Six years ago, I bought a diesel-powered SUV. One of the reasons I chose it was that it was classified as a “clean diesel vehicle,” which meant that I got a tax credit of about $2000. I was also attracted to the increased power and fuel economy provided by the diesel engine.
Diesel fuel contains more energy by volume than gasoline, diesel engines run more efficiently than gasoline engines, and diesel is easier to refine from crude oil. These advantages have combined to make diesel very popular in Europe, where it powers 30 percent of vehicles on the road.
There is a downside. Although diesel engines release less carbon dioxide in emissions, they release more nitrogen oxides and particulate matter, which contribute to smog and cause health hazards. The U.S. government has been less willing than European regulators to accept the tradeoffs, resulting in tight EPA restrictions on diesel emissions.
In order to meet U.S. standards, and sell more diesel vehicles worldwide, carmakers (especially German carmakers) have designed very elaborate systems for cleaning exhaust gasses before they reach the tailpipe. In the case of my own SUV, periodically a sensor light would come on because it had detected that those nitrogen oxide emissions were higher than they were supposed to be.
Every time the light came on it meant that some part of the diesel exhaust system had failed and needed to be replaced. By last summer I had spent around $5000 on repairs, and then in September the light came on again. As much as I liked my SUV, I decided I had to get rid of it before it drove me into the poorhouse.
Then something bizarre happened. On September 18, the Environmental Protection Agency announced that Volkswagen had very flagrantly violated the Clean Air Act, and would be ordered to fix the affected vehicles. It would also be subject to fines and possibly criminal charges.
A few days later, Volkswagen admitted that it had installed software programming on 11 million vehicles that was designed to circumvent emissions testing. To say that the business community was stunned is an understatement. In a relatively simple and straightforward statement, one of the largest corporations in the world was implicitly acknowledging a criminal conspiracy among high-level engineers and executives.
The damage to the company is nearly incalculable. During the first 10 days of the scandal, its stock price dropped by one-third, wiping out $32 billion dollars in shareholder wealth. Fines from regulators are currently estimated at $18 billion, or about two years’ worth of profits, but could go higher. Then there is the prospect of repairing, or replacing, 11 million vehicles, which will be tens of billions in additional costs.
Huge as those numbers are, they may not represent VW’s worst problem. The most important asset any company has is its customers, and there is no way to know what portion of that group is going to be lost over the course of this scandal.
The company has survived some difficult public relations issues in the past. In the late 1980s there were widespread reports of “unintended acceleration” of Audis in the U.S., resulting in a “60 Minutes” investigation and a decade of diminished sales in this country. Eventually it was determined that there was nothing wrong with the cars.
Ten years later, the press uncovered some disturbing facts from the firm’s early years, particularly the relationship between founder Ferdinand Porsche and the Nazis, and the employment of slave labor during World War II. In 1999, the company set up a fund to make reparations to Holocaust survivors.
Volkswagen was able to carry on and prosper in spite of these challenges, and was close to passing Toyota as the world’s largest automaker when the diesel emission story broke. In this case the customers feel personally betrayed, and many of them have joined in a massive class-action lawsuit to seek damages.
Speaking of damages, those are going to extend far beyond the customer base. Employees and dealers will take a hit, of course, but it won’t stop there. My SUV was not a Volkswagen, but dealers were hesitant to take it in trade because they were afraid that the public would no longer buy diesel vehicles, regardless of what company made them.
To look at the bigger picture, consider this. VW is the largest company in the largest industry of the largest economy in Europe. If Germany were to stumble into a recession, it would make the Greek credit crisis look like a day at the beach.
On September 23, the same day that Volkswagen CEO Martin Winterkorn resigned, The New York Times published an editorial entitled “What Was Volkswagen Thinking?” It was a good question, which was followed by another. “Did they really think it was worth the inestimable damage to their customers, to the environment, to their shareholders and to their venerable brand to squeeze a bit of illicit power out of their engines?”
Like most human dramas, I doubt that it was that simple. It will probably take a year or so to unravel the whole mess, but I’m guessing we’ll find that the engineers and executives in Wolfsburg had painted themselves into a corner by spending years of development on engines that were failing to meet the EPA emissions requirements.
Had they been students of American political history, they would have known the value of a bit of conventional wisdom which dates back to the Watergate investigation. “It’s not the crime, it’s the cover-up.” In their case the underlying issue wasn’t even a crime, but their solution to it was.
None of us know for certain what we would do in a difficult situation. I’m sure we all like to think that we would do the honest and ethical thing, but circumstances have a way of blurring the lines. What if you can’t afford to lose your job? What if the transgression seems like a minor technicality, and the benefits would help people who really need it?
When you listen to interviews with soldiers or police officers who did something heroic, they usually say that their training kicked in and they simply followed it. To a great extent, I think that employees can be trained to tell the truth.
My favorite book about business is Up the Organization, by Robert Townsend. Here is his advice: “Don’t con anybody. Not your wife, not your stockholders, not your boss, not your associates, not your suppliers, not your regulatory authorities, not even your competitors. Don’t con yourself, either.”
I can’t say it better.
by Kevin Fahy
You can e-mail Kevin at kfahy@fwpi.com.
