The nightmare will continue for years, just as it did for the banksby Jonathan Evans / October 6, 2015 / Leave a comment
The German car industry is an extended family, in which chief executives regularly move between the top slots at VW, Porsche and Mercedes. True to form, in the wake of the recent emissions scandal at Volkswagen, it was the head of Porsche who took over on the resignation of Martin Winterkorn, the boss of VW. So the recent emissions scandal is a blow not just to VW but to the German motor industry as a whole.
Indeed, how did it happen? Volkswagen is the best selling car company in the world. It is well represented for its luxury and lower end models, and is strong globally. Waitrose car parks might be full of VWs but so are Walmart’s, and on a recent visit to Shanghai I was struck by the prevalence of VWs. So why put it all at risk by cheating on emissions?
One answer lies in the characteristics of diesel engines. Diesels have always been more popular in Europe than in the US, and in recent years have been seen as a convenient way to reduce carbon emissions—but they do have a dirty little problem. They emit things that are bad for our health, increase smog and interfere with the development of some animals’ sensory abilities, especially bees.
In the European anti-carbon frenzy of a few years ago, when policymakers were keen to increase the uptake of diesels, these “particulate” problems were ignored, but US regulators were less amenable and imposed a tougher compliance regime. Conveniently, this raised an additional barrier to entry to the US market for diesel cars that are predominantly manufactured by non-US companies. In order to meet these tougher requirements, manufacturers had to fit more effective anti-emissions systems to their diesel cars, but these made them less responsive to drive and therefore harder to sell. We still do not know who in VW decided that the way to tackle this was to adapt the engine management software so that the cars passed the tests when necessary but still enjoyed the responsiveness of an unrestricted engine when on the road. Whoever it was is likely to need a good lawyer.
VW’s behaviour raises other technology questions. If they were prepared to cheat at diesel emissions then what else might they have cheated at? We all know that it is rare for cars to deliver anything like the fuel consumption figures claimed for them in tests. Is there skulduggery here as well or is it merely the over-accommodating test regime in place in some European markets? As cars become computers on wheels, they are susceptible to the same sort of cyber attacks as any other computer. How honest can we expect VW or other manufacturers to be about such vulnerabilities and how robust are their security measures?
Read more on Volkswagen and the German economy:
How can we make our cars cleaner?
Don’t envy Germany
There are clear parallels between the VW case and the banking scandals of recent years. When the pressure is on to compete in a cut-throat market, the temptations to cheat grow in strength. But, as with the banking scandals, unethical shortcuts might have short-term benefits, either to the company or to individuals within it, but the downside risks are enormous. VW now faces those risks on an almost unprecedented scale. On top of the inevitable regulatory penalties—which will be huge—there will follow group action lawsuits in many jurisdictions, customer remediation costs, criminal investigations, shareholder actions against the Board for failing in their duties and more. While banks have faced deferred prosecution agreements and the imposition of external monitors by the US courts, there have been increasing pressures in the US to bring malefactors to court and carry through on personal and corporate prosecutions. At the same time, the underlying health of VW’s business will be damaged as the hard-earned reputation for quality is eroded. Early polling suggests that two thirds of car buyers would be less likely to buy a VW now. The integrated nature of the VW business model, with shared engines and platforms across the group, means that sister brands such as Audi, Seat and Skoda are also in the frame. This nightmare will continue for years to come, as it has for the banks.
Similar problems are afflicting an increasing number of multinational companies in different sectors; financial services, oil and the automotive sectors being the most obvious examples. An unforgiving and occasionally capricious legal and regulatory environment, the erosion of trust in institutions, the compensation culture, an intrusive media, incentives for whistle blowers: all these conspire to make it increasingly difficult to manage risks in a global business where the foolishness or malpractice, possibly distant from the centre, can threaten the overall reputation and viability of a major corporation. Military leaders have been aware for some time that strategic success requires alignment across the whole chain of command. It is increasingly hard to be confident, sitting around the boardroom table that risks within the business are being managed adequately. This was especially so at VW, where the corporate structure has been criticised often for being too insular and prone to groupthink. The bigger and more dispersed the company (and with around 600,000 staff they don’t come much bigger than VW Group), the more difficult it is to ensure that a firm’s professed values really mean anything to workers a long way from the headquarters. We do not yet know how high up the company VW’s disastrous decision to try to cheat the system was taken. But if the internal culture discourages honest communication about problems, then the game is likely to be lost before it begins.
VW’s problems come at an awkward moment for the big car makers who face a serious challenge. Tesla, the US electric car maker, is the first newcomer to have produced an electric vehicle you might buy for excitement and style rather than for signalling your virtue. The company recently released its first SUV and a more affordable model will follow. Google is planning to bring a self-drive car to market within five years. Motor brands such as VW have entrenched positions, and risk seeing the centre of gravity in their industry moving from Wolfsburg (or Detroit or Tokyo) towards Silicon Valley.
Who could have thought that cheating was a good idea? VW has made cars that in every other way than their emission controls were excellent products. I am on my fourth VW and have enjoyed them all. I had just started thinking about replacing my current car and expected to choose another VW. But last weekend I found myself browsing the Volvo website instead.