Pall of scandal hanging over Volkswagen and German industry

The crooked actions of the world famous car company carry serious implications for all concerned

Volkswagen has admitted up to 11 million of its vehicles worldwide have been fitted with software to deceive US emissions tests. Assistant business editor Michael McAleer explains what happened and what it means for motorists and manufacturers. Video footage: Getty Images

 

Robert Bosch, one of the founding fathers of German engineering, remarked a century ago that it was better for a company to lose money than trust. This week the Bosch protégé Martin Winterkorn and Volkswagen lost both. Das Auto is facing Der Skandal and Mr Winterkorn has been Jetta-soned .

Since starting in Volkswagen in 1993, and as chief executive in Volkswagen’s sprawling Wolfsburg headquarters in 2007, the Swabian engineer with the rimless glasses earned the title “Mr Perfect”.

It was always a double-edged monicker: on the one hand, his €16 million salary made him Germany’s best-paid executive and the boss of 600,000 employees in 119 factories on four continents. Yet he remained an engineer: as obsessed with the detail of a steering wheel as any of his employees.

Volkswagen is the company that the Nazis built, that revolutionised motoring with Hitler’s “People’s Car” for the millions. Volkswagen survived its dictator creator, and the war he started, by rebuilding and rebranding itself with the beloved “beetle” Herbie, the Golf, the Passat.

But it was Martin “Mr Perfect” Winterkorn – WiKo to his confidantes – who made Volkswagen what it is today: a global player with a 12-brand portfolio from Skoda to Porsche, the luxury sports brand that launched a daring bid for VW but ended up itself being swallowed by the group in 2012.

Everything was going right for Winterkorn. Four months ago, in a dramatic reversal of boardroom fortune, he saw off the fearsome VW patriarch Ferdinand Piëch, his patron-turned-rival. Then, just two months ago, he achieved the goal he set when he took over in 2007 – to sell more cars than Toyota.

We now know that, even then, the storm was brewing that would eventually blow Winterkorn overboard, a storm that may yet drive his beloved VW onto the rocks.

Winterkorn resigned on Wednesday, days after it emerged that VW’s clean diesel cars were nothing of the sort.

They pumped out up to 40 times more noxious nitrogen oxide than permitted by the US Environmental Protection Agency (EPA). Unless, that is, the car’s electronic brain noticed it was being tested in a garage. Then an algorithm kicked in, switching the cars over to a rose-tinted programme to produce the exhaust fumes promised by its Clean Diesel advertising slogan. Try and learn more about this groundbreaking technology on the VW website today and you get a “Page Not Found” error message. Unfortunately for VW, the problem cars, multibillion euro fines and compensation claims won’t disappear as easily.

Worldwide crisis

On Tuesday afternoon Mr Winterkorn released a video message, saying he was “infinitely sorry” for manipulations that “go against everything we stand for”.

Hours later, as Bayern Munich’s Robert Lewandowski knocked five goals past Wolfsburg, the €80 million VW annual financing of that team seemed a pittance compared to the €6 billion the carmaker had set aside for the worst.

Volkswagen’s inner circle wasn’t watching the match, though. Ahead of Wednesday’s supervisory board meeting, they were huddled at Brunswick airport giving Winterkorn half-hearted backing – or none at all.

As the scandal grew, it pushed the refugee crisis into second place on German news bulletins. With each day and each new television news special, the trauma continued to build. This is not a company in crisis, but a country.

A recent YouGov survey asked Germans what they associate with their country and the top answer, with 63 per cent, is Volkswagen. Despite its new global standing in the Winterkorn era, Volkswagen AG remained the calling card for Germany Inc: German engineering, German manufacturing, and the German union-management co-determination business model.

Over the years, all have been praised as progressive, then derided as passé, then praised again as a more sustainable economic model than one built on financial engineering.

Volkswagen scandal

And now? For a company – and a country – that prides itself on keeping it real, how could crooked algorithms bring such disaster? And how did a boss who prided himself on keeping an eye on both the macro and the micro miss this? The dilemma was clear: either Winterkorn knew and was lying when he said he didn’t, or he didn’t know when he should have.

On Wednesday, just 24 hours after he promised to stay on to take out the trash, Winterkorn himself had been dumped.

Within minutes, an ashen-faced Sigmar Gabriel, Germany’s federal economics minister and Lower Saxony native, appeared on television to plead with VW: “Our showcase company in our showcase industry are at stake.”

After two horrific days that vaporised around €24 billion in shareholder value, VW faced the inevitable and hired Kirkland & Ellis. The lawyers represent big business in big trouble: UBS, Siemens and BP after its Deepwater Horizon disaster. VW may be in even deeper water.

New CEO

Herbert DiessBMW

Whoever inherits the most poisoned chalice in German corporate history already faces crucial questions: how to boost profitability or make VW’s empire more manageable? How should VW reorganise its low-cost and US markets?

But now the new CEO has other priorities: how to face down a long-term future of legal battles while winning back public trust. Two questions face the new Wolfsburg boss: who knew, and what now?

Though there are more questions than answers, it’s already clear that this is a home-grown scandal. Desperate attempts to blame others – in particular the US car lobby – have fallen flat since it emerged the manipulation was uncovered by German researchers.

Berlin-based transport campaigner Peter Mock was the one who commissioned the tests that trapped VW. He wanted test results proving that US models of German cars, thanks to next-generation diesel engines and tougher US norms, were cleaner than their European equivalents.

But his tests of a VW Jetta VW Passat and BMW X5 showed only the Bavarian car passing. The Jetta and Passat diesels exceeded the nitrogen oxide emission limits by 35 times and 20 times respectively.

“We were amazed when we saw the numbers,” said Mock at Berlin’s International Council on Clean Transportation. “It was shocking. We thought the vehicles would be clean.”

The report, filed a year ago, named no names But when Mock passed his results to the EPA, it took up the case and discovered the truth. Only when it threatened to withhold certification for VW’s 2016 models did the company come clean on its dirty diesel engines.

In this dark moment, it’s of little help to VW that few industry insiders are surprised by the scandal. Fiddling emission tests is a practice as old as the tests themselves, with a rogues gallery that is a who’s who of the car industry.

Ford, Chrysler, Honda, GM, Volvo and Renault have all been pulled up by the EPA for fiddling test results. This isn’t even Volkswagen’s first time at the rodeo. In 1974 it agreed to pay the EPA a $120,000 fine ($580,000 today) (see illustration) to settle charges because of “undocumented” temperature-based emissions modifiers.

But the fact that the broader industry has history on playing fast and loose on emissions tests doesn’t count now in US compensation courts, or in Germany’s court of public opinion, where a notion prevails – whether idealistic or naive – that German companies operate to higher standards than their foreign rivals.

No shortage of eye-watering scandals, from Siemens to arms company Heckler & Koch, appear to shake this moral certainty.

The moral outrage building in Germany means the consequences are unpredictable, particularly for Germany’s politicians. Despite EU attempts to crack open the company, one fifth of VW voting shares are still owned by the state of Lower Saxony. The group’s influence – as an employer, supplier and calling card – are immense around the world, and in Hanover, the Lower Saxon state capital, and in Berlin. Did none of VW’s political owners or political allies know what was going on?

For chancellor Angela Merkel, the scandal of Germany’s crooked car company hangs over today’s trip to the United Nations general assembly and, later this year, Paris climate change talks. But VW’s cavalier attitude to environmental standards are not new, nor is the political complicity in maintaining the status quo.

In 2012, hearing that Greenpeace would picket its AGM, VW ordered 34 people from a rent-a-crowd agency to stage a counter-demonstration with signs reading “Blue is the new Green”, in praise of its “BlueMotion” diesel technology at the heart of the crisis.

Such hypocrisy, industry critics say, goes hand-in-glove with political attitudes in Germany. Dr Merkel likes to be seen as the “climate chancellor”, pushing through high-minded agreements like this year’s promise by G7 leaders to have carbon-free economies by the end of the century. Yet, like all of her predecessors, Dr Merkel pulls no punches in Brussels when it comes to protecting the interests of the German car industry from ambitious green goals.

During her last re-election campaign in 2013, for instance, EU officials attacked as “reckless” Dr Merkel’s intervention to block stricter emissions that German car companies fear would impact on their bigger saloons. When Angela Merkel vows to defend the “diversity” of the European car industry, she means: anything that risks German car jobs risks my job.

Given the vast interlinkages between German leaders and its biggest industry, the unfolding VW scandal may yet claim political as well as managerial scalps.

As VW’s week from hell draws to a close, one irony is clear. Despite the dire warnings and tireless lobbying of the German car industry, it wasn’t the pressure to build environmentally-friendly cars that has brought VW to the brink, but its refusal to do so. Prioritising algorithms over emissions, and pushing a conspiracy to greenwash the VW brand, is what has brought a great company to its knees.

Asked last year how he would like to be remembered, Martin Winterkorn said: “As someone who tried to lead in the discussion of new technology”.

The company he leaves behind has certainly achieved that, but for all the wrong reasons. Unlike the Audi brand Mr Winterkorn once headed, the mortally wounded Volkswagen is not ahead through engineering, but behind.

Next in the VW driving seat: Matthias Müller is ‘a good choice’ Volkswagen is today expected to name Porsche boss Matthias Müller as the new chief executive to replace Martin Winterkorn.

Müller (62) has a background as a computer scientist and tool maker, with a well-earned reputation for running a tight, successful team at Porsche and his position keeps him close to the Porsche and Piech families, who control 50.7 per cent of Volkswagen shares. Müller also spent many years at Audi.

He is regarded as a favourite of Ferdinand Piech, the ousted chairman and long-time patriarch of VW who may once more find himself behind the wheel at Wolfsburg, even if it’s as a backseat driver.

Labour representatives, occupying half of the 20 board seats, would “only accept a personality with great technical and entrepreneurial expertise as well as great social competence”, VW works council chief Bernd Osterloh said in a letter to employees published yesterday.

“He is a good choice even though he may be seen as a transitionary CEO until another internal candidate such as VW brand CEO Diess has earned their stripes,” said Arndt Ellinghorst, an analyst at Evercore ISI investment banking advisory firm.

He said Mueller’s priority would be to renew VW’s leadership, restructure costs and turn VW into a “performance-driven company” where management was more accountable.

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