Scandal! Dieselgate

Let’s briefly remind ourselves what happened. Volkswagen was caught cheating in its diesel emissions tests, fitting a ‘defeat device’ – or special software – that allowed many diesel cars fraudulently to pass stringent emission test cycles by enabling the car to recognise when it was being tested under laboratory conditions and adjusting its settings accordingly. In real-world driving, nitrogen oxides emissions were up to 40 times the US limit. The cars also drove better and had improved fuel economy when cheating. It was a big software-conjured con trick.

In the US, where the fallout was biggest and the fines highest, Volkswagen had spent years promoting ‘Clean Diesel’ as a worthy alternative to hybrid and electric vehicles, including multi-million dollar Super Bowl commercials. Diesel was also at the heart of Volkswagen’s ambitious plan to boost American sales, to match the success it enjoyed in China and Europe.

In Europe, the real loser was diesel. The fuel once celebrated for its eco friendliness by politicians, the car industry and environmentalists, was suddenly demonised. Diesel sales would collapse.

The deception perpetrated by Germany’s biggest car maker was first discovered, ironically, by an American engineer called John German. Working for the Washington-based International Council on Clean Transportation (ICCT), he discovered that real-world tests on VW cars showed harmful NOx emissions were up to 35 times permitted levels. The findings were sent to the US Environmental Protection Agency (EPA) in May 2014.

It took more than a year for the EPA to act, partly because Volkswagen frustrated the regulators’ investigations, intentionally making ‘false and fraudulent statements’, according to a court document. A VW insider would confirm the deceit.

VW then had a chance to fix the problem before the scandal broke, but it didn’t take it. ‘They continued to try and cheat and do what they had done. That’s just amazing,’ John German would later say.

Arrests followed. The first engineer to be prosecuted was VW veteran James Liang, who admitted helping to develop the cheating software while working in Wolfsburg. He was transferred to work in the US, where he would be subsequently arrested. He was jailed for 40 months and fined $200,000.

The most dramatic courtroom drama involved Oliver Schmidt, who oversaw VW’s US compliance team. Born in VW’s homeland of Lower Saxony and a lifetime company man – he even held his wedding ceremony in a Volkswagen dealership – Schmidt was sentenced to seven years in prison in 2017 for his part in the scandal and fined $400,000.

When sentenced in a Detroit courtroom, he was in cuffs and leg-irons, wore a blood red prison jumpsuit and had a shaved head. His wife, sitting in a second-row pew, was in tears. The hefty sentence sent a clear message to VW bosses including Winterkorn, all beyond US legal jurisdiction. (Germany rarely extradites its nationals beyond EU borders.) The judge told Schmidt that his job required him to imprison ‘good people just making very, very bad decisions’. (Schmidt was released after serving four years.)

More charges followed in the US and in Germany. In 2018, Winterkorn was indicted in the US and charged in Germany the following year. VW supervisory board chairman Hans Dieter Pötsch and former VW boss Herbert Diess were also charged with market manipulation. The charges were dropped after VW paid a €9m fine.

But let’s turn from what happened to why it happened – which is much less well documented. Why did seemingly good and decent men knowingly break the law? Who was responsible for the biggest scandal in German automotive history? And what has been the knock-on effect?

Let us start with the Volkswagen culture. Here we must look to former chairman and CEO, the late Ferdinand Piëch, the most powerful and persuasive figure in the recent history of Volkswagen. When Piëch took over Volkswagen in 1993, the company was effectively bankrupt. When he retired in 2015, it was about to become number one in the world. Piëch achieved his success by demanding a lot. Good leaders always do.

He was a highly ambitious man who set his engineers highly ambitious targets. He famously demanded a road car that could exceed 400km/h (250mph) – and his engineers gave us the Bugatti Veyron. He demanded a car that could sip just three litres of fuel every 100km (and we got the Lupo 3L TDI). Not satisfied, he demanded a one litre/100km car and we got the XL1, the most fuel-efficient car in the world at the time. Piëch wanted Volkswagen to be the world’s number one car maker. And so it became.

He also wanted diesel cars that were as clean as petrol cars.

His view was that if you want to achieve the maximum possible, you demand the impossible. And as we have seen, some seemingly impossible targets were duly achieved. But some were not. And the root cause of what became Dieselgate was that a group of engineers and their supervisors were unable to achieve what they believed to be the impossible challenge of meeting both required diesel emissions standards while leaving the on-road performance of the cars unaffected. And, simply put, such was the nature of the corporate culture at VW at the time, they literally didn’t have the guts to tell their superiors, let alone Piëch. So, they cheated. (VW admitted in late 2015 that engineers cheated after finding it ‘impossible’ to meet the NOx emissions legally. It initially suspended nine managers.)

Former GM vice-chairman and Chrysler president Bob Lutz likened Piëch’s managerial style to ‘a reign of terror’. The culture was driven by ‘fear and intimidation. He just says, “You will sell diesels in the US and you will not fail. Do it or I’ll find somebody who will.” The guy was absolutely brutal.’

Der Spiegel magazine in Germany described the Volkswagen working culture as ‘North Korea without the labour camps’. It was a diesel dictatorship.

Controlled by the Porsche and Piëch families, Volkswagen had a corporate governance that was clearly woefully inadequate for the demands of the 21^st century. It was little changed since the 1960s. A group of engineers driven by fear of failure went rogue, their actions largely unchecked.

Europe’s car industry culture was also to blame. Before the VW emissions scandal, it was widely accepted that ‘official’ tests on fuel economy and emissions often bore little resemblance to ‘real-world’ driving. This was only corrected in 2017, when the more accurate but still flawed WLTP (Worldwide Harmonised Light Vehicle Test Procedure) was introduced.

Even today, ‘official’ figures are often absurdly fanciful. Take increasingly popular plug-in hybrids. Does anyone believe that a Porsche Cayenne E-Hybrid uses far less fuel and emits far lower levels of CO2 than a Volkswagen Polo? Or that a hybrid Bentley Bentayga is more economical than a Fiat Panda?

The ‘official’ rolling road tests that measured emissions in both Europe and America were also relatively tame. It was widely assumed by all car makers that real-world driving would typically be more challenging, causing higher emissions. Indeed, there were acknowledged ‘conformance factors’ that allowed for a significant margin of deviation (a factor of 2.1 before 2020 in Europe).

Plus, the European culture was different. Pass the test, and you’re legal. In America, there was an assumption of some real-world repeatability. The more regulated nature of US motoring also explains why the fuss was greater, the fines higher, the compensation more generous, and retribution and restitution far swifter.

An emissions cycle detection mode is also common in cars. It sets the software to run the car at the settings demanded by the test cycle and allows for the accurate repeatability of the tests. It clearly isn’t a big step to use such a mode dishonestly.

Volkswagen’s guilty engineers would also have been reassured by previous fines levied in the US for those makers which had fiddled emissions regulations. In 1996 GM was fined $11m and in 1997 Ford was hit with a $7.9m fine – enormous numbers to you and me but to two of the ‘Big Three’, small beer indeed.

Those responsible would also have been calmed by the belief that ‘they were all doing it’ – or at least some other car makers were. Fiat Chrysler would subsequently be fined for cheating on diesel emissions, as would Mercedes-Benz (which paid an €870m fine in Germany and $1.5bn in the US). GM was also fined. Tests by Germany’s ADAC would show that many diesel cars exceeded NOx limits by more than 10 times – although they weren’t necessarily using cheat software.

The fallout from the scandal was profound. The financial consequences, the cleaning up of VW’s technical and legal departments and Winterkorn’s sudden departure, all sent a profound shock through the company.

Volkswagen brand boss Herbert Diess (later, the VW Group CEO) focused on finance, perhaps not surprisingly given the fines and fees. Product quality was affected. The crucial Golf 8 suffered from lack of development. The ID.3 and ID.4 EVs suffered from poor quality and immature software.

Motorsport programmes were culled as budgets tightened. VW’s Polo WRC programme was shut down at the end of 2016, and at the same time Audi pulled out of endurance racing. The Bentley Daytona prototype that was meant to help celebrate its centenary in 2019 got canned, its GT3 programme scrapped in 2020. They were all regarded as pleasant engineering indulgences which achieved little cut-through with the public or with customers. There is only one big global racing series, and that’s F1. And Audi will be there, from 2026. Piëch always opposed F1.

Dieselgate would also have a surprising sunny upside. Before the scandal broke, makers designed cars that just met the emission standards officially and usually failed in real-world driving. Partly because of the scandal, Euro 6c was introduced. It coincided with the introduction of the WLTP test procedure in 2017 and, by changing the measuring method, it meant emission figures were far more ‘real-world’ realistic. Euro 6d added a real driving emissions (RDE) test.

Now, new ICE cars sold in Europe – including diesels – are typically well below the legal test limits in normal driving. The scandal also supercharged the motor industry’s drive to zero tailpipe emissions EVs.

Paradoxically the biggest long-term effect of Dieselgate is that modern cars have become significantly cleaner, an outcome anticipated by precisely none of the engineers quaking in fear at the prospect of telling head office they could not do what they were being asked for. The law of unintended consequences kicking in big time, and to the benefit of us all.