Volkswagen Caught Equipping 11 Million Cars with Software to Cheat Emission Tests

September 25, 2015

On Friday, September 18, 2015, the Environmental Protection Agency (“EPA”) sent a Notice of Violation to Volkswagen Group of America, Inc. (“Volkswagen”) stating that, in its ongoing investigation, the EPA has determined that several models of light-duty, diesel Volkswagen cars manufactured from 2009 to 2015 are in violation of federal emission standards. Later that same day and based on the EPA’s notice of violation, the Obama administration ordered Volkswagen to recall nearly 500,000 cars because the carmaker had installed illegal software to fake compliance with emission standards.
According to the EPA’s notice, Volkswagen installed software on the cars’ electronic control module that could sense when the vehicle was being tested for compliance with EPA emission standards. The software is known as a “defeat device,” which operates by sensing when the car is not being tested for emissions and consequently reducing (or “defeating”) the car’s emission control. For simplicity, the EPA referred to the defeat device as the “switch” in its notice. The switch checks inputs such as the position of the steering wheel, the vehicle’s speed, and the duration of the engine’s operation to specifically monitor the factors of the federal emission test procedure used by the EPA. In other words, when the switch sensed the car was undergoing emissions testing, it would calibrate the car to run in a mode specific for testing which increases the effectiveness of the emission control system and qualifies the car for certification. However, under regular vehicle operation, the switch would activate and calibrate the car to operate in its normal mode with vastly lower emission control. According to the EPA, this reduced emission control resulted in a significant increase of harmful nitrous oxide released “by a factor of 10 to 40 times above EPA compliant levels.
In what was likely an attempt to reduce the sting of the EPA’s continuing investigation, Volkswagen admitted on Tuesday, September 22, 2015, that 11 million of its diesel cars worldwide have been equipped with software designed to cheat emissions tests. The company followed with a statement that it would set aside €6.5 billion, or $7.27 billion, to win back the trust of its customers and pay for the affected vehicles’ necessary servicing. Despite the good faith act of reparation, however, Volkswagen could face tremendous fines totaling up to $18 billion in the United States alone. In addition the carmaker may face fines in other countries which are now investigating Volkswagen cars for noncompliant emission control. Perhaps most significant of all, Volkswagen executives could be criminally charged for the company’s fraudulent use of the software.
Since the EPA’s notice, the pressure on Volkswagen has been rapidly mounting.

German Chancellor Angela Merkel has urged Volkswagen to restore confidence in the company, normally regarded as a paragon of German engineering, as soon as possible.

In wake of the enormous pressure for change, Volkswagen’s Chief Executive Officer Martin Winterkorn resigned on Wednesday, September 23, 2015. Winterkorn had been CEO of the company since 2007, and under his administration, the company doubled in sales and nearly tripled in profit. The carmaker has not yet named a successor, aiming to do so with a full board meeting on Friday, September 25, 2015.
Financially, Volkswagen’s shares are down more than 30% since the crisis went public, wiping out around $28 billion of the company’s market value. Advertisements in the U.S. featuring the company’s iconic “clean diesel” theme have been stalled while the company decides whether to pull the entire ad campaign. Sales of the affected 2016 models have been completely frozen in the U.S. until the company’s new models comply with EPA certifications. Though Volkswagen is planning to continue selling in the EU, where emission requirements are less stringent, countries such as Germany, France, Italy, and South Korea have begun their own Volkswagen investigations.
Though there is no immediate resolution to Volkswagen’s crisis, perhaps complete transparency from the company can help resolve the scandal as soon as possible and salvage the carmaker’s brand in the eyes of the public. The crisis goes beyond just the company, however. The repercussions of Volkswagen’s purposeful evasion of the law will potentially affect the integrity of the German auto industry at large. Market analyst Dave Madden states that the carmaker “sector as a whole will be a sector to swerve until there is a conclusion to this saga.” The Deutsche Bank, Germany’s largest bank, warned clients to expect “a potentially more sustained loss in brand value and prolonged recovery period ahead in the U.S.” Both financial investors and consumers hope to see Volkswagen do the right thing and offer total transparency to expedite the ongoing, international investigations. Only then will the consequences be dealt as necessary and allow Volkswagen, the European automobile industry, and Germany’s economy to begin recovering as soon as possible.