This book by journalist Jack Ewing, was published in 2017. The subtitle is The Volkswagen Scandal, meaning the diesel engines manufactured by the Volkswagen Group and used in Audis, Porsches, Volkswagens and other marques of the Group.
You’ll recall that these engines, marketed as ‘clean diesel,’ in fact, used software to detect when they were being tested in a lab, and then changed the engines’ behavior to pass the tests. Meanwhile, on the road, they defaulted to their normal running modes and polluted far in excess of allowed emissions. This software is known as a ‘defeat device’ and it is specifically called out in legislation as illegal.
I thought the book would be about this specific scandal, albeit huge, which unleased millions of high polluting cars around the world. Eventually resulting in billions of dollars in fines. But, instead, the author spends the first half of the book reviewing the history of the Volkswagen Group.
It is time well spent. Well spent because it explains the culture of the company and how such a huge scandal could happen. It is a fascinating, and disgusting, story of what must be the most unethical large industrial company in the world.
The Volkswagen company, started in 1937 with the Nazi labor front founding the company to build a “people’s car” or Volkswagen. Ferdinand Porsche was engaged by Adolf Hitler to design what Hitler had conceptualized. One of Hitler’s first ideas when he came to power in 1933 was a people’s car. It was meant to demonstrate the improvements in living standards the Nazis would bring. It also provided a reason to build the autobahns, which could be used by the armed forces to relocate military assets to protect the country.
Central to the story is the Porsche and Piech families, two branches of the family that control Volkswagen currently. Both sides have a common ancestor of Ferdinand Porsche (1875-1951) who was the designer of the original Beetle and the founder of Volkswagenwerk.
While not many Beetles were built during the war, in the post-war period, VW was a real success story. But under German law, half the board of directors are union representatives. While VW grew large, it never was very profitable.
By 1993, the company looked for a new CEO and chose Ferdinand Piech, grandson of the founder. The workforce was bloated at VW and the Japanese companies had all but forced VW from the American market. Piech began to introduce Japanese production methods.
About the same time, Piech began trying to poach Jose Ignacio Lopez from GM. He was a star purchasing manager. He eventually was hired, bringing along most of his team, but also stealing a lot of GM strategic documents. Lawsuits followed and took years to settle. It was one of the biggest industrial espionage cases ever.
Piech managed by fear and intimidation. He didn’t yell, but he was feared by all, and no one dared stand up to him. Piech stepped down as CEO in 2002 when he turned 65. Piech remained chairman of the supervisory board at VW and very much in charge.
The new VW CEO, Martin Winterkorn, introduced a plan to have the VW Group sell more than 10 million cars a year and become the biggest carmaker in the world, surpassing GM and Toyota. Diesel engines in passenger cars were a big part of the plan.
The problem with diesel engines was the high temperatures that created nitrogen oxides, a carcinogen. Mercedes used urea to pass the tests. VW decided against using the Mercedes technology because of cost, inconvenience and ‘not invented here.’
Winterkorn and Piech both ruled by fear. The combination of fear and the aversion to using others’ technology, caused VW to create a small diesel engine that could not meet emission standards. Audi had originally developed the ‘common rail’ system. VW decided to use it too. They discovered a piece of code in the software that was a ‘defeat device.’
Volkswagen’s ‘clean diesel’ was marketed as environmentally sound. It was a good way to attack Toyota and their Prius hybrids. It worked and sales were brisk. At engineering conferences, VW sold their clean diesels as a breakthrough. Others couldn’t figure out how they were doing it. That’s because they weren’t. The whole thing was a fraud.
Eventually, a team from West Virginia University was doing on-road testing of emissions. In particular, they were tasked with testing European diesel-engined cars. They tested BMWs, Mercedes, Audis and VWs. In the labs, all the cars passed the tests. On the road, there was something wrong with the VWs. They kept waiting for the VW emissions to average out, but they never did. In the end, the VWs were 20-35X the legal limit. The other brands only exceeded the limits in unusual circumstances.
Volkswagen knew they had committed fraud and had the opportunity to come clean with the U.S. authorities. Instead, they decided to lie and deceive the regulators. In June 2015, VW recalled all its diesel cars in the U.S. That was half a million cars. Worldwide, there were 11 million cars with the defeat device. That’s a lot of carcinogens spewing into the air.
After the announcement, within a month, VW shares had dropped 45 percent. In the end, VW admitted they had built 11 million cars with the defeat device. The board set aside $7.3 billion but it wasn’t enough.
The book was written almost six years ago, and the ultimate results of the scandal weren’t known at that point. Looking back now, the stock has fully recovered.
In the end, the author lays the blame at the feet of the Porsche and Piech families, the controlling shareholders. They set the management tone of unaccountability, keeping insiders who cheated, and pressuring engineers to produce impossible results. Plus, the family controlled, and still controls, the supervisory board and could have made changes.
It’s a good book. But after you read it, you’ll have to think twice about buying a car from this company.
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