The Volk­swa­gen rev­o­lu­tion

Financial Mirror (Cyprus) - - FRONT PAGE -

When Michael Horn, the pres­i­dent and CEO of Volk­swa­gen Group of Amer­ica, re­cently tes­ti­fied be­fore a com­mit­tee of the US Congress about the soft­ware that Volk­swa­gen in­stalled on its diesel-pow­ered cars to de­feat emis­sions tests, he ex­pressed his own in­credulity that the blame lay with a cou­ple of en­gi­neers. “I did not think that some­thing like this was pos­si­ble at the Volk­swa­gen Group,” Horn said.

Horn and the mem­bers of Congress are not the only ones who feel be­trayed by Volk­swa­gen’s pur­pose­ful malfea­sance. So do the con­sumers who bought into the com­pany’s “clean diesel” mar­ket­ing and pur­chased one of the 11 mil­lion af­fected Volk­swa­gen, Audi, Skoda, and Seat cars. And the deal­ers, sup­pli­ers, work­ers, reg­u­la­tors, and leg­is­la­tors in ev­ery coun­try who now have to deal with the af­ter­math feel be­trayed as well.

When a high-pro­file con­sumer com­pany, one built on con­fi­dence and spe­cialised skill, breaches the pub­lic’s trust, the dam­age is enor­mous. The US hear­ings have been fol­lowed by par­lia­men­tary hear­ings in the United King­dom, and more of­fi­cial in­quiries are be­ing launched else­where. In Italy and Ger­many, the po­lice have searched of­fices and pri­vate homes to se­cure rel­e­vant doc­u­ments. There is talk of con­sumer class-ac­tion suits around the world, from the US to Aus­tralia. And the Euro­pean In­vest­ment Bank plans to in­ves­ti­gate whether any of the loans ex­tended to the com­pany – which were linked to ful­fill­ing cli­mate tar­gets – were used to rig emis­sions tests. If so, it could de­mand the money back.

With Volk­swa­gen an­nounc­ing the re­call of 8.5 mil­lion cars in Europe, the com­pany may not sur­vive – at least not in its cur­rent form. The financial dam­age is set to be enor­mous: Volk­swa­gen now says that it will set aside EUR 6.5 bln to cover the costs of the scan­dal. That may not be enough, and the com­pany’s stock is re­flect­ing the mar­ket’s con­cerns, as is its Stan­dard & Poor’s credit rat­ing.

The en­tire auto industry is now un­der scru­tiny, as are reg­u­la­tors, whose test­ing pro­ce­dures proved so easy to game and whose com­plex re­la­tion­ships with gov­ern­ments and auto man­u­fac­tur­ers may not serve the pub­lic in­ter­est. And Volk­swa­gen is so closely aligned with the Ger­man en­gi­neer­ing “brand” that, un­fair as it may be, the scan­dal is bound to af­fect the per­cep­tion of other Ger­man car­mak­ers and in­dus­tries.

Here, af­ter all, was a much-cel­e­brated com­pany that put its en­vi­ron­men­tal cre­den­tials front and cen­ter, and then, where the rub­ber hits the road (so to speak), proac­tively cheated. Cov­er­ing up a mis­take, à la GM and its faulty ig­ni­tion switches, is bad enough; cre­at­ing and in­stalling a piece of soft­ware de­signed for the sole pur­pose of de­fraud­ing the pub­lic is a symp­tom of some­thing much worse.

A fish rots from the head. Volk­swa­gen is well known for hav­ing a par­tic­u­larly poorly run and struc­tured board: in­su­lar, in­ward-look­ing, and plagued with in­fight­ing and fam­ily ri­val­ries. Mat­ters came to a head last April, when then­Chair­man Fer­di­nand Piech re­signed fol­low­ing a power strug­gle with the com­pany’s (now former) CEO, Martin Win­terkorn. Piech’s wife, Ur­sula, a former kinder­garten teacher who was also a su­per­vi­sory board mem­ber, re­signed as well.

If th­ese peo­ple can say with a straight face that they didn’t know what was go­ing on, they are either not be­ing com­pletely forth­com­ing, or they failed to carry out one of a board’s fun­da­men­tal du­ties – ask­ing hard ques­tions and hold­ing the ex­ec­u­tive team to ac­count, es­pe­cially when things seem too good to be true.

Un­for­tu­nately, in the wake of the rev­e­la­tions, Volk­swa­gen has squan­dered what could have been a watershed mo­ment for the com­pany – a per­fect op­por­tu­nity to over­haul its bro­ken cor­po­rate gov­er­nance and bring in truly in­de­pen­dent board mem­bers and fresh new think­ing at the top. In­stead, Hans Di­eter Potsch, Volk­swa­gen’s chief financial of­fi­cer since 2003, a true in­sider, has been ap­pointed chair­man of the su­per­vi­sory board, and the new CEO is an­other in­sider, Matthias Muller, the former head of Volk­swa­gen’s Porsche brand. Who will trust such a lead­er­ship’s in­ter­nal in­quiries and prom­ises of trans­parency?

All of this comes at a time when tra­di­tional car­mak­ers face strong chal­lenges from out­side the industry. The be­hav­iour of com­pa­nies like Volk­swa­gen may end up en­cour­ag­ing con­sumers to shift from the industry’s in­cum­bent man­u­fac­tur­ers to new­com­ers such as Google’s forth­com­ing self-driv­ing cars and Tesla’s elec­tric mod­els, which chal­lenge the very premise of emis­sions tests.

But there is more to the story. The fact that lines of code, not a piece of plas­tic or me­tal, was used to dupe the emis­sions tests high­lights the power and prom­ise of so­phis­ti­cated, high-tech cars that can do more than ever be­fore. But it also ex­poses the per­ni­cious pos­si­bil­i­ties of cars that have be­come so com­plex that al­most no driv­ers know what is un­der the hood, what data are be­ing col­lected about them, and what that means for the fu­ture.

What Volk­swa­gen claims was the work of a cou­ple of rogue en­gi­neers could turn out to be a cat­a­lyst for new think­ing and ap­proaches in the car industry, par­tic­u­larly given the pos­si­bil­ity of new leg­is­la­tion to com­bat cli­mate change. Peo­ple would be pushed that much more quickly to­ward adopt­ing cars that do not de­pend on fos­sil fu­els. And the rise of new chal­lengers would ac­cel­er­ate as con­sumers let com­pa­nies know that busi­ness as usual – poor cor­po­rate gov­er­nance and empty prom­ises – will no longer be tol­er­ated.

We are only at the be­gin­ning of what could be a long process of in­ves­ti­ga­tion and ac­count­abil­ity for Volk­swa­gen. If that process fu­els wider dis­rup­tion of the industry, it could has­ten the dawn of a gen­uinely new era for hu­man mo­bil­ity.

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