Volkswagen scandal threatens to overwhelm the entire industry

FRANKFURT – A Volkswagen Beetle with a mind of its own in a series of Disney films launched in the 1960s, had its share of misadventures. But things had a way of ending up happily for both the car and its passengers. The German carmaker’s more recent attempts to give its cars the gift of thought have things headed in an altogether grimmer direction. Its use of hidden software to deceive American regulators measuring emissions from diesel-engined cars has plunged VW into crisis. And as the scandal provokes further investigations it seems likely to throw into question a wider range of claims about emissions and fuel efficiency. It could thus be a blow to much of the industry one that might be large enough to reshape it.

The damage to VW, the world’s biggest carmaker, is cataclysmic. The company’s shares have collapsed by a third since its chicanery surfaced. It faces billions of dollars in fines and other financial penalties. Lawsuits will be flying their way to its headquarters in Wolfsburg. Its strategy for the crucial American market is ruined; its reputation is in tatters.

The company’s home country is in shock. Germany’s environment minister, Barbara Hendricks, spoke for many times when she declared herself “more than astonished”—though the Greens, an opposition party, say that in its response to a parliamentary question earlier this year the government admitted that it knew manipulating emissions data was technically possible. There is also a certain apprehension. Germany’s economic strength rests in large part on the idea that anything stamped “Made in Germany” will offer a high level of reliability, trustworthiness and engineering prowess. Much of that reputation rests on the broad shoulders and sturdy tyres of the car industry, which directly or indirectly employs one in seven of the country’s workers; and with a stable of Marques that includes Porsche and Audi, VW is that industry’s leader.

Unfortunately, the benefits come with costs. Diesel cars’ efficiency comes from burning their fuel at a higher temperature, and that means they turn more of the nitrogen in the air they use for burning into various oxides of nitrogen, collectively known as NOx. This does not have global climate effects on the same scale as those of carbon dioxide, which is the most important long-lived greenhouse gas. But it has far worse local effects, generating smogs and damaging plants and lungs. To make matters worse, the catalytic technologies used to deal with the NOx emitted by petrol engines are not well suited for use with diesels, requiring engine makers to deploy more complex and expensive alternatives. That is not a big problem for large engines like those of trucks and ships. But it is for small engines like those of cars.

In America NOx standards are more demanding than they are in Europe. Mazda and Honda, both accomplished producers of diesel engines, have had trouble complying with them. And if it turns out that under real-life conditions many diesels also break Europe’s less stringent NOx standards then the future of diesel cars worldwide will be bleak.

The scandal broke on September 18th, when America’s Environmental Protection Agency (EPA) revealed that several diesel-engined VWs and Audis had software which switched NOx-controlling technology on only when faced with the highly predictable sort of demands seen under test conditions. The NOx-emission limit for a fleet of cars is 0.07 grams per mile (0.04g/km); under normal conditions the cars were 40 times over the limit. The EPA ordered VW to recall around half a million cars in America to fix the software. On September 22nd the company admitted that in 11m vehicles worldwide there was a “noticeable deviation” between the NOx emissions seen in official testing and those found in real-world use.

On the basis of 482,000 cars sold and a maximum fine of $37,500 per vehicle under the Clean Air Act, the Department of Justice could in theory fine VW $18 billion. In practice the punishment may be a lot less severe. General Motors, which for years ignored problems with ignition switches that directly claimed 124 lives, was fined just $900m earlier in September. In 2014 Toyota paid $1.2 billion when it settled a criminal investigation into its handling of unintended acceleration problems that led to 8.1m recalls.

Doubts about NOx emissions from VW’s four-cylinder TDI series of diesels first surfaced after testing by the International Council on Clean Transportation (ICCT), a small NGO, two years ago. The tests intended, ironically, to demonstrate the engines’ cleanliness revealed that the cars’ emissions far exceeded what the company had previously stated. The ICCT brought the results to the attention of the California Air Resources Board (CARB), which badgered VW into a voluntary recall to fix what the company insisted were “technical issues”. When the recall failed to resolve things VW offered excuse after excuse before eventually confessing it was still dithering when the EPA, with which CARB had shared its results, finally acted.

It is possible that some companies are using software trickery to cheat on Europe’s tests on fuel efficiency. But as Nick Molden of Emission Analytics, a consulting firm in Britain, argues, the European testing regime is so out of date and open to abuse that carmakers do not have to bother with such subtlety. The companies test their own vehicles under the auspices of independent testing organisations certified by national governments. But these organisations are commercial enterprises that compete for business. Although obliged to put the vehicles through standard activity cycles both in a laboratory and on a test track neither of which is remotely realistic they are aware that their ability to “optimise” the test procedures is a way to win clients. In practice this means doing everything possible to make the test cars perform far better than the versions punters drive off the forecourt.

Worst of all, though, is that once this charade has produced a claim as to the car’s efficiency, no one checks whether it is true or not. In America, too, carmakers are responsible for their own tests. But there the EPA goes on to acquire vehicles at random for testing at a later date, to see if the cars on sale to the public live up to the claims. If the numbers do not match up substantial fines can follow. In 2014 Hyundai-Kia was fined $300m for misstating fuel-economy figures. Europe has no such system for punishing those who transgress. As a result more than half Europe’s claimed gains in efficiency since 2008 have been “purely theoretical”, says T&E. And the industry as a whole has developed a gaming attitude to tests and regulations that it should take seriously. A new level of scrutiny will change things. It may turn out that other manufacturers are using similar software to cheat on either NOx or carbon-dioxide tests. The NOx emissions from new diesel cars in Europe are on average five times higher on the road than in tests; some cars run at ten times the limit, according to T&E. But even if they are not, a wider understanding of the bogus way in which the system runs seems sure to provoke action, and weaken the power of the industry to keep the system lax. Carmakers have been lobbying against the EU’s plans to introduce more realistic cycles into their tests by 2017, saying it can’t be done until 2020. Their pleading is unlikely now to help; the changes may not just arrive in 2017 but also be more exacting than previously planned.

This all takes place against a background of increasingly strict controls on carbon emissions. Europe’s carbon-dioxide goal of an average of 95g/km across all a carmaker’s models by 2021 is already demanding. It will be even harder to achieve if it has to be reached honestly. The same goes for more stringent fuel-economy standards that are coming soon in other markets such as China, America and Japan.

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