Thursday, December 15, 2016

On the VW TDI "Scandal"...



By now you are well aware of the Volkswagen “TDI Scandal”: In September 2015 VW got caught by a West Virginia University lab[1] cheating on its emissions testing procedures for 2009 – 2015 VW 2.0L TDI-equipped cars. Simply put, the EPA accused VW of putting code in its ECU to recognize that the car was being officially tested by the EPA and adjust the engine appropriately to pass the tests[2]. However, when the car was being driven normally by the consumer, the ECU code would revert to different emissions levels to improve drivability and fuel economy.[3] The result was increased emissions of NOx, claimed by the EPA to be “of 10 to 40 times above EPA compliant levels”.

VW could have addressed this by the addition of “selective catalytic reduction”, or SCR, which involves injecting urea into the exhaust; this is what they did on 2016 and later models. However, doing so affects the packaging of the components (tank, heater, mixer) in the smaller vehicle and around the suspension components and that, of course, costs extra money and intrudes into interior space. Instead, in the mid-2000s VW worked on an alternative called “lean NOx trap” or LNT, which uses a catalyst to absorb and store NOx so it doesn’t escape into the atmosphere[4]. It costs less and uses less space, but the downside is reduced fuel economy. VW apparently didn’t initially get it right and delayed delivery of TDI  cars through the summer of 2008. But VW finally announced that they figured it out and the 2009 cars were eventually released. Now we know how they did it.

One can debate the final source of that decision – VW managers are pointing fingers at “rogue engineers” and vice versa – but ultimately that die was cast, placing Volkswagen in its current situation.

This past September a resolution was agreed to in Federal court: an estimated $14.7 billion in buybacks, repairs, fines, and punitive damages. Volkswagen has agreed to either buy back or repair all affected VW TDIs; buybacks will be at the wholesale value as of immediately prior to the public release of the  find (values of TDIs plummeted on the news) plus $5100.[5] As of yet there is no approved “fix” for the emissions issue but if one is found and the owner chooses that option, they will receive a $5100 “we’re sorry” check.

While no one is debating whether VW cheated the tests – they clearly did – missing in the discussion is discussion of the regulatory limits to which they’re tested: are these limits reasonable to begin with? I've yet to find any supporting evidence that the 2009 and later Environmental Protection Agency regulations for which VW did an end-run are actually effective in, well, protecting the environment. These same cars meet the emissions regs in other parts of the world; EU regs, for example, are much more focused on big-picture environmental goals. Their standards push fuel efficiency and limit CO2 emissions; in the USA it's all about acid rain (NOx), smog, and health impacts, which hurts fuel efficiency.[6] VW’s cheat “resolved” the NOx problem.

As Eric Peters wrote in his blog last June:
It is not enough that the “affected” VW cars would have easily met all the standards in place circa five years ago – standards that were already extremely strict. Most people are not aware of the fact that since the 1990s, harmful exhaust emissions have been reduced to almost nothing; that for the past ten years at least, EPA has been chasing fractions of the remaining 3 or so percent of what comes out of a new car’s tailpipe that’s potentially an issue, air-quality or health-wise.
At some point – and we’ve arguably passed it – we’ll either have to accept that internal combustion will never be 100 percent ‘clean’ but that 97.5 percent’“clean’ is clean enough – or internal combustion will have to be outlawed.[7]

Are our laws tainted with political bias with the implied intent to limit diesels (and other internal-combustion engines) in the passenger market? That theory is supported further by secondary requirement of the Federally-approved VW resolution: as part of the decree, VW is mandated to "direct $2 billion of investments over a period of up to 10 years into actions that will support increased use of zero emission vehicle (“ZEV”) technology in the United States, including, but not limited to, the development, construction, and maintenance of zero emission vehicle-related infrastructure."[8]

So, in effect, as part of VW’s penance, the Feds are mandating that (one of?) the largest automakers in the world "invest" billions of dollars into EV technology. Any guess how that's gonna work out for all the others that have to compete against this worldwide automotive Goliath? Expect Volkswagen to tout its new religion of “clean electric technology” at a dealership near you.

Another environmental concern with the Federal decree is disposition of the bought-back vehicles. Obviously, these vehicles cannot be re-sold until they are fixed, assuming a fix is ever found (I don’t expect VW can fix these engines to the Feds’ and CARB’s satisfaction in a reasonably economical manner without significantly hurting performance, economy, and interior space. And even if it happens the “fix” will be expensive and may not even resolve the issue.[9]) More troubling, the Feds will not even allow VW to export ‘un-fixed’ cars to a market where they do meet the emissions regulations! I find that ridiculous, given how clean these engines actually are; why not force VW to do a “Cash for Clunkers” swap in Delhi or Mexico City where old-vehicle-diesel pollution is killing people, and in the process improve air quality in both locations?[10] I‘d not be surprised if those vehicles actually cleaned the air as they drove around!

Instead, these ‘un-fixed’ returned vehicles are going to be scrapped; well, per the decree, “rendered inoperable by removing the vehicle’s Engine Control Unit (“ECU”) and may be, to the extent possible, recycled to the extent permitted by law.” At least they moved away from the proposed decree’s requirement of punching a 3” hole in the side of the engine blocks and bisecting the frames in at least two locations…but consider the environmental damage of these buyback/salvage cars: the environmental costs of delivery to dealership, from dealerships to staging areas, drainage and storage of fluids, crushing, sorting, recycling, and landfills. And then there’s the environmental cost of producing all the new replacement cars; it’s been said that the buyback might be environmentally worse than the crime.[11] Can’t we just leave the cars on the road to live a normal life cycle and plant a bunch of trees instead (and maybe give Al Gore a Tiguan)…? In aggregate, if it's worse for society than just letting them be then why are we doing that?

Why indeed: revenge? Vengeance? $14.7B for ‘crimes against the environment’ (compare that to fines given to Takata (airbags), Toyota (accusations of unintended acceleration), and GM (key/ignition failures), things that actually killed people). You can (and should) crush VW's lawlessness – and send a message to the industry – through forcing compliance and significant fines. But if you crush vehicles and thus overall societal and environmental value in the process you have failed in the overall endeavor. I don't think that’s supposed to be the intent, but don’t I expect our "leadership" to take that into consideration.

So what now? Well, I suggest VW will eventually make situation this whole for the majority of affected TDI owners. In December 2015 VW offered a $1000 TDI Goodwill Program ($500 VISA gift card, $500 VW dealership credit, 3 years roadside coverage). It has agreed to buy back all affected vehicles at reasonable trade-in prices plus a $5100 “we’re sorry” check. Go to vwdieselinfo.com and vwcourtsettlement.com to learn more. Alternatively, owners can wait for a fix to be developed at which point the car could be fixed and the owner will receive that $5100 compensation. Note that owners have until September 1, 2018 to make a decision.

As an owner of one of the affected vehicles – a 2010 Jetta TDI Sportwagen – my initial reaction upon learning of this was “whoa!” As a racer constantly looking for rules loopholes,I followed that up with a “hah, that’s clever!” As a citizen, I’m more concerned about the reality of these emissions regulations and environmental effects. In the end, it seems to me that these regulations, and the subsequent decree, are designed for a singular purpose: to get the oil-burners off the road and replace them with electric vehicles. As a diesel fan (I also have a Ford Excursion diesel), I am upset that Volkswagen pulled this end-run and has, in a lot of ways, walked right into a trap set for passenger car diesel specifically and internal combustion engines as a whole. Volkswagen has announced they will no longer sell diesel-powered vehicles in the United States and with limited exceptions other manufacturers have clearly decided this is not the market for their diesel options. This is unfortunate.

For our part, we are in no hurry to turn in our car. We enjoy the vehicle, it continues to serve us well (just did a 3500-mile roundtrip to visit family, swallowed everything we needed plus a large dog in a crate). Further, given VW’s agreement, as long as we do not put more than 1,042 miles per month on average on the car, the buyback offer will not decrease (and if we do, it’s at about $35/5000 miles) so it’s fully depreciated. Also, as long as the vehicle is “operable under its own 2L TDI power” it is eligible for buyback, so even if the vehicle is totaled by the insurance company but still drivable, we can get our full VW compensation (so maybe we save some money by dropping collision insurance?) Emissions are covered under extended warranty as are some key high-failure items (e.g., exhaust flap, high pressure fuel pump, others). Finally, this older vehicle is cheaper to insure and property taxes are significantly lower.

I suppose we could always decide to do nothing; after all, no one is going to come to our home and confiscate our car (right…?) However, it remains to be seen how states will handle emissions testing  and registration on affected vehicles (a table of all affected VINs has been provided by VW and released by the courts, so it’s possible that states with emissions testing may choose to not re-register TDIs unless provided proof of repair). Maybe there will be a burgeoning TDI market in Montana?

Finally, another part of the Federal decree is that VW must either repair or buyback 85% of the affected vehicles or it will face a fine of $85M per 1% of the fleet it misses, or about $17,500 per vehicle. I’m guessing at that point they’ll be “highly motivated” to cut some deals on new cars…you just never know.

So, overall, it just makes rational sense to continue driving it until September 2018. There's truly no downside other than you don't get to buy a new car. Maybe a “fix” will come, maybe it won’t. And if it doesn’t we’ll surrender the car back to Volkswagen in 2018 for a big check, and look into replacing it with one of their fuel-efficient turbo gasser wagons (it is highly unlikely to get replaced with an electric vehicle). Or, maybe we’ll pocket the check and I give my wife the GTI while I daily-drive my V8-diesel-powered Ford Excursion...how's that for unintended consequences/perverse incentives...?

One of the most important lessons I learned in B-school was not about spreadsheets or numbers, or forecasts or financial documents, it was that “corporate culture comes from the top”. We had many a conversation about failures of companies that resulted from the corporate culture that the leadership created, either intentionally or accidentally. Values and mission statements hung on the wall are nice, and look great in company documents, but how you live them day-to-day has a much greater affect. History will decide who/what/when this all came about; expect a movie starring Matt Damon soon.

I sure hope that works out for the rest of us.


[1] http://www.npr.org/2015/09/24/443053672/how-a-little-lab-in-west-virginia-caught-volkswagens-big-cheat
[2] https://www.epa.gov/vw
[3] http://www.nytimes.com/2015/09/19/business/volkswagen-is-ordered-to-recall-nearly-500000-vehicles-over-emissions-software.html
[4] http://www.pbs.org/wgbh/nova/next/tech/volkswagen-diesel-emissions/
[5] https://www.vwdieselinfo.com/
[6] http://voxeu.org/article/diffusion-european-diesel-automobiles
[7] http://ericpetersautos.com/2016/06/21/measuring-cost-vw-cheating-scandal-far/
[8] http://www.cand.uscourts.gov/filelibrary/1776/Partial-Consent-Decree.pdf
[9] http://blog.caranddriver.com/vws-tdi-solution-could-cost-10-billion-and-not-fix-the-problem/
[10] http://www.accessmagazine.org/articles/spring-2011/cash-clunkers-environmental-impact-mexicos-demand-used-vehicles/
[11] http://www.thetruthaboutcars.com/2016/04/volkswagens-buyback-might-worse-environmentally-crime/

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