement or reinterpreting rules, as it has for so many other industries lately. A sum greater than the possible fine has already been wiped from its market value, angering some shareholders, including Nordea Bank, which said it will retain its 2.2bn kronor stock and debt holdings but has banned its fund managers from buying any more VW stock.

For the unfortunate investor holding Volkswagen shares, the lesson to be learnt is proving a painful one: namely that a company’s corporate governance can often prove instructive on whether future trouble lies ahead. London, Birmingham and Leeds are forecast to exceed EU air pollution limits until 2030, and local governments are examining levies and even bans on certain disel vehicles to ensure that pollution readings fall. A study by King’s College London published last year found that nearly 9,500 people a year were dying prematurely in London every year as a result of air pollutants including nitrogen oxide.

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