The crisis underway at Volkswagen over EPA allegations — and now company admissions — that the firm cheated on emissions tests for its popular TDI diesel engine line has already cost the company’s stock more than a third in value — or some $26 billion — and has caused some to question the company’s viability. It has also now cost the company its CEO: Today, Martin Winterkorn announced his resignation.
And the meter is still running.
The EPA says penalties could run up to $18 billion, and that would be in addition to individual and class action lawsuits on the way from formerly loyal customers who thought they were buying an environmentally progressive vehicle but now find it is pumping out pollutants far higher than advertised.
The big stock price hit followed reports that some 11 million cars worldwide are affected – not just the nearly half million Volkswagen and Audi cars sold in the U.S. since 2009 with a so-called emissions test “defeat device” as first reported. The device is actually a software fix that tricks emissions tests into picking up deceptive readings. Actual emissions released on the road can be up to 40 times the levels found under the tampered testing conditions for the Volkswagen TDI diesel engines, news reports noted.
Now that the U.S. Justice Department is conducting a criminal probe to follow up the EPA charges, questions are being raised about the future of Volkswagen and of diesel-powered cars in the United States, potential peripheral damage to the image of German automakers more generally, and the health and environmental harms caused by the false readings.
The latest black eye for automakers comes on the heels of General Motors’ ongoing controversy. The company recently agreed to spend $575 million to end a shareholder suit connected to flawed ignition switches that led to the death of 15 people and serious injuries to an unspecified number of others. GM also paid $900 million to resolve a federal criminal investigation and faces billions more costs in potential liability from consumers claiming they were placed in harm’s way after the company learned of the problem but took no initial action.
With so much focus on air quality and climate change, “to have such a big, prominent automaker [caught] is a pretty big deal.”–John Paul MacDuffieWharton management professor John Paul MacDuffie notes that any damage to the health of the public or the environment from VW’s issue cannot be known immediately, but there could be plenty of fallout for hopes of making diesel-powered cars a viable, environmentally sound alternative in the U.S. The disclosures will of course damage VW’s reputation, though it is too early to say how much.
With so much focus on air quality and climate change, “to have such a big, prominent automaker [caught] is a pretty big deal,” MacDuffie added. And it was not easy to catch them. VW “spent year denying it” and it took a “dogged” effort from a small university lab to piece it together. It is “hard to imagine a rogue engineer” being responsible. “That does not mean the CEO knew, but he oversees R&D.”
Wharton professor of legal studies and business ethics Eric W. Orts, who is also director of the Wharton/Penn Initiative for Global Environmental Leadership, notes that it is likely several parts of the firm participated in the deception – from programmers to executives – which makes it difficult to precisely locate blame. The question the case will shine light on, he says, is: “How do you pin responsibility on individuals and the firm” in a way that changes this kind of behavior in the future?
Cary Coglianese, a Penn law professor and director of the law school’s Penn Program on Regulation, agrees, noting this was a “system-wide decision…. It was a centralized deception.” According to Coglianese, the case will highlight the “widening gulf” between the private sector’s increasingly sophisticated technological capabilities and the government’s ability to keep pace in that arena. “We need to close the gap so that the government can effectively regulate.” (Both Coglianese and Orts shared their views on the Knowledge@Wharton show on Wharton Business Radio on SiriusXM channel 111. Listen to the podcast at the top of this page.)
The Cost to Volkswagen
Could the controversy grow large enough to bring the company down? “I can’t see it taking down the company in any sense,” MacDuffie says. While the damage to the company’s U.S. market could be huge, “VW is not so strong in U.S.” Worldwide, its presence is stronger: The company recently surpassed Toyota as the world’s largest automaker – temporarily, it would appear — and has a massive global portfolio of models and markets. “They were first in China with a joint venture. They have been strong for years in Brazil, Mexico and all over South and Central America,” setting down stakes before most other companies, MacDuffie noted. “They have many brands and strong brand portfolios, from Audi to SEAT in Spain…. They have been clever about platform engineering, and get a lot of different models to fill these many different segments from a small number of platforms” very efficiently. “None of those competitive strengths are going to disappear.”
MacDuffie thinks that instead, if the crisis turns out to be the direct responsibility of corporate executives versus a rogue engineer, then “they might be replaced with the next person vowing to make sure it never happens again.”
As a backdrop to the whole issue, MacDuffie points out that Europe generally has had auto and tax regulation rules favoring diesel — “so that diesel was always cheaper than gasoline in Europe” — while the opposite is true in the U.S. What’s more, the U.S. is the only major market where VW’s diesel car sales are soft.
“I can imagine … the mindset of the engineers,” says MacDuffie. The so-called “clean” diesel high-tech engine is a “source of tremendous technical advance.” When Toyota first introduced the Prius, “a lot of Europeans I talked with could see no chance of it becoming popular.” They thought their diesel engine had equal mileage and better performance characteristics and avoided the inefficiency of “having two drive trains (gasoline and electric).”
“How do you pin responsibility on individuals and the firm” in a way that changes this kind of behavior in the future?–Eric Orts
Today, those engineers may have seen the U.S. Clean Air Act as a stumbling block to their “clean” diesel technology. Europe is highly conscious of pollutants and climate change, and has stringent regulations on them overall. But U.S. regulations are very “tough on NOx (nitrogen oxides), which is what diesel emits in higher quantities, so they might feel the only thing keeping them from proving the superiority of this technology are these American regulations, which are ‘anti-diesel.’ I could see that having some effect: Because all of Europe is on a different standard that allows more NOx,” the engineers may not agree with the American standards, rather seeing them as a means of “trying to keep diesel out.”
‘Wait and See’
Could this significantly damage the German auto brand overall? According to MacDuffie, “A lot depends on what they find when they test the other makers of diesel, which are mostly German…. If they turn out to be clean, the contrast effect will probably help them” or certainly not cause damage. “But if they are found to have done any version of the same thing then absolutely [it could damage German automakers]…. We must wait and see.”
Regarding crisis management, MacDuffie points to the way Toyota appears to have mishandled its latest embarrassment of problems with Tarkata airbags, which led to the recall of nearly 3 million cars. American officials had difficulty getting a clear story from Toyota executives, and they even had to fly to Japan to interview them. Toyota had “no clear spokesman in the U.S. to represent top management.” There were senior American executives, but they were not the top brass.
One Congressman even tried to pass legislation requiring large foreign companies to have an American CEO so there was someone they could get hold of, MacDuffie says. The legislation didn’t go forward, but it showed the level of frustration U.S officials felt.
In light of Toyota’s difficulties, it would be “very helpful” for Volkswagen “to get some very effective communicator from their senior executive team to be in the U.S. and show responsiveness…. In terms of American public opinion, it helps to have a sense that somebody is here and that the company is taking [the issue seriously enough] to send a top executive.”
MacDuffie notes that because diesel engines comprise a small part of the U.S. fleet (about 1%, and VW is a fraction of that), at first glance it would appear that the health consequences of the emissions scandal would not be high. “But when you hear that with the controls turned off it was almost 40 times the level of pollutants as when the controls are turned on … that is a huge multiple. If it were only four times as much, it would not be getting this kind of attention…. You would almost have to multiply the impact of their diesel vehicles by 40 to say what their real impact was.”
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