From the December 2015 issue
Caught Black-Handed: Why Did Volkswagen Cheat?
It’s amusing to watch the mainstream press sink its fangs into an auto scandal. Business-page reporters hurriedly scan the releases and the statements—quickly now, the home page needs updating every 17 seconds—and distill a basic, highly superficial narrative. Press agents for experts in all manner of non-automotive subjects, from business ethics to crisis management to consumer advocacy, flood the email inboxes of the news outlets, their clients desperate for the exposure that comes from getting a rote observation into quotes. The flames of public outrage get fanned for a few days with hyperbolic and often-inaccurate punditry.
Granted, Volkswagen’s diesel doomsday is not a simple story, rife as it is with technical inside-baseball. Basically, VW programmed an algorithmic routine into the controllers of its model-year 2009–2015 2.0-liter turbo-diesel engines that recognized the protocols of the EPA’s FTP-75 test, including the US06 and SC03 cycles, and altered the engine calibrations to selectively reduce oxides of nitrogen to make the engine compliant with U.S. EPA Tier 2, Bin 5 limits, all in violation of sections 203(a)(3)(B) and 203(a)(1) of the Clean Air Act.
Legions of TDI owners who thought they bought a “Clean Diesel” (in spite of the slip-slap sound of the stinky, carbon-rich fuel going into their tanks) howled in indignation. Were they victims of a greedy corporate evil, or of ordinary people in the trenches trying to wriggle out of a difficult spot? Here’s a theory on why a carmaker that seemed to have the world conquered made such a heinously bad, unethical, and trust-eroding decision that equally battered both its reputation and its market value.
The pressure on VW engineers to deliver a clean diesel, or one delivering both good fuel economy and low emissions, was titanic.
While other automakers pursued hybrids and electric cars, VW long ago bet its green-tech chips on diesels. The decision was emblematic of VW’s prioritization of Europe, where diesels are popular, over diesel-averse North America, a market the carmaker has traditionally dismissed as secondary. The pressure on VW engineers to deliver a clean diesel, or one delivering both good fuel economy and low emissions, was titanic, but the effort ran headlong into U.S. regulations.
The decision to cheat must have happened sometime before 2009, two years after the EPA’s Tier 2 emissions standards were in full effect. Tier 2 sets extremely difficult requirements for diesels, cutting allowable oxides of nitrogen by 83 percent over Tier 1 regs, to 0.07 gram per mile (fleet average). NO and NO2 (NOx), the strange chemical compounds formed by the high temperature and pressure of an internal-combustion engine, especially diesels, contribute to ground-level ozone, or smog. Tier 2 established by far the toughest NOx standard in the world.
It came at a bad time for VW. The most effective technology to cut NOx is called selective catalytic reduction (SCR), which involves spritzing small amounts of urea and water into the exhaust stream to facilitate the breakdown of NOx into nitrogen and carbon dioxide. The problem is that SCR requires a tank, a pump, and plumbing—not easy things to package on a small vehicle platform such as the PQ35, the aging component set comprising the fifth-generation Golf and Jetta.
VW faced spending millions on an aging product to make its diesel engines legal in the U.S.
There’s more to putting a urea tank on a car than just lashing it down with zip ties. The floorpan will likely change, the addition of a secondary filler can mean retooling a quarter-panel, and the reengineered car has to go through full crash certification. Golf V owners liked their multilink rear suspensions, a feature that probably would have to be scrapped in favor of a more compact torsion beam to leave room for the tank. (The larger Passat got a urea system in 2012, but VW programmed it so that, apart from the emissions test, it would be stingier with the urea injections, meaning that the owner wouldn’t be inconvenienced with refilling the tank as often.)
With Tier 2 looming, VW faced spending millions on an aging product to make its diesel engines legal in the U.S., one of the smallest diesel-passenger-car markets in the world. In 2007, diesel passenger cars represented only about 0.2 percent of the American market. Factor in the contemporaneous collapse of the world economy and the plunge in U.S. vehicle sales, and VW’s engineers were painted into a corner.
But a new, totally compliant Jetta TDI appeared as a 2009 model. Its supposed silver bullet was an underfloor NOx trap, in which NOx is captured, then converted to nitrogen and carbon dioxide via occasional spurts of diesel fuel. Maybe it didn’t work quite as well as SCR, but it was a lot easier and cheaper to retrofit. And there didn’t seem to be a fuel-economy penalty. The companion 2010 Golf TDI advertised stellar city and highway figures of 30 and 41–42 mpg (depending on the transmission), and owners in forums claimed even higher mileage. What nobody knew then was that the engine was programmed to squirt less fuel into the exhaust when the car was off the test dyno, allowing more NOx out of the tailpipe and raising mileage.
Given the choice of reducing the global problem of CO2 or the local problem of smog, VW’s engineers chose a middle path with a cheat that would give U.S. regulators the low NOx they demanded and TDI buyers the high mileage they wanted. As it happened, the fudge would only be needed for six years, until 2014, when Europe, the market that dominates VW’s decision-making, implemented its own tough NOx standards with the so-called Euro 6 regs. By then, the engineers may have figured, VW could phase in better NOx-eating technology through normal platform updating. Why VW continued to include the software cheat in engines built in 2014 and afterward is anyone’s guess.
From a moral and legal standpoint, the fraud was a colossally bad decision.
The perpetrators likely believed they wouldn’t be caught, as self-certification is the norm under the EPA, which is too cash-strapped to test but 15 percent of the powertrains on the market and is perennially threatened with extinction by Congress. (Independent researchers discovered the ploy.) And if they were caught, VW probably figured, the penalty and market fallout would be small. Perhaps it was an easy choice to cheat. The European competitive environment is rife with deception. Just look at FIFA soccer, where officials are under indictment by U.S. prosecutors. Europeans have a win-by-any-means streak that sometimes emerges under intense pressure. There certainly was pressure. Then-CEO Martin Winterkorn, who took over Volkswagen AG in 2007 determined to make VW the world leader in volume and profit, ordered his staff to deliver a clean diesel that could be sold worldwide and could carry VW’s diesel religion to the New World to convert nonbelievers. And they did deliver. Did Winterkorn know the details? Maybe he didn’t want to. He has denied any knowledge of the deceit.
From a moral and legal standpoint, the fraud was a colossally bad decision. Whether it was a bad financial decision remains to be seen. A half-million cheater diesels were sold in the U.S., with 11 million sold worldwide. Meanwhile, the costs of the scam will take years to measure. It took four years for the federal government to slap a $1.2 billion penalty on Toyota for hiding evidence in its sudden-acceleration investigation, so it’ll be a while before we know how many pounds of VW’s flesh are in play. It almost certainly will be a fraction of the $18 billion widely speculated upon in the press. The rules allow Uncle Sam a lot of wiggle room. This was an emissions issue, after all, not a safety defect involving crashes and fatalities.
Only VW’s accountants will ever know the whole truth.
If you look at the settlement pattern—$935 million for GM, $1.2 billion for Toyota—the fines tend to be starkly punitive but not crushing. Then again, European regulators will likely demand something and there will be civil suits to settle.
Once all the shouting is over, VW’s decision to break the rules may prove hugely damaging, a shattering of its recent momentum that distracts and dispirits the company, opens a crack in its armor for competitors, and scuttles demand for the diesel technology upon which VW has staked so much. Or it might just be a break-even, forcing both VW and government regulators into some uncomfortable but necessary changes while being a financial wash against the sales it generated. Or it may even prove to have saved the company some money over the alternatives available to the engineers at the time.
Only VW’s accountants will ever know the whole truth.
Clearing the Air
NOx-trap and SCR emissions-control systems require a similar amount of undercar space. But finding a spot to safely carry a four-gallon tank of urea and water is more difficult. Industry sources tell us upgrading the Golf to SCR would have cost VW $300 per car for added components, not counting major reengineering expenses.