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VW Prepares to Come out of Its Shell

by Roger Lanctot | 9月 28, 2015

As the lawsuits and government investigations of Volkswagen unfold, the automotive industry is just beginning to comprehend the long and short-term impact of Volkswagen’s admitted manipulation of diesel emissions tests. Speculation is swirling around the future of diesel in the U.S. and the future of Volkswagen itself. But this is a good time to set aside hysteria and ponder the impact inside and outside the industry.

First the facts, Volkswagen has acknowledged that it manipulated the on-board software so that certain VW diesel vehicles only turned on pollution-control equipment when the vehicle detected that an emissions test was underway – based on the position of the steering wheel, speed of the vehicle, length of engine running time and barometric pressure.

The infraction involves an estimated 11M Volkswagen and Audi cars globally. Reports suggest that the current output of pollutants from the effected vehicles is 35x-40x allowable limits in the U.S., where 482,000 vehicles are implicated.

CEO Martin Winterkorn has resigned and been replaced. Potential remedies for current owners of effected cars include recalls to correct the software, compensation for lost value, and/or buybacks of the cars.

But what will be the enduring result of VW’s deception? What is the path forward for the company?

Trust and transparency

CEO Winterkorn had made a strong case in the past two years for Volkswagen being the most transparent and trustworthy car company in the industry. The company was even recognized as the most trusted car brand in Germany by the Reader’s Digest earlier this month - prior to the latest news.

The scope of the customer betrayal – the revelation that VW’s diesels fell far short of the “clean diesel” moniker affixed to them by the company since 2008 – is difficult to grasp or compensate for. It is not enough to fix the software. It is not enough to pay consumers for the lost value in their vehicles. It is impossible to recapture the pollution released during the past seven years by these cars.

Trust is fought for and won over years and lost in an instant. The fact that VW worked so hard to make the case for clean diesel including superior performance and fuel efficiency and correspondingly lower cost of ownership to overcome the higher sticker price only deepens the dismay. The workout for VW will be no less complex and painful than the very public struggles faced by Toyota (unintended acceleration), GM (ignition switches) and Takata (airbags).

It is up to VW to show the world what trust and transparency in the auto industry really looks like. This will be no small challenge for such a hermetically sealed, still-mainly-family-owned entity. But VW now has something to prove and has been given the opportunity to offer itself as a model for defining the future of automotive propriety.

Auto makers have fought efforts at fostering greater openness by trying to limit access to vehicle diagnostic data or by protecting vehicle data via the Digital Millenium Copyright Act. Similar issues have played out in Europe.

VW has some of the most opaque and carefully protected software code in the industry. Opening up that code to repair shops, vehicle owners, universities and inspectors will be a first positive step forward.

Powertrain

Diesel was to be the linchpin of VW’s strategy for meeting emissions and fuel efficiency requirements in the U.S. as part of an effort to return to past glory in North America and world dominance as the largest global auto maker. Both objectives are now in jeopardy.

VW must swiftly shift gears with a greater emphasis on hybrid and fully electric vehicles. The tailpipe dream of a diesel-driven resurgence is irrecoverable.

Sourcing and scale

Volkswagen is famous for its sourcing acumen characterized by its inclination to use the same component on as many cars as possible in order to achieve the greatest scale of production and get the cheapest cost per unit. The diesel debacle reveals the dark downside of this strategy when something goes wrong.

The EA 189 diesel engine implicated in the investigation was shipped in 11M cars and may also have been sold to Chrysler and Mitsubishi. Additionally, the electronic control unit (ECU) supplied by Robert Bosch has also been implicated – an ECU that was used in conjunction with the engine in question and possibly in connection with diesels from other car makers.

Bosch has denied any knowledge of or participation in any deception of regulators or emissions testers. In fact, there is some email evidence that Bosch cautioned VW against improper software manipulation. VW must reassess its sourcing strategy and consider a more flexible sourcing scheme capable of reducing the corporation’s exposure to a single point of global failure – especially when that single point of failure is coming from the lowest bidder.

OBDII ports

The on-board diagnostic port found in most cars manufactured after 1996 is intended specifically to facilitate emissions testing. It was access to this port that enabled the EPA, working in conjunction with university researchers, to uncover the discrepancy between the test results during static and mobile tests.

The fact that investigators discovered that vehicle performance could be modified via a device plugged into the OBDII port has implications for the multiplicity of aftermarket devices being used for applications such as vehicle tracking and usage-based insurance. Everything from Progressive’s Snapshot to Automatic’s plug-in diagnostic device might be used in the future to modify vehicle performance including removing emission controls.

It remains to be seen whether EPA or the National Highway Traffic Safety Administration will be taking a harder look at aftermarket OBDII devices and their impact on vehicle performance. The auto industry has fought against the OBDII port and has sought work-arounds to protect both on-board software code and vehicle data. Expect further scrutiny and reassessment of the function and future of the OBDII.

Hacking and privacy

Aside from a widely reported hack of Skoda’s Wi-Fi gateway in the past year, VW had largely sidestepped high profile intrusions of its vehicles by hackers. It is therefore ironic that VW was caught hacking itself.

VW’s willingness to deceive regulators and the general public raises questions about the security of its vehicles and its commitment to protecting customer data. Greater openness from VW will be helpful including a stepped up outreach to the hacking community along the lines of hackathons and Tesla’s hacking challenges.

Brand

YouGov BrandIndex’s Buzz score showed VW going negative for the first time in six years in the past week. (http://tinyurl.com/pvy7smn - “Volkswagen Diesel Scandal Brings Lowest Perception in Six Years”).

The finding is sad in the context of Volkswagen showing the third-best improvement in brand consideration in YouGov results published in June. (http://tinyurl.com/pl69td2 - “Toyota Tops Purchase Consideration with Millenials”)

It will take time for VW's brand to recover, though it is worth noting Toyota's improvement following its own failure.

Software

As in the case of Toyota, software is the source of VW’s woes, but unlike the Toyota case the offending code may already have been identified by the EPA and its investigative partners. VW’s testimony and internal and external investigations are more likely to resemble GM’s, centering on the decision making process behind the violation. VW could distinguish itself here by accelerating its internal investigation and acknowledging the responsibility of senior management rather than throwing lower level employees “under the bus.”

Industry oversight

The fact that the EPA played a role in the VW investigation revealed the limitations of NHTSA in the U.S. EPA was found to have greater leverage and stronger tools of persuasion at its disposal, including potential fines of $18B for the VW violation.

It is probably no coincidence that both Toyota and GM announced plans to implement V2V technology on at least one vehicle each for the 2017 model year. V2V technology is being pushed and promoted by the U.S. Department of Transportation in connection with a global effort to foster vehicle to vehicle communications using Wi-Fi technology.

Toyota and GM no doubt hope to score “Brownie points” with NHTSA and the USDOT by agreeing to deploy V2V technology, which is still unproven. Volkswagen, too, may feel some obligation to be hyper cooperative with regulators. The difference, in the VW case, though, is with the EPA and not NHTSA. So don’t look for a V2V announcement from VW. But VW will be expected to be a model citizen when it comes to environmental affairs – something already reflected in the green building LEED Platinum rating of the company’s Chattanooga, Tenn., plant.

Conclusion

The bottom line for VW is that the company must use this horrible event to come out of its shell and come clean with customers and regulators. Nothing less than complete openness will suffice.

Lawsuits and investigations will likely take a year or longer to resolve during which time the company will begin to take the steps necessary to return to the good graces of consumers and regulators. Consumers will be asking themselves what the VW brand means to them as they have been forced to ponder the actions of the company’s leadership.

A visit to the U.S. Senate seems likely to be in the cards for VW senior management along the lines of Toyota’s and GM’s Capitol Hill testimony.

Only time will enable this cleansing. And only cash or replacement cars will satisfy current owners of offending vehicles. Fines, lawsuits and customer compensation will require billions of dollars which ought to buy a lot of change at VW HQ.

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