Germans Bearing Gifts

Will VW Bosses Go to Jail for Emissions Scandal? The Net Is Tightening

Ugly family feuds, a 10-year conspiracy to cheat car buyers and a slew of big payouts in the U.S. still leave big questions about corporate integrity.

It could be argued that the best thing ever to happen to Volkswagen was being whacked by U.S. prosecutors.

That might seem odd, given that as of now the company has agreed to pay $2.8 billion in criminal penalties, $1.5 billion in civil fines, another $2.9 billion in environmental remediation costs and $2 billion to promote zero-emission vehicles. Altogether the cost of the greatest scandal in auto company history, deliberate cheating on the emissions tests of diesel-powered models, will be more than $20 billion in the U.S. alone.

America has turned out to be the world’s best cop when it comes to bringing this global corporate monster into line. The exposure of the scandal and the rigorous pursuit of VW executives has shaken a culture that was arrogant and behaved as though it was above the law. That ought to be a teachable moment, good for the company’s future and good for VW customers who bought unknowingly a product being sold on the basis of a lie, the “clean diesel.”

This may, however, be too optimistic.

There is something ineluctably Teutonic about VW – the bad part of Teutonic, a resolutely blinkered belief in its own superiority and an inability to admit any failures.

The attitude begins at the top. VW is run by a supervisory board of 20 that is a combination of family fiefdom and workers’ council. These two groups might appear to have little in common. In fact they are incestuously bound together in an arrangement that has been described by one German industrialist as “an unholy alliance of losers.”

By far the most powerful influence on the board is dynastic. It flows through one of the three largest shareholders, a holding company, Porsche SE. This is in the hands of descendants of Ferdinand Porsche, who created for Adolf Hitler the eponymous people’s (volks) wagon, the first Beetle.

Several generations of cousins are involved, split between the Porsche and Piech families. The diesel scandal has now brought into public view an ugly feud between Wolfgang Porsche, grandson of the founder of VW and chairman of the holding company, and another grandson, the Austrian-born Ferdinand Piech, acknowledged as a brilliant engineer, who ran VW until 2015 when he was forced to step down in a power struggle.

The board has proved itself to be resistant to any serious overhaul of the company culture. Early in 2016, under pressure to let in more daylight, they appointed the first woman board member, Christine Hohmann-Dennhart, a former high court judge, to handle “integrity and legal affairs.” This January, after barely a year in the job, Ms Hohmann-Dennhart quit, due she said to “differences in their understanding of responsibilities and future operating structures.”

Last month Piech angered the board by saying that Wolfgang Porsche had known about the scandal a lot earlier than he had been claiming – a charge refuted by the company. Piech’s allegation also included the man who was VW chief executive when the scandal was planned and executed, Martin Winterkorn.

The threat to VW now is that the damage of the scandal to the company’s reputation will be exacerbated by the disclosure of an equally nefarious cover-up going right to the top.

And Winterkorn is in the cross hairs of that investigation.

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The net began to close on him in October. A senior VW engineer, James Liang of Newbury Park, California, pleaded guilty to one count of conspiracy to defraud the government and agreed to cooperate with investigators in the U.S. and Germany.

Last summer Liang’s importance to the case was revealed in an indictment against VW brought by New York State Attorney General Eric Schneiderman. Liang had been directly involved in the fraud from the beginning, when the computer code controlling emissions had been written to detect when a car was stationary for an emissions test, the so-called defeat device.

For the duration of the test the toxic emissions fell to a level that met regulations. At all other times the emissions of highly toxic nitrogen oxide exceeded the permitted limit by as much as 35 times.

Liang had worked on the first defeat device in 2006 and on five later generations. In 2014 he was sent to California to devise tests that would persuade regulators that the emissions problem could be solved by a recall to update the software.

The October grand jury indictment against Liang placed him at the center of a 10 year conspiracy and described emails between Liang and other VW engineers in which they remained confident until mid 2015 that the defeat device would not be discovered. Liang was the first VW executive to enter a plea and it was obvious that he would be able to finger others.

In January another engineer, Oliver Schmidt, who had been head of VW’s regulation compliance team in the U.S., was arrested by federal authorities while on holiday in South Florida. The indictment against Schmidt (who will stand trial in April) sheds new light on the timeline that prosecutors have been constructing in order to answer the basic question, who knew what and when did they know it?

The indictment alleges that Schmidt and others briefed top VW management at the corporate headquarters in Wolfsburg in July, 2015, assuring them that the U.S. regulators had not detected the fraud.

But confidence in that belief did not last long. The New York State indictment revealed that a few weeks later a senior VW attorney in Wolfsburg advised “multiple employees” that a litigation hold was about to be issued prohibiting the destruction or deletion of documents from their computers. A team of at least 40 employees then deleted or removed critical data from the company records, according to the attorney general’s complaint.

Winterkorn resigned on September 23, 2015, as the scandal first became public. (The day before he resigned Winterkorn had a call from German Chancellor Angela Merkel. Merkel told German lawmakers that this call followed her learning about the scandal from American media.)

Two months ago Winterkorn appeared in public for the first time since his resignation, to answer questions from a committee of German lawmakers in Berlin. He astonished them by claiming that he had never heard the term defeat device before the scandal was revealed. He was mystified, he claimed, “how striving for perfection could end this way. The unthinkable has happened and we must all deal with it.”

At best, this appeared disingenuous. As chief executive, Winterkorn was known in the industry as an obsessive details man, frequently seen at auto shows peering under the hoods of cars being introduced by rivals to see whether their engineers were smarter than his, and he rarely conceded that they were - or could ever be.

Winterkorn took over as chief executive in 2006, installed after a management purge by his mentor, the then chairman, Ferdinand Piech. Immediately Winterkorn discovered that VW had a huge problem in the U.S. Their existing range of diesel sedans no longer met U.S. emissions standards and had to be dropped. They had to do something no engineer in any other company had achieved: produce a diesel that did meet the rigorous new standards.

When it was revealed that VW had solved this problem by cheating, the company tried to maintain that this had been done by a small group of rogue employees who had in some miraculous way kept their handiwork secret from top managers. That fiction has collapsed as a result of the multiple indictments by U.S. prosecutors and the work of German investigators – there are now at least 37 VW managers under investigation, and prosecutors believe the final total could be in the hundreds.

Moreover, it is clear that both Liang and Schmidt briefed top executives in Wolfsburg well before the scandal became public, according to court documents. Prosecutors in Braunschweig, the authority that includes Wolfsburg, are inching closer to Winterkorn and have publicly gone as far as saying that he “could have known of the manipulated software and its effects sooner than he has maintained.”

The indictment against Schmidt alleges that when he discovered in April, 2014, that tests carried out on VW sedans at West Virginia University since 2013 on behalf of a non-profit named The International Council on Clean Transportation had probably detected the defeat device, he wrote to a colleague, “It should first be decided if we are honest. If we are not honest everything stays as it is.”

So far no record has emerged of any communication between Schmidt and Winterkorn specifically about defeat devices. After 90 minutes of questioning Winterkorn, the German lawmakers were frustrated by his evasions, frequently resorting to “I am not aware” or “I don’t know” and declaring “never did I have the impression that anyone was afraid to speak to me.”

“He missed a really good chance to shed more light,” one of the lawmakers said.

The scale of the conspiracy as now revealed makes it virtually impossible to believe that it could have been initiated and sustained for a decade without the consent of managers at the very highest level. This is an indictment not just of people but of the culture, and the failure of that culture to be accountable. And a significant part of this failure is that the VW board just doesn’t get its American problem.

On the face of it, the “unholy alliance of losers” doesn’t seem to be losing. Last year VW overtook Toyota as the world’s number one automaker, selling 10.31 million vehicles (up 3.8 percent over 2015) against Toyota’s 10.18 million. But there was a problem hidden in those numbers: sales in the U.S. were down by 2.6 percent, totaling 591,100 vehicles. Compare that to Toyota, who sold just short of 2.5 million vehicles in the U.S.

America is the most competitive auto market in the world but in more than 50 years of trying VW has never managed to become a mass market brand in the way that Toyota and Honda learned to do. They never adapted to American tastes to produce an equivalent of the Camry or Acclaim. They persisted in believing that they could exploit the aura of “German engineering” and sell models that were basically unchanged from those that were hits in Europe.

The lie of the “clean diesel” was a last resort. Neither their American or Japanese competitors could figure out how to house-train a diesel and they wondered what magical part of “German engineering” had pulled off that trick. It wasn’t magical engineering, it was malignant engineering.

The other part of VW’s American problem was not believing that they would be caught, and then finding out how costly the consequences of being caught would be. Indeed, the contrast between VW’s readiness to fork out billions in settlements in the U.S. and its attitude in Europe is striking.

For decades the production of diesel cars was encouraged in Europe with tax relief because shifting from gasoline to diesel was thought to be the easiest way to cut carbon emissions, and because diesels delivered far higher mileage. As a result of lobbying by the auto makers, European regulators were slow to incorporate nitrogen oxide testing into their environmental standards. Consequently, VW has resisted compensating European owners of their diesels on the grounds that when the cars were sold they met the legal limits.

In the U.S. VW has agreed to pay the owners of nearly half a million diesel VW and Audi vehicles between $5,100 and $10,000 each to either buy back the cars or fix them. And Europeans can only boggle at the uncharacteristic largesse of the $2.9 billion that VW has allocated for environmental mitigation.

This fund is nearly five times larger than the federal government has provided to the states over the past nine years under the Diesel Emissions Reduction Act. Among other things the money will go to upgrading the diesel engines in school buses and heavy-duty public vehicles like garbage trucks. It will also be used for extending the infrastructure needed to build fleets of electric vehicles.

Beware Germans bearing gifts? Not really. But VW is being held to account in the U.S. to a degree it has never experienced in its homeland. Whether or not they are ready to take the punishment required of a criminal enterprise remains to be seen.