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Thursday, October 1, 2015

Whatever Happened at VW?


 

by Ingo Walter

With the resignation of CEO Martin Winterkorn and his replacement by Porsche’s CEO, the firing of three key R&D bosses, the herds of prosecutors and tort lawyers hoping for years of litigation, and the ominous clouds overhead from the media, among regulators and customers – and not least investors who have lost up to 42% of the value of their shares - the VW scandal raises lots or questions that go way beyond the world’s largest car manufacturer itself. They concern corporate governance, management decision processes and individual accountability, the regulatory environment, as well as industry competitive structure and performance. A true learning moment.

As the proud owner of a VW Toureg turbodiesel, it also hits close to home. Happily for now, VW V6 diesels like mine have not been named in the fraud allegations. But that may just be because of the expensive urea-based technology to cut nitrogen oxide (NOx) emissions found in large diesels was what VW was trying to avoid using in small ones by relying a “magic” approach that nobody could replicate and that turned out to be fraudulent. Now pundits have proclaimed the “death of diesel,” probably prematurely and unfairly.

What next for VW? Examples from the banking industry suggest that "rogue" behavior in one firm often turns out to be "industry practice." Examples include manipulation of foreign exchange and Libor benchmarks, hedge fund “late trading” in mutual fund shares, mis-selling of “payment protection insurance to ordinary retail customers,” insurance broker kickbacks from underwriters, falsification of international payment transactions, aiding and abetting tax evasion, and the list goes on.

One firm gets tagged and the others run for the hills and take a very low profile until the posse rounds them up. That could be the case here also, with MB, BMW, Renault, Peugeot, etc. Some are saved (for the moment) because they focus on big or expensive cars able to support urea-based approach. Others focus on mass-market, cheaper diesels and may have encountered engineering problems similar to VW’s. They say they have not, that VW is unique. If not they will step up very soon. Last guy in is a reputationally rotten egg. So we’ll soon see whether the VW problem is in fact firm-specific or industry-wide.

Certainly the nitrogen oxide emissions remain an issue with the US and especially California most aggressive in putting on the regulatory pressure. The European approach seems to have been more retarded and haphazard by comparison, with heavy lobbing from the important car manufacturers and their governments. Travelers can tell you that the air pollution problem is pretty bad in parts of Europe. On a dozen or so days a year the speed limit in the Paris region is cut to 90 km/hr because of the health effects of NOx and particulates – in an air-shed where well over half the cars and almost all trucks are diesels. This is not a matter of engineering fraud but rather one of deficient emissions standards, but now that the VW cat’s out of the bag it points to things to come for the automakers.

To the outside observer it seems that what happened here is that the VW engineers got seriously squeezed between the marketing pitch for modern European common-rail diesels (fuel economy, durability, torque and environmental friendliness – much of it true) and the tightening noose of US environmental standards. This eventually made the two simply incompatible.

The engineers no doubt signaled the problem internally (how high up we don't precisely know) and senior management told them to fix it or else. So they were trapped. Pressed to the wall, the engineers came up with a workaround. Whether in the whole process anyone raised the full range of potential consequences including the possibility of individual criminal charges we also don't know. Anyway, decisions got made somewhere. Under German law such matters tend to move quickly into the criminal domain where unlike in the US firms cannot be charged in civil proceedings (and allow a range of punitive options, possibly including criminal pleas by firms themselves) but rather are targeted on the individual.

So the otherwise walk-on-water CEO has walked the plank instead and may be personally charged (famously, this has rarely happened in banking).
Some Europeans have blamed the US regulatory approach and litigiousness for triggering the brouhaha. In Europe it would have been taken care of in a sensible way by corporate specialists talking to regulatory specialists, eventually arriving at a mutually acceptable solution. Maybe so. But they said the same thing in the FIFA mess.


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