Handelsblatt Exclusive

VW Probe Result: Ignorance is Bliss

The two protagonists on the sided: Ferdinand Piëch, left, and VW CEO Martin Winterkorn, right. Hans Dieter Pötsch, center, is set become the new VW chairman. Source: DPA
Ferdinand Piëch, left, a major Volkswagen shareholder and its former CEO and chairman, and the former CEO Martin Winterkorn, right, with Hans Dieter Pötsch, the chairman of VW's non-executive supervisory board, during happier days in 2015.
  • Why it matters

    Why it matters

    Getting to the bottom of Volkswagen’s Dieselgate emissions scandal will determine how much damage, both financial and reputational, the German automaker will ultimately bear.

  • Facts

    Facts

    • An internal probe ordered by Volkswagen has found no evidence that the automaker’s top managers knew of or ordered the massive emissions fraud.
    • But documents obtained by Handelsblatt suggest that many managers knew of the U.S. emissions problem as early as 2014, almost a year before it became public.
    • U.S. and German prosecutors are still investigating, but big unanswered questions remain: Why was VW’s top supervisory board not informed of the problems for more than nine months after they first surfaced?
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    Audio

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The recall in late 2014 was no big deal for Volkswagen’s management board. A half a million diesel cars in the United States would be ordered to repair shops because their emission levels were too high.

The problem was annoying but not unresolvable.

VW technicians had already developed a software update to recalibrate the engine control module. Such a recall, VW sources said, might not be daily business but they happen often.

Nobody on the management board seemed upset.

At that point, nearly a year before the carmaker’s emissions rigging scandal exploded, it might not have been clear to the management board exactly what was slumbering in its diesel engines.

Otherwise top managers, led at the time by then-Chief Executive Martin Winterkorn, could have contained the biggest crisis in Volkswagen’s 78-year history, or perhaps even prevented it.

“It is to be suspected that authorities will examine VW systems to see whether Volkswagen has installed engine management software.”

Bernd Gottweis, Leader of VW's Product Safety Task Force in a memo from May 2014

Over the years, VW engineers had illegally falsified emission levels in up to 11 million diesel cars. For that reason, authorities in several countries are now investigating the German automaker. The Dieselgate scandal could ultimately cost the carmaker tens of billions of dollars.

The fraud was publicly uncovered by the U.S. Environmental Protection Agency and the California Air Resources Board last September. The regulators had determined earlier, in spring 2014, that Volkswagen’s diesel vehicles only met legal limits for nitrogen oxide emissions in lab tests. In normal traffic, the cars spewed out far higher levels.

At this early stage, U.S. authorities shared their findings with Volkswagen — and the information began making the rounds through company hierarchies.

The president and CEO of Volkswagen America, Michael Horn, was informed, as was his staff. News of the excessive emission levels also arrived at VW headquarters in Wolfsburg.

In a memo dated May 2014, the leader of Volkswagen’s Product Safety Task Force, Bernd Gottweis, sketched out the consequences that could result.

“It is to be suspected that authorities will examine VW systems to see whether Volkswagen has installed engine management software,” Mr. Gottweis wrote in a memo quoted by Bild am Sonntag, the German newspaper.

 

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The documents also reached Mr. Winterkorn, but he might not have paid much attention to them. Many notes and a lot of information land on his desk, said a long-time friend. At the time, Mr. Winterkorn had a number of other matters on his plate, including reorganizing the huge corporation.

At the same time, Volkswagen was riding a wave of success in the summer of 2014. Both sales and profits were soaring. VW had passed General Motors in the number of vehicles produced annually to become the world’s No. 2 automaker, just a bit behind the leader, Toyota.

To overtake the Japanese, plans were being developed for a new SUV to hit the U.S. market. By mid-2014, VW was in its start-up phase and upgrading its plant in Chattanooga, Tennessee, at a cost of $900 million, or about €810 million.

Mr. Winterkorn spoke at the time of the “can-do spirit” he felt with his people in the United States.

VW was in “attack mode” in the U.S. market, Mr. Winterkorn said during public appearances. Looking back, the problems with emission levels were apparently not given sufficient attention.

 

volkswagen work meeting_Roland Niepaul_dpa
Wolfgang Porsche, whose family with his cousins the Piechs are Volkswagen’s largest shareholders, speaks to worried VW workers in Wolfsburg, Germany, last year after the automaker’s Dieselgate scandal broke. VW has signalled plans to cut costs as it prepares to pay billions of euros in fines, court judgements and other costs. Source: DPA / Roland Niepaul

 

But indications that something was wrong not only landed with Mr. Winterkorn. All essential corporate divisions are integrated into the Product Safety Task Force headed by Mr. Gottweis.

Marketing and sales is represented there, as is technical development, production, procurement, finance, communications and legal affairs.

That means representatives of practically every division in the German automaker sat at one table. In January 2015, Mr. Gottweis explained that speed was of the essence: Product-related crises announce themselves in advance and, as a rule, can be avoided with fast action.

At an event in Bad Wörishofen, Germany, according to attendees, Mr. Gottweis sketched out for industry experts how crises could be avoided after defects in their cars were reported.

Mr. Gottweis also made reference during his lecture to the strictness of U.S. pollution authorities, sources told Handelsblatt. An industry expert was impressed: VW’s mechanisms were exemplary.

Why Volkswagen would cheat on emissions levels is now being investigated by a U.S.-based law firm, Jones Day, which the automaker hired to look into the scandal after it broke last September.

The lawyers have been tasked with finding out who was involved in the fraud. In other words: What did top managers know and when did they know it?

 

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Volkswagen’s supervisory board plans to present findings of the internal investigation in April.

Company insiders say top VW management was not directly involved in the fraud, according to information Jones Day has uncovered. That fits with a statement made Mr. Winterkorn’s successor, Matthias Müller — that only a few employees in engine development were involved in the cheating.

But that small group of perpetrators does not include all who might share in the responsibility.

Higher-level managers and board members face questions as to whether they took a close enough look. After all, in the months after Mr. Gottweis’ May 2014 memo, the management board must have discussed the excessive emission levels and investigation by U.S. authorities.

They had to sign off on a recall later that same year: The issue was costs and whether the recall measures would be sufficient.

The success of the recall, for instance, was already doubtful in October 2014.

According to documents from the state chancellery in Lower Saxony, the northern German state that owns a 20-percent stake in Volkswagen, it was clear that emissions could only be lowered 50 to 60 percent by the repairs envisioned in the recall at the end of 2014.

But since nitrogen oxide emissions were up to 35 times the U.S. legal limit, the recall and its planned fix would not address the problem.

Lower Saxony is the second-largest shareholder in VW after the Porsche and Piëch families. The state government is represented on the automaker’s supervisory board by its minister president, Stephan Weil, the rough equivalent of a U.S. governor, and the state’s economic minister, Olaf Lies.

Mr. Weil ordered an investigation after the scandal was made public by the U.S. authorities in September 2015. Estimates for success of the recall action were based on company information.

 

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VW and the state chancellery declined to comment specifically on the information obtained by Handelsblatt. A VW spokesperson said it wasn’t possible to comment because of the ongoing investigation. Prosecutors in the United States and in Brunswick, Germany, are looking into the scandal.

But the limited success of the 2014 recall could hardly have been a surprise for the VW team — and also not for the California Air Resources Board, which uncovered the fraud and drove the initial investigation.

In fact, VW had agreed to a second recall should the first not deliver the desired results. But it did not come to that.

U.S. authorities eventually discovered the software that recognized when cars were being tested and rigged emission levels to meet standards. Once the cars left the testing lab, the software was turned off, giving the vehicles greater performance but at the cost of much higher pollution.

Last August 19, VW engineers “partly” admitted to the illegal software in a meeting with California regulators. On September 3, their full confession followed.

Why Volkswagen’s leadership didn’t intervene earlier remains a mystery. It is also unclear why Volkswagen’s own supervisory board would not have known about the emissions fraud until it was informed by U.S. authorities on September 18.

It’s is standard protocol at VW supervisory board meetings for the management board, which is chaired by the CEO, to regularly report on U.S. strategy. But, according to what Volkswagen officials have said, top managers did not waste a word on the emerging emissions disaster for one and a half years.

 

Martin Murphy and Christian Schnell are editors at Handelsblatt who cover Volkswagen and the German auto industry, among other topics. To reach them: murphy@handelsblatt.com and schnell@handelsblatt.com

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