Dieselgate: Volkswagen boss quits

Four working days after Volkswagen admitted to intentionally cheating to meet US emissions regulations on its new cars, a senior manager has finally been held accountable.

Late yesterday in Europe, Volkswagen waited until 30 minutes after the German Stock Exchange had closed before announcing that its Chief Executive Officer, Dr Martin Winterkorn, had resigned.

“Volkswagen needs a fresh start,” Dr Winterkorn said. “I am clearing the way for this fresh start with my resignation.

“I am shocked by the events of the past few days. Above all, I am stunned that misconduct on such a scale was possible within the Volkswagen Group.

“As CEO, I accept responsibility for the irregularities that have been found in diesel engine and therefore requested the Supervisory Board to agree on terminating my function as CEO of the Volkswagen Group.

“I am doing this in the interests of the company, even though I am not aware of any wrongdoing on my part,” he said.

There is already conjecture about when the resignation was tendered (or demanded), thanks to Hannover’s Hannoversche Allgemeine Zeitung newspaper, which Tuesday night published a story on its website that Dr Winterkorn had been forced to resign, then pulled it down again within 10 minutes. Hannover is the closest major city to Volkswagen’s headquarters in Wolfsburg.

His replacement will be announced tomorrow (Friday) at the same meeting of the Volkswagen Supervisory Board that was meant to ratify Dr Winterkorn’s three-year contract extension. But Dr Winterkorn is unlikely to be the last casualty of the 'DieselGate' crisis.

Criminal charges will almost certainly be brought after the Supervisory Board revealed it had called in the state prosecutor to get to the bottom of the scandal, which stems from an emissions-dodging “cheat” written into the software code of 11 million cars fitted with Volkswagen’s 2.0-litre turbo-diesel EA189 engine.

The Supervisory Board insisted Dr Winterkorn had no knowledge of the “cheat” code, which slices emissions to comply with US Environmental Protection Agency limits when they are being tested, but remains switched off in real-world driving because they interfere with fuel economy and performance.

More heads to roll
In a nine-point statement, it warned of “further personnel consequences in the next days.

“The internal Group investigations are continuing at a high tempo. All participants in these proceedings that have resulted in immeasurable harm for Volkswagen will be subject to the full consequences,” it warned.

“The Executive Committee has great respect for Chairman Professor Dr Winterkorn’s offer to resign his position and to ask that his employment agreement be terminated.

“The Executive Committee notes that Professor Dr Winterkorn had no knowledge of the manipulation of emissions data. The Executive Committee has tremendous respect for his willingness to nevertheless assume responsibility and, in so doing, to send a strong signal both internally and externally.”

The Supervisory Board also plans to bring in independent external advisors to both investigate the timeline and culpability surrounding the crisis and to help plot a path out of it.

It’s likely to be a complex and expensive path for the 78-year old company.

Law suits and recalls to come
Almost 40 class-action law suits have already been lodged in the US and criminal complaints have been lodged in California and in Germany. Volkswagen has responded in the US by engaging Kirkland & Ellis LLP, the same legal firm that represented BP over the Deepwater Horizon oil-rig disaster.

There has been no word from Volkswagen on a recall yet and the sustained silence that is fuelling anger from consumers and commentators across the US, Europe, Asia, various national parliaments and social media. Volkswagen has insisted there were no safety, handling, comfort or fuel-consumption issues.

“We are not that far yet (to announce recalls),” a Volkswagen spokesman told German newspaper Handelsblatt yesterday. “We only learned about numbers yesterday.”

Investment banker JP Morgan yesterday estimated that fixing the scandal could cost Volkswagen as much as $US40 billion. Its share price crashed through the €100 barrier yesterday, dropping to €98 a share before rallying back up to nearly €114.60 when the market closed yesterday afternoon.

The German government is now in the crosshairs, too, with Reuters insisting it has documents that prove it knew about Volkswagen’s NOx fiddles a year ago. Given that the tests by the University of West Virginia (which tipped off the US Environmental Protection Agency) were made public 18 months ago that seems feasible.

The shares appear to have rallied on the news that Volkswagen’s four-member Supervisory Board Presidium held an emergency meeting at Braunschwieg airport on Tuesday night, then sat again to hear Dr Winterkorn fight for his job yesterday (Wednesday).

Dr Winterkorn’s three-year contract extension was due to be ratified by the full 20-member board on Friday, though German legal advice has been published insisting that to do so now would expose the Supervisory Board to investor lawsuits.

The company has still lost nearly 35 per cent of its value in less than a week, despite being the biggest car-maker in the world in the first six months of the year. Its two-day losses on Monday and Tuesday (where it dropped from €160 to €108 a share and lost more than €22 billion) exceeded the market capitalisation of Renault, and almost matched the capitalisation of Fiat Chrysler and Peugeot combined.

For now, Volkswagen is financially sound, despite threats of EPA penalties of $US18 billion in the US alone. At the end of June, the automotive division alone had a net liquidity of €21.1 billion after posting a €12.7 billion profit in 2014.

Problems with replacements
Dr Winterkorn’s departure will leave a tricky succession at Volkswagen. Possible replacements include Audi Chairman Rupert Stadler, Porsche boss Matthias Mueller, incoming Volkswagen brand boss Herbert Diess and Volkswagen’s director of development Hans-Jakob Neusser.

None of the four come without complications, then there’s always the regular interference and politicking from former Volkswagen head, Dr Piech.

Volkswagen’s Chairman and CEO posts traditionally go to engineers, which would rule out the economist Stadler despite Audi’s continued success.

Mueller has a background as a computer scientist (handy when software code is at the heart of this crisis) and tool maker, though runs a tight, successful team at Porsche and his position keeps him close to the Porsche and Piech families, who control 50.7 per cent of Volkswagen shares. And, coincidence or not, the 62-year-old was in Wolfsburg on Tuesday.

Neusser is in an awkward position. He became the engine boss of Volkswagen in 2011 and, with the Supervisory Board accepting that Dr Winterkorn didn’t know about the software cheat, investigators will inevitably be keen to understand why Neusser didn’t tell him.

Neusser took over from Jens Hadler, the diesel-engine development specialist who abruptly resigned from Volkswagen in 2011 at the age of just 45. Neusser may find his closeness to the scandal’s timeline is at least a major negative.

Along with Mueller, Diess seems a clean-skin option, though the mechanical engineer and former Director of Development at BMW only joined as Volkswagen brand boss weeks ago. The 57-year-old has also never managed a car company before, much less eight of them at once, plus a motorcycle company, commercial vehicles and heavy trucks.

Another option certain to be considered is former Volkswagen brand boss Wolfgang Bernhard, who has run passenger car, commercial and truck businesses and sits on the board of Mercedes-Benz’s parent company, Daimler. Bernhard made his name as a cost cutter who has previously fallen foul of both German unions and Dr Ferdinand Piech.

The former head of BMW and Ford’s Premier Automotive Group, Wolfgang Reitzle, is also believed to be in the mix.

The man who will decide is Volkswagen Group Supervisory Board Chairman, Hans Dieter Pötsch, a Dr Piech-nominee who has been utterly silent on the issue, allowing Interim Chairman, Bernhold Huber, to take the heat.

While Mueller is the speculative (and Piech) favourite, it’s feasible that Pötsch would prefer Diess as a “fix it” man with no links to the scandalous past.

Scandalous past exposed
For a company as compliance- and accountability-driven as Volkswagen, it seems to be taking an inordinately long time to uncover all of the links in this scandal.

Volkswagen is a huge company, with fingers in pies all over the world and with 12 brands under its umbrella (Volkswagen, Seat, Skoda, Audi, Porsche, Ducati, Lamborghini, Bugatti, Bentley, Volkswagen Commercial, Scania and MAN).

Insiders have said it is desperate to keep the other brands out of the scandal and isolate it to Volkswagen, even though Audi’s A3 is included in the Volkswagen admission.

Yet the company's V6 TDI, used in Porsche and Audi models, uses the same Bosch EDC 16 engine management system as the EA189 four-cylinder models, and in which the sneaky second line of code was written.

While the EPA has not commented on our questions, industry specialist Detroit News insists the watchdog is now investigating all Volkswagen Group diesels, including the V6s, which would drag down the image of Porsche and Audi, in particular.

Other brands implicated
There are also attempts to broaden the investigations to include all German car-makers, with the German green group DeutscheUmwelthilfer claiming to have evidence that BMW, Mercedes-Benz, Ford and Porsche have all cheated on emissions tests.

The European Automobile Manufacturer’s Association (ACEA) has vigorously denied the claim, though, insisting there is no evidence of industry-wide cheating.

“The ACEA recognises the gravity of the situation and is taking this very seriously, however we cannot comment on an issue affecting one individual company,” it said in a statement last night.

“In the UE, the legal requirements concerning motor vehicle pollutant emissions currently refer to a test cycle performed under common laboratory conditions. All Euro 6 diesel cars on the market have received a Euro 6 approval certificate issued by a member state approval authority that confirms they comply with the legal requirements,” it observed.

“Soon, Euro 6 will also require for the first time emissions testing of diesel cars under realistic driving conditions, making Europe the only region in the world to implement such real-world testing for cars… to ensure a more robust control on emissions.”

How the cheat code was found

The US EPA has been irked by Volkswagen’s attitude in the lead up to the crisis, which saw it deny the problem, blame the testers and finally send through a software patch in December last year.

The California Air Resources Board (CARB) kept testing the patched cars and found their emissions were still too high. It informed both Volkswagen and the EPA on July 8 this year. Still Volkswagen stalled.

It only responded to CARB and EPA demands about its older diesels when it was threatened with withholding certification for its 2016 diesels, which were projected to make up 25 per cent of Volkswagen’s US volumes.

Only then did Volkswagen admit that it had a “cheat” code that breached its Certificate of Conformity, rendering the cars out of compliance and emitting more NOx than it was allowed to.

Insider trading probe
Things could get even worse for Volkswagen with the German Stock Exhange’s insider-trading investigators, BaFin, announcing they are examining the company’s share crash and the rollout of its public communications during the crisis. While there were no accusations of insider trading, BaFin said there were “irregular trades” that it would examine.

Until the resignation of Dr Winterkorn, Volkswagen had remained oddly silent, even in the face of calls for clarity over emissions compliance from governments in Australia, the US, South Korea, Italy, France, the UK and Germany.

Then on Tuesday night, it shot itself in the foot with a contrite apology from Dr Winterkorn that crashed the Volkswagen media server, but was entirely in German. There were no subtitles or translations in any other language until three hours later. For a company trying to appease US customers and regulatory bodies, it was an astonishingly inept miscalculation.

VW green credentials shot
This is especially so since it came to light that the same “cheat coded” EA189 2.0-litre turbo-diesel engines at the heart of the crisis had also seen Volkswagen given $US51 million in 'green' subsidies by the US government for the Jetta in 2009.

This green status was boasted about by Volkswagen at the Vienna Engine Symposium when it launched the EA189 in 2008, insisting its engine met the US BIN5/LEV2 standard of 0.05 grams of NOX/mile by using internal engine modifications and a maintenance-free NOx trap.

Volkswagen explained that the 103kW/320Nm motor, which is built in Saltzgitter (Germany), Polkowice  (Poland) and Györ in Hungary, included modifications to the “design of the injection system of both the American and European TDI as well as the implementation of cylinder control pressure sensors.

“Another unique feature is the combination of a high-pressure exhaust gas recirculation system with additional low-pressure exhaust gas recirculation. This dual exhaust gas recirculation (dual circuit EGR) is an effective means of reducing nitrogen oxides in the engine. The dual circuit EGR system alone reduces NOx by up to 60 per cent," said VW.

“Outside of the engine, it is the NOx trap – connected downstream of the oxidation catalytic converter and the particle filter – that reduces nitrogen oxide to an absolute minimum. Implemented together, these measures reduce nitrogen oxide emissions by 90 per cent.

“Drive the Jetta BlueTDI and you will be driving one of the most economical and environmentally-friendly cars in America,” Volkswagen claimed in 2008.

How VW cheated
About 500,000 US-sold cars -- and up to 11 million globally -- were fitted with a 'defeat device' built into software of their EA189 engine that allowed them to pass emissions tests.

According to experts modern cars have as many as 20 million lines of software code -- more than many planes -- to control everything from the engine, gearbox and diagnostics to the power windows. The software in question here helps a car control the amount of pollutants it emits by monitoring levels of carbon monoxide and nitrogen oxide (NOx).

Diesel cars use sensors and sophisticated engine-management software to detect and limit emissions by regulating the mix of diesel fuel and oxygen used in the combustion process, as well as relying on NOx traps to capture the pollutant and catalysts to clean emissions.

But these measures, which can also improve fuel economy and cut noise in the car, can also reduce engine performance.

It's unclear exactly what the VW software did specifically to reduce emissions during testing, but VW has said the EA189 engines found in some models like the Jetta displayed “a noticeable deviation between bench test results and actual road use" and that it was "working intensely to eliminate these deviations through technical measures”.

Bosch, which supplied the parts in question for the Volkswagen cars now being probed, said “responsibility for calibrating and integrating the components supplied by Bosch into the system as a whole lies with VW”.

VW could have acted earlier
This was the same engine that researchers, led by Daniel Carder from the University of West Virginia, found emitting up to 35 times more Nitrogen Oxides (NOx) than the EPA limit.

Carder was flummoxed by the drama resulting from his small team’s research, suggesting that to fix it might be something “very small”.

“It can simply be a change in the fuel-injection strategy,” he said. “What might be realised is a penalty in fuel economy in order to get these systems more active, to lower the emissions levels.”

Oddly, his team’s findings were made public nearly 18 months ago but have only just been brought to a head by an EPA fed up with waiting for Volkswagen to satisfactorily explain its position.

It’s also not as though the university’s $US50,000 study should have surprised anybody, especially Volkswagen. It helped develop the first technology to measure emissions on the road 15 years ago – technology which saw Cummins and Caterpillar fined $US83.4 million for using similar “defeat” devices in 1998.

Implications for Australia
Volkswagen Australia this week said the local arm was 'still investigating' how the issue affects cars sold Down Under.

According to Kieren Gradidge, Technical Manager for Volkswagen Australia, the EA189 engine is not used in the importer's current line-up and is believed to have been withdrawn from the local market with the introduction of the Golf 7 in April 2013, if not earlier.

That predates the introduction of Euro 5 legislation in Australia, meaning Volkswagen could be off the hook for cars sold locally, at least.

Dieselgate related reading

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