Diesel fuels VW scandal

Volkswagen, one of the world's most trusted brands, has found itself mired in moral and political disaster after it admitted cheating emissions tests. William Scholes explores the scandal of VW's dodgy diesels

THE October 2015 edition of Glass's thumped onto my desk this week. About the thickness of a Bible and just as authoritative, Glass's is the definitive guide to used car values in the UK.

Every model sold over the last 11 years is listed in painstaking detail.

It's an obsessive's delight. You can look up any car you care to think of, find a particular engine and trim level, make an adjustment for mileage, condition and age, and then arrive at what the trade says it is worth.

It adds up to an unparalleled view of the car market, and means Glass's editorial comments on trends in the car market are worth paying attention to.

The cataclysm that began to engulf Volkswagen last week - first in the United States, then in Europe and beyond - came too late for this month's Glass's editorial comment.

However, November's edition is sure to have something to say about how cheating regulators and legislators will damage resale values of customer's cars.

When a large chunk of your business is built on the idea that people are prepared to pay extra for your brands because they represent superior quality, reliability and trustworthiness, the cost of being caught lying on an industrial scale must be even more keenly felt.

The financial impact of the diesel scandal is what will most concern owners who have unwittingly found themselves caught up in what Berthold Huber, deputy chairman of the VW Group's supervisory board, has described as "a moral and political disaster for Volkswagen".

The affected cars don't only wear Volkswagen badges on their grilles, of course.

Audi, Seat and Skoda, all Volkswagen Group subsidiaries, built cars with the offending diesel engine (see panel for affected cars). VW's van and pick-up division is also involved.

In all, 11 million vehicles are thought to have engines fitted with software designed to cheat the very particular requirements of emissions tests in the United States, where nitrogen oxides targets are far lower than those in Europe.

In the EU, legislation has tended to focus on reducing carbon dioxide emissions - a difficult enough technical exercise, though neither as tough nor as expensive as cutting NOX.

The very latest European standard, called EU6, applies to all new cars sold in Europe since the start of last month.

EU6 continues to target CO2 but - belatedly, perhaps - clamps down on NOX.

Meeting this part of the new EU test has given all manufacturers of diesel engines headaches - an engineer at one European car company told me he reckoned the cost of making a diesel engine EU6 compliant was around £1,000 per unit.

The engines involved in the VW diesel scandal - known by the internal designation EA189 - were produced between 2009 and this year under the previous EU5 standard with its more relaxed approach to NOX.

That may have been fine in European markets but when it came to selling diesel-engined vehicles in the US and passing the emissions tests there, it gave VW a problem.

We now know that instead of spending money on re-engineering its diesels for the United States - an outlay almost impossible to justify given the country's tiny diesel market - Volkswagen, in an outrageous gamble, came up with a cheaper solution: engine management software to cheat the test.

This meant that NOX exhaust emissions were substantially lowered under test conditions, and that when the car was released back on to the public highway it returned to normal, pumping out pollutants at levels that would have seen it fail to meet the US standard.

The US Environmental Protection Agency found that NOX emissions were 40 times higher when running in normal mode.

"Put simply, these cars contained software that turns off emissions controls when driving normally and turns them on when the car is undergoing an emissions test," said Cynthia Giles from the EPA.

"We intend to hold Volkswagen responsible. VW was concealing the facts from the EPA, the state of California and from consumers.

"We expected better from VW. Using a defeat device in cars to evade clean air standards is illegal and a threat to public health."

It is difficult to think of anything that could be more commercially damaging to any large company than standing accused of 'damaging public health'.

Volkswagen immediately held up its hands; one imagines it thinks it deserves credit for this prompt admission of deceit, though that would be too generous. What other credible option did it have?

In America, 482,000 vehicles are affected and will be recalled. The cost of that alone is astronomical, to which can be added hefty fines - up to $37,500 per vehicle - and legal action.

There are estimates that Volkswagen's disaster could cost it as much as $18 billion in the US alone, making it almost as financially calamitous as BP's Deepwater Horizon spill, which saw it fined $18.7bn.

And that is before getting to any European penalties...

Switzerland moved quickly to ban sales of VW Group cars with the EA189 diesel engine; Italy followed, and others - including Germany - are expected to do the same.

The British government says it will retest VW vehicles and the German authorities have given the company until next week to present a remedy.

Herbert Diess, boss of VW's car division, stressed that the vehicles "are and remain technically safe and roadworthy" and explained that the company was "working at full speed on a technical solution".

This, he said, will be presented to "partners, to our customers and to the public as swiftly as possible".

"Our aim is to inform our customers as quickly as possible, so that their vehicles comply fully with regulations.

"I assure you that Volkswagen will do everything humanly possible to win back the trust of our customers, the dealerships and the public."

One wonders if the roots of the Volkswagen Group's fall from grace as one of the most trusted brands of them all, a synonym for solid reliability and quality, lie in its obsession with becoming the world's largest car manufacturer.

This was driven by its recently retired boss Ferdinand Piech, a member of the Porsche family who are the company's biggest shareholders.

A formidable engineer in his own right, he also masterminded the strategy that saw VW add brands such as Skoda, Seat, Bentley and Bugatti, among others to a portfolio that already included Audi. Porsche also joined the fold.

This approach has proved highly successful, with the Volkswagen Group recently nudging ahead of Toyota as the world's largest car maker.

VW's genius lies in how it uses the same engines, gearboxes, heater systems and so on - the more expensive parts of a car's anatomy, in other words - across its brands in such a way that it enjoy the benefits of economy of scale with none of the crude 'badge engineering' baggage that blighted, for example, British Leyland's ham-fisted efforts to pass off various Morris models as Austins.

So while a Skoda Octavia, Seat Leon, Volkswagen Golf and Audi A3 share a significant proportion of parts under the skin, they each look distinctive and feel different to drive and to sit in.

The man in charge of VW's research and development division - the largest in the industry - at the time the dodgy software was dreamt up was Martin Winterkorn, who later went on to become its chief executive.

As the diesel scandal developed and VW's share price plummeted, Winterkorn was forced to resign - he now also faces criminal investigation in Germany - and has been replaced by another company insider, Matthias Müller, who had been in charge of Porsche.

"My most urgent task is to win back trust for the Volkswagen Group," said Müller, setting out his stall, "by leaving no stone unturned and with maximum transparency, as well as drawing the right conclusions from the current situation.

"Under my leadership, Volkswagen will do everything it can to develop and implement the most stringent compliance and governance standards in our industry.

"If we manage to achieve that then the Volkswagen Group with its innovative strength, its strong brands and above all its competent and highly motivated team has the opportunity to emerge from this crisis stronger than before."

Müller is entitled to put a brave face on things, but there is no doubt that VW faces a monumental struggle to regain its hard-won reputation.

Whether the solution lies with another internal appointment - more of the same, in other words - remains to be seen, but is by no means guaranteed.

Anyone with an EA189-engined Volkswagen, Audi, Skoda or Seat probably won't particularly care about the company's internal difficulties.

They'll be more concerned with how the value of their own car is affected - which brings us back to Glass's Guide.

In the UK market, Volkswagen and Audi resale values have been under pressure for a while.

"It does not help that Volkswagen and Audi has started to reach a saturation point in the UK market in recent years," said Rupert Pontin, Glass's head of valuations.

"Our view has been for a while that Volkswagen sells too many cars for a semi-prestige brand and Audi too many for a prestige one.

"The volumes are large enough that they are creating downward pressure on residual values.

"The emissions scandal is obviously not going to help this situation. If buyers lose trust in the brands, then there is inevitably less demand and values suffer."

Mr Pontin said the company faced a "major credibility crisis".

"Essentially, the company has deliberately set out to mislead legislators and customers," he said.

"If you are a fleet or private motorist who has chosen a VW or Audi, with the emissions performance of that vehicle being a major benefit, then you are going to feel cheated.

"Exactly how this plays out is very difficult to predict but it could affect the used values of Audis and VWs.

"These are brands built on decades of credibility and that credibility has been badly damaged."

VW's fraud is also sure to change customer attitudes to diesel. What this means for companies like BMW - a staggering 80 per cent of its vehicles in Europe are diesel-fuelled - in the medium-term is unclear, but it seems likely that a new breed of efficient petrol engines will accelerate in popularity across the industry.

One positive by-product of the VW scandal is an awakening of interest in fuel consumption figures, and just how hopelessly inaccurate so-called official figures are.

Beyond VW, this is the real con being perpetrated on the motorist, with manufacturers selling us cars with fuel consumption figures they know can never be replicated in the real world (see panel).

And if Volkswagen's self-inflicted shambles leads to more transparency about what it really costs to fuel a car, then we will all have reason to be thankful.


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