A week ago the automotive world was put into turmoil over news that Volkswagen had, allegedly, committed widespread fraud with their emissions test results. Specific Volkswagen and Audi vehicles were emitting lots more pollution than allowed, while their EPA emissions ratings garnered praise and government subsidies by supposedly being the cleanest Diesel vehicles ever produced. These weren’t your grandfathers dirty noisy diesels, somehow the VW 2 liter TDI Diesel gave supremely excellent emissions, great power, a very fun driving experience, very high fuel efficiency, all at the same time. Somehow we all bought that VW’s engineering staff had pulled off that amazing feat, until news broke a week ago that they actually hadn’t done so, and that it was apparently all a sham.
Since then Volkswagen’s stock price took a steep nosedive (since recovering a bit), the CEO has stepped down, with a new CEO already replaced, a reshuffling of the management structure at Volkswagen AG, and the EPA (and other organizations) have put the worlds automakers on notice that other cars will be tested as well because it’s not clear how widespread was the cheating. As we’ll see below, Volkswagen’s upper management wants us to believe the decision to cheat on emissions tests occurred somewhere in the mid-level management.
Review
As I reported a few days ago, tests by researchers at two European organizations, Transport and Environment, and TheICCT, have shown similar results (cars passing laboratory emissions tests, but failing them on the road) with both Diesel and Gasoline vehicles from almost all manufacturers. According to those researchers, manufacturer cheating on emissions tests (in Europe) is widespread.
The allegation against Volkswagen made by the EPA and CARB is that Volkswagen’s cars were programmed to detect when they’re undergoing an emissions test, and then reconfigure emissions control equipment to pass the test. In all other circumstances emissions control would be reconfigured for more power/performance at the cost of vastly higher emissions. The EPA calls this a “defeat device”, a technique that’s illegal under the Clean Air Act. The EPA/CARB were originally warned of the problem by researchers at West Virginia University collaborating with TheICCT, when they discovered anomalous emissions results on certain Volkswagen cars.
Volkswagen is facing huge fines – perhaps as much as $18 billion from the US EPA alone – and are facing investigations by automotive regulatory agencies around the world.
Resignation of Dr. Winterkorn
On Wednesday, the CEO of Volkswagen AG, Martin Winterkorn, resigned. By coincidence VW’s supervisory board was having meetings this week and on Friday was due to consider extending Winterkorn’s employment contract. Until the EPA allegations broke, it was widely expected he’d continue as CEO, but with the scandal engulfing the company he was the first to go.
The statements by Prof. Dr. Winterkorn and the Supervisory Board (below) were contrite and reiterated that a claimed core value of Volkswagen – transparency and honesty – had been violated. While the statements said they expected criminal complaints to arise in this matter, it’s clear that upper management says they are not responsible.
How widespread is the cheating?
The big question in this scandal is just how widespread is the cheating. Was this the result of rogue employees and mid-level managers deciding something on their own? Or was upper management involved in the decision to deceive the regulatory agencies?
Today, the EPA sent a letter to all automakers giving notice that
:
Per the regulations of 40 CFR §86.1809, EPA may test or require testing on any vehicle at a designated location, using driving cycles and conditions that may reasonably be expected to be encountered in normal operation and use, for the purposes of investigating a potential defeat device. Such testing can be expected in addition to the standard emissions test cycles when Emissions Data Vehicles (EDV), and Fuel Economy Data Vehicles (FEDV) are tested by EPA.
Manufacturers should expect that this additional testing may add time to the confirmatory test process and that additional mileage may be accumulated on the EDVs and FEDVs.
The regulations of 40 CFR §86.1836 also require manufacturers to supply production vehicles for testing upon request.
In other words, as is being widely reported, the EPA is beefing up testing across the board in order to determine if other automakers have cheated on emissions tests. If the Transport and Environment research summarized above has any truth, the other automakers are probably cheating as well.
VW Supervisory Board says it was VW mid-level employees
In the statements below, note that upon the resignation of Prof. Dr. Winterkorn the management board said: “The Executive Committee notes that Professor Dr. Winterkorn had no knowledge of the manipulation of emissions data” before praising him for his multiple years of contribution to Volkswagen’s success. Later that statement talked about the necessity of firing more people:
The Executive Committee is expecting further personnel consequences in the next days. The internal Group investigations are continuing at a high tempo. All participants in these proceedings that has resulted in unmeasurable harm for Volkswagen, will be subject to the full consequences.
For his part Winterkorn said he was shocked and “stunned that misconduct on such a scale was possible in the Volkswagen Group”.
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In selecting Matthias Müller to replace Winterkorn, the board has chosen an insider who’s worked for Audi, Volkswagen and Porsche his entire adult career since the mid-1970’s.
At the same time the Board again pointed its fingers at mid-level employees:
Berthold Huber, Deputy Chairman of the Supervisory Board, said: “The test manipulations are a moral and political disaster for Volkswagen. The unlawful behavior of engineers and technicians involved in engine development shocked Volkswagen just as much as it shocked the public….”
Analysis
Volkswagen AG is making all the right moves to quickly “take care of” this situation. They admitted to having deceived regulators, journalists, dealers and the public. They’ve decisively moved to push out the CEO, and have found some culprits already and are looking for others. They’ve reiterated Volkswagen core values of transparency and honesty, and say they’re working with prosecutors and lawyers to resolve the issues and make things right.
Should we simply take all this at face value and say it’s alright? I don’t think so.
I find it hard to believe that upper management was not involved in making these decisions. I’ve worked in engineering organizations, and know that upper management will be getting regular progress reports on key acceptance metrics. Any key metric that’s failing (like emissions that don’t meet new emissions standards) will cause upper management to ask hard questions.
It’s not that a rogue employee would have done this on his own. This sort of engineering team certainly should have every change reviewed by multiple people. These engineers and their managers will have known their new common rail TDI Diesel engines did not pass emissions standards. We know now they resolved that issue by cheating. The same engine choice was made for multiple vehicles, meaning that multiple engineering teams had to be involved in the subterfuge. The question is — At what level of Volkswagen AG was the decision made to cheat on the emissions test?
The Supervisory Board clearly says they were not involved with the decision. I just cannot believe that’s the case.
Dr. Herbert Diess, CEO of the Volkswagen Passenger Cars brand, explains: “We are working at full speed on a solution.”
In the press release dated September 22, 2015, the Volkswagen Group announced that Volkswagen Group vehicles worldwide are affected by the current issues regarding emissions.
The internal evaluation revealed that approximately five million Volkswagen Passenger Cars brand vehicles are affected worldwide. Certain models and model years of these vehicles (such as the sixth generation Volkswagen Golf, the seventh generation Volkswagen Passat and the first generation Volkswagen Tiguan) are equipped exclusively with type EA 189 diesel engines.
As previously announced, all new Volkswagen Passenger Car brand vehicles that fulfill the EU6 norm valid throughout Europe are not affected. This therefore also includes the current Golf, Passat and Touran models.
Dr. Herbert Diess, CEO of the Volkswagen Passenger Cars brand stressed: “We are working at full speed on a technical solution that we will present to partners, to our customers and to the public as swiftly as possible. Our aim is to inform our customers as quickly as possible, so that their vehicles comply fully with regulations. I assure you that Volkswagen will do everything humanly possible to win back the trust of our customers, the dealerships and the public.”
The Volkswagen Passenger Cars brand will inform all markets worldwide how many of vehicles are affected locally. We are working intensively on remedial measures in close coordination with the certification authorities. The vehicles are and remain technically safe and roadworthy.
Statement by the Supervisory Board of Volkswagen AG
The Volkswagen Supervisory Board consulted intensively on the current situation at its meeting today. There is absolutely no excuse for the manipulations which have deeply shocked Volkswagen. The company will leave no stone unturned in getting to the bottom of this, will call those responsible to account, and take the necessary actions. The first consequences in this regard were agreed upon at today’s meeting:
1. The Supervisory Board has authorized the Chairman to mandate German and US lawyers to objectively investigate and fully clarify the manipulation of emissions data of diesel engines.
2. The Executive Committee of the Supervisory Board will be charged with coordinating and safeguarding all necessary steps to monitor clarification until such time as a proposed committee commences its work.
3. With the information currently available the Supervisory Board recommended the immediate suspension of some employees. This process is already underway.
4. Matthias Müller will lead the Volkswagen Group going forward as the new CEO of Volkswagen AG. He is what the company needs now. Matthias Müller is exactly the right man at the right time to make a fresh start and to drive clarification of the current crisis that has hit our company with decisiveness and to draw the right conclusions. We expressly value his critical and constructive approach.
5. The Supervisory Board resolved to propose to the Extraordinary Meeting of Shareholders on November 9, 2015 to elect Mr. Hans Dieter Pötsch as a member of the Supervisory Board. The Supervisory Board intends to subsequently elect him as its Chairman.
Berthold Huber, Deputy Chairman of the Supervisory Board, said: “The test manipulations are a moral and political disaster for Volkswagen. The unlawful behavior of engineers and technicians involved in engine development shocked Volkswagen just as much as it shocked the public. We can only apologize and ask our customers, the public, the authorities and our investors to give us a chance to make amends.” The Supervisory Board today commissioned an American law firm to assist in further clarification and in preparing the necessary steps.
The Volkswagen Group is restructuring: Supervisory Board passes resolutions for new organization
• Brands and regions to be strengthened
• Vahland moves from Škoda to the Volkswagen brand Board of Management
• De Meo, Maier and Stackmann in new functions
• Board Member for Sales Klingler leaves the Group
• Contract with Board member for Procurement Garcia Sanz extended
The Supervisory Board of Volkswagen AG approved a new management structure for the Group and the brands as well as for the North America region today (Friday) in Wolfsburg. The interim Chairman of the Supervisory Board, Berthold Huber, commented: “The new structure strengthens the brands and regions, gives the Group Board of Management the necessary leeway for strategy and steering within the company, and lays a focus on the targeted development of future-oriented fields.”
Details of major changes:
Reorganization of the North America region / Successor Prof. Vahland
The Supervisory Board decided on the reorganization of the Group’s activities in North America. The markets in the USA, Mexico, and Canada will be combined and significantly strengthened to form a new North America region. Effective November 1, the Group’s activities in the region will be led by Prof. Dr. Winfried Vahland (58), formerly Chairman of the Board of Directors at Škoda, who in this new role becomes a member of the Volkswagen brand Board of Management. Prof. Vahland’s successor as Chairman of the Board of Directors at Škoda will be Bernhard Maier (55), until now Board Member for Sales and Marketing of Porsche AG. Michael Horn (52) remains President and CEO of Volkswagen Group of America.
Porsche brand group with Bentley and Bugatti
At Group level the management structure will be oriented even more systematically to the modular toolkits. These toolkits feature standardized technical components for each automotive vehicle segment (volume, premium, sport and commercial vehicles). Consequently, a Porsche brand group with Bentley and Bugatti will be established for the sportscar and mid-engine toolkit. The toolkit strategy will come under the even closer guidance of the Group CEO; a separate department will be set up for this purpose. The Audi brand group with Lamborghini and Ducati will be continued as will the Truck Holding, and the Power Engineering and Financial Services business lines. The volume brands Volkswagen (with principal responsibility for the modular transverse toolkit), SEAT, and Škoda will be represented by one member each in the Group Board of Management.
New Group functions for efficiency and future-oriented fields
Group functions will concentrate more closely on efficiency and future-oriented fields; organizational units, for example for Group product strategy, new business fields, cooperations and holdings, connected car activities, and CO2 steering, will therefore be set up. According to Huber, “new, strong Group functions, such as for standardization and harmonized production processes, will lay the timely foundations for efficient decision-making. We will become faster and more agile.” Furthermore, a Chief Technology Officer will analyze and, if necessary, co-steer technical developments throughout the Group as mandated by the Group Board of Management.
Upgrading of brands and regions
At the same time, existing corporate bodies, structures and processes will be streamlined at Group level, in particular by strengthening the brands and regional accountability. To that end the Volkswagen brand will introduce a management structure with four regions, each led by a local CEO with a direct reporting line to the brand Chairman, Herbert Diess.
Streamlining the Group Board of Management
The production department at Group level, until now led by Thomas Ulbrich in an interim capacity, will be abolished with immediate effect. This is one consequence of delegating responsibility to the brands and regions. Berthold Huber commented: “Going forward, the brands and regions will also have greater independence with regard to production. So it follows that they should also hold the responsibility for these activities.”
The interim Supervisory Board Chairman emphasized that “one key point is that we are scaling back complexity in the Group. In recent weeks, we have already undertaken important steps such as separating Group and brand functions.” He said the developments of the last few days had underscored the urgency of this project: “We will not lose any time. The new management model will be implemented at the beginning of 2016.” This would bring the Board greater freedom to address urgent issues concerning Group strategy, development and steering.
Further Board of Management changes
The Supervisory Board extended the contract with Francisco Javier Garcia Sanz (58), Member of the Board of Management of Volkswagen Aktiengesellschaft with responsibility for Procurement, by five years.
Christian Klingler (47), member of the Board of Management of Volkswagen Aktiengesellschaft with responsibility for Sales and Marketing and member of the Volkswagen brand Board of Management with responsibility for Sales and Marketing, is leaving the company with immediate effect as part of long-term planned structural changes and as a result of differences with regard to business strategy. This is not related to recent events. The new CEO Matthias Müller will head the Sales department at Group level in an interim capacity until further notice.
Jürgen Stackmann (54), previously Chairman of SEAT, will take over Christian Klingler’s function as a member of the Volkswagen brand Board of Management. Stackmann is succeeded by Luca de Meo (48), currently Audi AG Board of Management member for Sales and Marketing. These personnel changes become effective from October 1.
Matthias Müller appointed CEO of the Volkswagen Group
• Müller remains Chairman of Porsche AG until a successor has been found
Matthias Müller (62) has been appointed CEO of Volkswagen AG with immediate effect. This was decided by the Supervisory Board at its meeting in Wolfsburg today (Friday). Müller is currently Chairman of Porsche AG in Stuttgart. He will continue in this function until a successor has been found.
The interim Chairman of the Supervisory Board of Volkswagen AG, Berthold Huber, underscored: “Matthias Müller is a person of great strategic, entrepreneurial and social competence. He knows the Group and its brands well and can immediately engage in his new task with full energy. We expressly value his critical and constructive approach.”
Bernd Osterloh, Chairman of the Group Works Council, commented: “When it comes to leadership appointments the Volkswagen Group does not need hasty decisions. We know and value Matthias Müller for his determination and decisiveness. He does not work on his own, rather he is a team player. That is what Volkswagen needs now.”
Matthias Müller said: “My most urgent task is to win back trust for the Volkswagen Group – by leaving no stone unturned and with maximum transparency, as well as drawing the right conclusions from the current situation. Under my leadership, Volkswagen will do everything it can to develop and implement the most stringent compliance and governance standards in our industry. If we manage to achieve that then the Volkswagen Group with its innovative strength, its strong brands and above all its competent and highly motivated team has the opportunity to emerge from this crisis stronger than before.”
Matthias Müller was born in Chemnitz (Saxony) on June 9, 1953. He completed his high school education in Ingolstadt followed by an apprenticeship as a toolmaker with AUDI AG. He then studied computer science at Munich University of Applied Sciences. After obtaining his master’s degree in computer science, Müller resumed his career with AUDI AG in Ingolstadt in 1978, becoming Head of the Systems Analysis Division in 1984 and Head of Project Management for the Audi A3 in 1993. He assumed responsibility for Product Management at Audi AG, SEAT and Lamborghini in 1995.
Müller moved to Wolfsburg as Head of Product Management of the Volkswagen Group and the Volkswagen brand in 2007 and also became a General Representative of the Volkswagen Group. He has been Chairman of the Executive Board of Dr. Ing. h.c. F. Porsche AG and a member of the Executive Board of Porsche Automobil Holding SE since 2010. In his function as Chairman of the Executive Board of Dr. Ing. h.c. F. Porsche AG, Müller was appointed member of the Board of Management of Volkswagen AG effective March 1, 2015.
Matthias Müller’s current contract as a Board member of Volkswagen AG will continue to apply in his new function as CEO. This contract runs until the end of February 2020.
Matthias Müller succeeds Prof. Dr. Martin Winterkorn, who offered his resignation on Wednesday.
Statement from the Executive Committee of Volkswagen AG’s Supervisory Board
In a meeting on Wednesday, September 23, the Executive Committee of the Supervisory Board of Volkswagen AG discussed in detail the manipulation of emissions data of Volkswagen Group diesel engines and came to the following conclusions:
1. The Executive Committee takes this matter extremely seriously. The Executive Committee recognizes not only the economic damage caused, but also the loss of trust among many customers worldwide.
2. The Executive Committee agrees that these incidents need to be clarified with great conviction and that mistakes are corrected. At the same time, the Executive Committee is adamant that it will take the necessary decisive steps to ensure a credible new beginning.
3. The Executive Committee has great respect for Chairman Professor Dr. Winterkorn’s offer to resign his position and to ask that his employment agreement be terminated. The Executive Committee notes that Professor Dr. Winterkorn had no knowledge of the manipulation of emissions data. The Executive Committee has tremendous respect for his willingness to nevertheless assume responsibility and, in so doing, to send a strong signal both internally and externally. Dr. Winterkorn has made invaluable contributions to Volkswagen. The company’s rise to global company is inextricably linked to his name. The Executive Committee thanks Dr. Winterkorn for towering contributions in the past decades and for his willingness to take responsibility in this criticall phase for the company. This attitude is illustrious.
4. Recommendations for new personnel will be presented at the upcoming meeting of the Supervisory Board this Friday.
5. The Executive Committee is expecting further personnel consequences in the next days. The internal Group investigations are continuing at a high tempo. All participants in these proceedings that has resulted in unmeasurable harm for Volkswagen, will be subject to the full consequences.
6. The Executive Committee have decided that the company will voluntarily submit a complaint to the State Prosecutors’ office in Brunswick. In the view of the Executive Committee criminal proceedings may be relevant due to the irregularities. The investigations of the State Prosecutor will be supported in all form from the side of Volkswagen.
7. The Executive Committee proposes that the Supervisory Board of Volkswagen AG create a special committee, under whose leadership further clarifying steps will follow, including the preparation of the necessary consequences. In this regard, the Special Committee would make use of external advice. Further details about this will be decided at the Supervisory Board meeting on Friday.
8. The Executive Committee is aware that coming to terms with the crisis of trust will be a long term task that requires a high degree of consistency and thoroughness.
9. The Executive Committee will work on these tasks together with the employees and the Management Board. Volkswagen is a magnificent company that depends on the efforts of hundreds of thousands of people. We consider it our task that this company regains the trust of our customers in every respect.
Statement by Prof. Dr. Winterkorn
““I am shocked by the events of the past few days. Above all, I am stunned that misconduct on such a scale was possible in the Volkswagen Group.
As CEO I accept responsibility for the irregularities that have been found in diesel engines and have therefore requested the Supervisory Board to agree on terminating my function as CEO of the Volkswagen Group. I am doing this in the interests of the company even though I am not aware of any wrong doing on my part.
Volkswagen needs a fresh start – also in terms of personnel. I am clearing the way for this fresh start with my resignation.
I have always been driven by my desire to serve this company, especially our customers and employees. Volkswagen has been, is and will always be my life.
The process of clarification and transparency must continue. This is the only way to win back trust. I am convinced that the Volkswagen Group and its team will overcome this grave crisis.”
Volkswagen AG has issued the following information:
Volkswagen is working at full speed to clarify irregularities concerning a particular software used in diesel engines. New vehicles from the Volkswagen Group with EU 6 diesel engines currently available in the European Union comply with legal requirements and environmental standards. The software in question does not affect handling, consumption or emissions. This gives clarity to customers and dealers.
Further internal investigations conducted to date have established that the relevant engine management software is also installed in other Volkswagen Group vehicles with diesel engines. For the majority of these engines the software does not have any effect.
Discrepancies relate to vehicles with Type EA 189 engines, involving some eleven million vehicles worldwide. A noticeable deviation between bench test results and actual road use was established solely for this type of engine. Volkswagen is working intensely to eliminate these deviations through technical measures. The company is therefore in contact with the relevant authorities and the German Federal Motor Transport Authority (KBA – Kraftfahrtbundesamt).
To cover the necessary service measures and other efforts to win back the trust of our customers, Volkswagen plans to set aside a provision of some 6.5 billion EUR recognized in the profit and loss statement in the third quarter of the current fiscal year. Due to the ongoing investigations the amounts estimated may be subject to revaluation. Earnings targets for the Group for 2015 will be adjusted accordingly.
Volkswagen does not tolerate any kind of violation of laws whatsoever. It is and remains the top priority of the Board of Management to win back lost trust and to avert damage to our customers. The Group will inform the public on the further progress of the investigations constantly and transparently.
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