Volkswagen’s disappointing embrace of Wall Street principles

Volkswagen’s emissions scandal has more in common with the arcane algorithms and opaque schemes at the heart of Wall Street’s financial crisis than with traditional automotive recalls

REUTERS/Axel Schmidt

REUTERS/Axel Schmidt

Since the Volkswagen emissions scandal erupted last week, there’s been a tendency to liken it to other automotive outrages of recent years—GM and its ignition switches, Toyota and its gas pedals, Honda and its airbags. That’s entirely reasonable. The crisis engulfing VW involves the recall of a massive number of cars (check), shame-faced executives (check) and millions of furious customers (check). But there are important distinctions that need to be made.

The revelations coming out of the U.S. Environmental Protection Agency (EPA) and VW itself are certainly astonishing. The automaker admits that, since 2009, it outfitted several of its diesel-powered models—such as the Golf, Passat, Jetta, and Beetle—with “defeat devices” that would switch off emissions controls, and thereby boost performance, except when the vehicles were being put through environmental tests. So far VW has ordered its dealers in the U.S., Canada and elsewhere to stop selling all 2015 and 2016 vehicles with its 2.0 litre TDI engine. The company has sold roughly 100,000 “clean diesel” vehicles in Canada, 600,000 in the U.S. and another 11 million worldwide. As Michael Horn, VW’s top U.S. executive, said in a speech: “We have totally screwed up.”

But don’t be confused by the mechanical imagery conveyed by words like “device” and “switch.” There was no decision made years ago to use cheaper parts to cut costs, no arcane calculation of projected failure rates that turned out to be flawed, or wasn’t sufficiently tested. Based on what VW and environmental officials have described, this was a deliberate and elaborate scheme rooted in digital ones and zeroes. VW acknowledges that it installed a cheating algorithm in each car that takes in reams of data—about atmospheric pressure, how the car was being steered, how fast it was going and how far—then determines whether the vehicle is being tested by regulators or driven in the real world, applying emissions controls accordingly. As a result testers got one outcome—a diesel-powered car that met all the EPA’s emissions requirements—while VW owners got another: a more powerful vehicle that spewed out up to 35 times more nitrogen oxide, an air pollutant, than standards allow.

Complex algorithms. Regulatory manipulation. Deception of customers. Sound familiar? VW’s wrongdoing has more in common with the arcane algorithms and opaque schemes at the heart of the Wall Street’s financial crisis than with the dangers of faulty gas pedals, ignition switches or airbags of previous recalls. To take that comparison a step further, is there really any difference between the way VW packaged and marketed its pollution-spewing cars to regulators and customers as “clean,” and the way financial dark wizards took lowly subprime mortgages and prettied them up for sale as Triple-A high quality securities to gullible investors?

Not surprisingly, VW customers are sharpening their legal pitchforks. The type of people who would be most offended that a car company would flagrantly deceive environmental regulators are precisely the people who would be in the market for a VW clean-diesel vehicle—and hitherto were willing to pay a hefty premium for the environmental cache it conveyed. They suddenly now find themselves owners of vehicles at risk of losing them both resale value and green credibility.

In the short term, the hit to VW will be enormous. The company has set aside US$7.3 billion to cover fines and lawsuits. That may not be enough—should the EPA choose, it could levy fines of up to US$18 billion, and criminal charges are possible. Meanwhile a company fond of telling investors how it planned to cement itself as the world’s largest automaker has instead seen its market fortunes smashed. In just three days, the stock market valuation of the company plunged as much as US$30 billion.

Will this scandal do lasting damage to the car company? There are reasons to believe it might. True, other automakers rebounded from scandals that involved actual driver deaths, and VW’s algorithmic deception hurt no one physically. Yet there’s a difference between a company that gets something wrong or makes a mistake, and a company that sets out to deceive. But also, car companies strive to develop an emotional connection with their customers, and people who own VWs love them a lot. You know what they’re far less fond of? Wall Street-esque financial engineers trying to figure out how to rook the system.


Volkswagen’s disappointing embrace of Wall Street principles

  1. In my opinion McLeans is simply following in the trail established by most automotive writers following the petroleum crisis of 1973. In the famous exclamation of Randy Macho Man Savage “OH YEAH” let’s dump on VW for this weeks story. As was exploded in the press of the last 4 days, “VW only the latest automaker to get in hot water” the press is going “Whole Hog” on VW. Last year it was GM, turn and others too etc.

    In the meantime the press never takes to task the pickup truck industry for having for the most part a suspension from the 1950’s, pickup trucks with engines that make 300,400,500 horsepower and guzzles a proportional amount of petroleum to carry two persons and a six-pack of beer for the weekend and that produce prodigious amounts of Green House Gas(GHG) 90 % of the time. Why not call out the Automotive industry for allowing vehicles to go 150 Km/hour when the only time a vehicle may exceed 110 Km/hour except on a closed circuit course? If vehicles are restricted to 120 KM/hour or less, 1/2 the horsepower would be required accompanied by the reduction in fuel consumption and GHG emissions.

    Let’s work for a cleaner environment. Someone once said that “a journey begins with one step” well why not ask the Auto industry to take the first step with us and beside us?

  2. Lost in all the talk of this is how misquided regulation is the root cause. Automakers have been pushing back against increasingly stringent emissions standards that are essentially removing ever smaller amounts of “pollutants” at ever increasing costs to the consumer. The difference in emissions, at new, between a 1995 automobile and a 2015 is almost undetectable, yet the cost to the consumer is several thousand dollars more per car JUST to meet the emissions standard.
    Worse, as FoMoCo demonstrated several years back, an easement in emissions rules would have allowed manufacturers to build more robust engine management profiles that would result in lowered emissions measured over the projected lifetime of the actual car, than what can be obtained by having to continually be at the “leading edge” of meeting ever more stringent regulations.
    Consumers are given no choice in this matter. Should they not be allowed to choose between low initial emissions vs lower overall at a reduced cost? Lower emissions versus better fuel economy, at a reduced cost? For that matter, what about federally mandated safety standards and devices that add cost, complexity, and weight (thereby reducing fuel economy, as well)? Why aren’t consumers allowed a choice?
    While pondering this, along with the mentioned GM ignition switch scandal, ponder this. In the late 80’s and early 90’s, the US federal government (and by default the Canadian federal government) mandated an airbag deployment rate that every engineer in Detroit told them was flawed. The feds were told point blank that the deployment rate imposed by federal fiat would kill 2000 female drivers per year, and a large number of female passengers as well, when passenger airbags became mandatory. The federal lawyers, who of course are far more learned on the subject of kinetic energy than mere engineers, told the engineers to pound sand. The media cheered.
    When women started dying in what would normally be non-injury accidents, due to the overly aggressive expansion rate of the airbags, people started to pay attention. It took a few years for the feds to allow an adjustment of the standard. In the meantime, women were still being killed or maimed by an airbag standard that someone in government imposed upon them. Did any of the federal regulators who are guilty of hundreds of counts of malicious manslaughter ever face a jury? Did any of them ever get fired and disgraced? No.
    Worse, why has no mainstream journalist ever committed journalism about this very well documented case of regulatory malfeasance? For that matter, why have so few journalists committed a little bit of journalism about the so-called ignition switch scandal, and looked into the number of fatalities related to that which involve alcohol? And finally, how many journalists have actually tried the simple act of trying to drive a V6 Camry with one foot pressing hard on the brake and one on the gas? If you look at YouTube, and the number of videos that show people driving through the front door of the 7/11 because they mistook the gas for the brake, and are aware of the fact that Car&Driver magazine was able to make a V6 Camry decelerate from 110 km/h to 0 WHILE AT WIDE OPEN THROTTLE in less distance than a Ford Taurus with no throttle applied, you might be led to a different conclusion than the journalists who could not bring themselves to do the most basic of research.

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