Volkswagen-Car-LogoThe power of academic research

In 2013, three faculty members and two graduate students from West Virginia University, who are also affiliated with the University’s Center for Alternative Fuels Engines and Emissions, began working on a research project with the objective of determining the relative performance of European diesel-engine cars sold in the US. The project was funded by International Council on Clean Transportation (ICCT), a nonprofit European research organization.

The researchers selected BMW diesel-engine X5 and two Volkswagen diesel-run cars—Jetta and Passat. One innovation of their research design was that, distinct from the standard emission tests that relied on stationary test-bed tests, the researchers measured pollutants created while the cars were being driven. They discovered a puzzling anomaly. Contrary to the BMW emission test results, which were very similar when driven or stationary in laboratory tests, the two VW cars were emitting far more pollutants when they were being driven. The West Virginia researchers and ICCT forwarded their findings EPA in May 2014.

EPA and emission-gate scandal

This month, the EPA formally charged Volkswagen of intentionally violating U.S. air-pollution rules by installing software on nearly 500,000 U.S.-sold cars to evade government emissions testing, standards and requirements. According to the EPA, Volkswagen deployed sophisticated software algorithms on some cars that detects “when the car is undergoing official emissions testing, and turns full emissions controls on only during the test.” The effectiveness of the cars’ emissions-control devices is “greatly reduced during all normal driving situations.” The Volkswagen software is a “defeat device” as defined by the Clean Air Act, says the EPA.

The accusations concern four Volkswagen diesel cars—Jetta, Beetle, Golf and Passat—and the Audi A3. Eventually, Volkswagen acknowledged that they sold nearly 11 million diesel-engine cars world-wide containing the same emission software tested by the US researchers.

Race to become #1

Five years ago, Martin Winterkorn, then CEO of VW had laid out an aggressive growth plan with the intention of racing to the top of the global auto industry by 2018 surpassing both General Motors and Toyota. By 2013, VW had the third largest global market share behind Toyota and GM. Winterkorn then concluded that “Volkswagen would be the world’s most profitable, fascinating and sustainable automobile manufacturer.” Forbes (April 17, 2013) prophesied, concurring with Winterkorn, that “Volkswagen Would Rule The World.”

Germany politics

In Germany, nearly one in seven people earn their living, directly or indirectly, from auto making. The automotive industry is the most important driver of the German economy. Volkswagen has strong interconnection with government. The company is based in the state of lower Saxony, which owns a 20% stake in the company and has two supervisory board seats. Many high-ranking politicians with tight links to Volkswagen have emerged from lower Saxony including former Chancellor Gerhard Schröder. He sat on the board of Volkswagen in the 1990s.

What are the consequences of the emission-gate scandal?

• Martin Winterkorn resigned as the CEO of Volkswagen AG. However, he could be entitled to severance compensation of up to $66.9 million, depending on how the company calculates his severance pay.
• The company declared that it would record a €6.5 billion ($7.27 billion) charge to earnings.
• Since the scandal broke, the stock price has declined by a whopping 40% (E170 to E107) and the worst might not be over yet. Thus far, shareholders have lost nearly 28 billion euros.
• Based on the stock market reaction, the charge taken by VW may not be sufficient to combat various lawsuits, government sanctions, and penalties.
• Several auto stocks, especially those in Europe, have been adversely affected.
• Some countries are considering a ban on VW cars

The stock market often attaches lofty valuations for companies with unusually high growth or those with large market shares. The emission-gate scandal is a solemn reminder that the stock market is equally brutal in punishing the fallen.

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