The scandal that has ensnared the German automaker Volkswagen may prove to be the largest, and most expensive corporate crisis ever. The discovery of secret software installed to allow its vehicles to cheat on emissions tests has done extraordinary damage not only to the car manufacturer’s reputation and bottom line, but to human health and the environment as well.
The revelations and repercussions from this scandal are not complete. More corporate heads will fall as responsibility for decisions to install the software is made clear and the scale of the cheating is exposed. The scandal has also exposed an uncomfortable truth that has long been known but rarely discussed — virtually all automakers “cheat” on the emissions tests. The implications of this revelation could be equally troubling.
VW’s problems began when an independent, nonprofit organization proposed testing diesel emissions from cars in the United States while they were operating, rather than in carefully controlled settings as was the usual practice. The tests produced surprising results showing that Volkswagens were generating higher than anticipated levels of emissions. Yet when the same cars were put on treadmills usually used for emissions tests, they performed exactly as expected.
The U.S. authorities were notified of the anomalies, as was VW, which fought the results and challenged the integrity of the tests. As they repeated the tests, however, investigators discovered that a secret subroutine, or a set of instructions for the vehicles’ computers, was deliberately turning off emissions equipment when the vehicle was on the road — which would drastically increase mileage — and switching it back on when conditions indicated a test was being conducted. In other words, real-world testing of emissions equipment flummoxed the software because it was expected to be needed only under specific conditions. When the equipment was turned off, emissions were 40 times the official level. Confronted with the evidence and the threat by U.S. authorities to withhold approval of certification of 2016 vehicles — effectively denying VW a vital product in the U.S. market — the automaker conceded that it had installed the software on nearly 500,000 diesel vehicles going as far back as the 2009 model year.
This was not the first time Volkswagen had tried to cheat. It was caught in 1973 with a “defeat device” that blocked a vehicle’s emission control systems and fined $120,000. This time, however, the scale of the cheating was much larger. It is estimated that the software was installed on 11 million vehicles sold around the world. British, French, Italian and Swiss authorities have now opened investigations as well and banned the sale of new VW diesel cars, as well as other brands fitted with the device.
The damage to VW is hard to estimate. There is of course the cost of fines that will be imposed, which will reach tens of billions of dollars in the U.S. alone. Then there is the costs associated with fixing the software; in theory that could be done rather easily, but some officials are pushing for a buyback since the fraud is so central to the vehicles’ performance.
Indeed, Volkswagen’s reputation in large part has rested on the development of its “clean diesel technology.” Many auto purchasers opted for a VW precisely because it had claimed to offer an efficient, affordable and environmentally-friendly automobile. This scandal suggests that reputation was not deserved and the sales were procured by false pretenses. The impact of that revelation is most immediately apparent in the automaker’s plummeting share price, which has fallen nearly in half since the scandal broke. Estimates of the total cost of the debacle range from some $26 billion to as much as $86 billion, eclipsing the BP Deepwater Horizon oil spill and making it the worst corporate economic disaster in history.
Those costs will be well distributed. Auto manufacturing is critical to the German economy, employing more than 750,000 people. Parts, components and assembly operations are scattered throughout Central Europe as well — the auto industry accounts for about 4 percent of the economy of the Czech Republic — and those economies will be squeezed as VW adjusts operations.
While VW is taking the heat for its cheating, it is not the only automaker under scrutiny. The U.S. Environmental Protection Agency has announced that it will tighten tests for all auto makers and will look closely at 28 diesel models made by BMW, Chrysler, General Motors, Land Rover and Mercedes-Benz.
In fact, the dirty secret of all emissions testing is that it is conducted under artificial conditions that render the results close to meaningless. Cars are taped to reduce drag and increase mileage, and the treadmills create ideal driving conditions rarely replicated even on open roads.
As a result, there is some cynicism about cheating on these tests. While conceding that VW misled consumers and regulators, European auto manufacturers are already pushing back, worrying that the scandal will produce unrealistic standards that will disadvantage them in global competition. That logic forgets that one reason for their success to date is cheating.