A few days ago Volkswagen agreed to pay US owners of some of its cars $20 billion.
With $20bn, you could buy most of the island nations of the Pacific and the Caribbean, including places like Vanuatu, Tonga and Samoa. I know what I’d rather be doing.
Anyway, US District Court judge Charles Breyer gave his preliminarily approval to a partial $20bn settlement between the Volkswagen Group and VW, Audi and Porsche owners who had brought 888 actions, and actions brought by the Environmental Protection Agency and the Federal Trade Commission.
Under the terms, VW will spend $13bn buying back or repairing 475,000 VWs and Audis with 2.0-litre engines and paying owners up to $13,000 each. VW will also pay $7bn in fines and promotion of green cars. The deal doesn’t cover owners of cars with 3.0-litre diesels. More importantly it is clear that VW has and is trying to limit the cost to the company of its “wilful and systematic scheme of cheating” in countries outside the US, including Australia.
So what happened at the owner of some of the world’s most respected auto brands including Bentley, Lamborghini, Audi and Porsche?
Towards the end of the 90s it was clear VW had a culture problem. The company’s HR team found an interesting way to solve their labour problems. They set up “a company slush fund to pay for high-class prostitutes and to sponsor the mistresses of trade union officials, as well as regular visits to brothels, cash gifts for wives and even free supplies of Viagra”.
Around the same time, according to lawsuits filed this month by New York Attorney-General Eric Schneiderman and two other state attorneys-general, the VW group “embarked on a wilful and systematic scheme of cheating by dozens of employees at all levels of the company regarding emissions. This was after Volkswagen was unwilling to manufacture diesel vehicles that would meet federal and state standards in the United States. This scheme, which extended over nearly a decade, was perpetrated by Volkswagen and its Audi, Volkswagen and Porsche subsidiaries, through their employees, executives and officers.” The suits seek up to $600 million in civil penalties.
At the end of the 90s, VW’s Audi operation faced a challenge in trying to develop a 3.0-litre V6 diesel engine for its large luxury cars. One of the problems with marketing diesel engines to upmarket car buyers was the clattering noise of diesel engines when you turned the key. Audi had developed the technology to beat the noise but it caused the engine to exceed European emissions standards during emissions testing.
Audi solved this problem by installing defeat device software on its European-market Audi 3.0-litre V6 diesels from 2004 to 2008 that allowed the engine to recognise when it was being tested and cut emissions during the test.
VW was facing a similar problem in the US market. Success in the mid-sized market required clean, green power plants. Toyota had a hybrid, VW had no answer but diesel. US buyers knew diesel engines as dirty, smelly and noisy so the company installed the defeat software and ran ads promoting its cars as “a proven environmental solution”. When tested, the cars met emission standards. When driven, emissions were between 10 and 40 times the legal limit.
In September 2011, Porsche’s engineering department put the Audi defeat-device equipped 3.0-litre engine in its entry into the US diesel market, the 2013 Cayenne diesel SUV. Porsche Cayennes with the defeat device are estimated to emit nitrous oxide at roughly nine times the legal limit.
As the lawsuit says, “Volkswagen Group has admitted all this”. At a 2015 launch, Michael Horn, then president and CEO of Volkswagen Group of America, said: “Let’s be clear about this. Our company was dishonest with the EPA and the California Air Resources Board and with all of you, and, in my German words, we have totally screwed up.”
A short time later, Horn told the House Committee on Energy and Commerce Subcommittee on Oversight and Investigations that “emissions in (VW’s) four-cylinder diesel vehicles from model years 2009-2015 contained a ‘defeat device’ in the form of hidden software that could recognise whether a vehicle was being operated in a test laboratory or on the road. The software made those vehicles emit higher levels of nitrogen oxides when the vehicles were driven in actual road use than during laboratory testing.”
The New York Attorney-General points out that despite Horn’s testimony the decision to install defeat devices was not made by “a couple of software engineers”, nor was it confined to the 2.0-litre diesel vehicles that were the focus of the 2014 independent study that led to the exposure of Volkswagen’s emissions fraud to the public.
“Rather, it was the result of a wilful and systematic scheme of cheating by dozens of employees at all levels of the company regarding emissions, after Volkswagen was unwilling to manufacture diesel vehicles that would meet federal and state standards in the United States. This scheme, which extended over nearly a decade, was perpetrated by Volkswagen and its Audi, Volkswagen and Porsche subsidiaries, through their employees, executives, and officers.
“In addition to defrauding the state and federal agencies responsible for regulating car emissions, Volkswagen carried out a cynical fraud on the American car-buying public. It traded on the reputation for stellar engineering that Audi (whose slogan is Truth in Engineering), Porsche and Volkswagen enjoyed, by aggressively marketing the non-compliant diesel engines to US consumers as the product of environmentally friendly German advanced technology, thereby obtaining premiums for the vehicles on the basis of this fundamentally dishonest marketing.”
In March 2014, executives at VW’s head office in Wolfsburg were in a panic. A US university report was about to be published showing that some light diesel cars were pouring out emissions at five to 35 times the limit.
Internal documents demonstrate that top management knew that if they were found out, VW could be up for serious fines and buying back the cars. Of course, in the best tradition of big companies everywhere, VW chose “the mislead and confuse PR strategy” that the company is still using today, as we will see in Australia.
In fact, in October 2014, “Volkswagen attempted to placate regulators by offering deceptive sham software recalls”. As late as February 2015 Audi tried to tell regulators that emission problems on its cars resulted from Los Angeles “driving kinematics” — even though Audi’s own tests turned up worse results than the independent tests.
Throughout 2015, internal emails show VW management continued to try to mislead regulators. In September, the EPA issued a notice of violation to the company for its 2.0-litre diesels. Despite this and front-page publicity, “Audi and Volkswagen continued to deny the existence of defeat devices on the 3.0Ls (litre engines)”.
Once Wolfsburg realised the US regulators were closing in, one of VW’s in-house lawyers advised that once litigation was issued it might become impossible to destroy documents. Some incriminating data was promptly deleted or removed.
In September 2015, VW admitted to installing the cheating device, or what it called “a particular software used in diesel engines”, on more than 11 million cars worldwide sold in 150 countries.
In October, Volkswagen Australia admitted more than 91,000 cars in Australia were affected by the diesel emissions scandal. The Australian cars are Golfs built between 2009 and 2013, Polos manufactured between 2009 and 2014 and Skoda Octavias built between 2009 and 2013. The figure also includes 14,000 Audis.
“Volkswagen Group Australia takes this issue extremely seriously and is continuing to gather all the facts from our head office to support any rectification plans in Australia,” former managing director John White.
Again in the best traditions of big company culture, VW’s 2016 annual report showed it would pay each of the nine sitting management board members who were there in 2015 at least $6m in compensation. In total, current and former management board members would receive $95m.
But the final word goes to Volkswagen Group Australia managing director Michael Bartsch. Last month Bartsch said: “It is regrettable that interested parties ignore the polar differences between emission regulations in the United States and Australia. This only adds to public confusion.
This is a shortened version of the original article. Read the rest at: http://www.theaustralian.com.au/life/motoring/how-volkswagen-took-buyers-for-a-20bn-ride/news-story/e513ccfcd7744b9279dd50d5e63def56?login=1
