I have two reasons for taking a very close interest in the scandal over Volkswagen’s rigging of its diesel engines to evade regulatory scrutiny. The first is that I have spent my entire career working in regulatory compliance and, while my experience has been confined to the broadcasting industry, I take a keen interest in compliance in other fields. There is so much you can learn about how organisations conduct their risk management and compliance management that you can then apply in other settings. And there is no better learning experience than catastrophic failure – particularly if it’s someone else’s. A great deal comes down to issues of human psychology and corporate culture and these things, in my experience, tend to matter more than any formal compliance mechanisms, systems or processes that might be in place – and that seems to be true whenever there is a major compliance failure.
My second reason for following this story closely is that I am the owner of two Volkswagen cars, one of which – a 2010 diesel engine Golf – now appears very likely to have the ‘defeat device’ that is the cause of all the furore programmed into it.
I wanted to put down some initial thoughts on the VW scandal, to see if my experience of regulation and compliance in an entirely different industry (and much much smaller organisations) can be applied with any value to this situation. I have no knowledge of how cars are designed and built and no knowledge of the organisational structure of Volkswagen (or any car manufacturer). I have no inside knowledge of any aspect of the current scandal, and can only go by what has been published either by parties directly involved or by the media and other commentators.
The story so far
I took some time today to read two key documents – they are, thus far, the only source documents available on this scandal. They are short and worth reading. This is the Notice of Violation from the US federal Environmental Protection Agency (EPA) to Volkswagen, dated 18 September 2015. And this, in similar vein, is the letter to Volkswagen from the California Air Resources Board (CARB). Both are addressed to David Geanocopoulos, who is identified as VW America’s Executive Vice President for Public Affairs and General Counsel (i.e. their senior in-house lawyer and lobbyist) based in Herndon, northern Virginia; and Stuart Johnson, who is identified as VW America’s General Manager in the Engineering and Environmental Office in Auburn Hills, Michigan where VW North America is headquartered. The EPA letter is copied to CARB; to Walter Benjamin Fisherow at the US Department of Justice – described by The Washington Post in 2009 as “a seasoned litigator and environmental warrior”; and Stuart Drake at the law firm Kirkland & Ellis representing VW – who, according to The Guardian, represented BP after the Deepwater Horizon oil disaster. According to Kirkland’s own website, Drake specialises in industries “subject to air pollution control” such as by the EPA and CARB, and he has represented General Motors and Toyota. Kirkland quotes one guide to business lawyers as describing Drake as “a fearless advocate for his clients”. The CARB letter to the VW is copied to the federal EPA and the Michigan EPA.
Both letters are filled with highly technical language relating to car engine design as well as environmental protection legislation. They are light on the details of the agencies’ investigations and their findings. We do, however, learn a few key facts.
The basic problem, as has been reported widely and in great detail, is that a large number of VW’s diesel cars – about 500,000 of them in the US, manufactured between 2009 and 2015 and all built with the same diesel engine – included in their electronic systems computer code whose purpose was deliberately to determine when the car was being tested for nitrogen oxide (NOx) emissions and, only at times when the car was being tested, alter the performance of the engine so as to reduce drastically those emissions. This ensured that any regulatory vehicle test would give a wholly misleading finding as to level of the car’s NOx emissions – giving a figure that, by the EPA’s reckoning, was some 10-40 times lower than could actually be achieved in normal driving conditions.
The two letters sketch out a basic timeline. The possibility of a problem first came to light in May 2014 when West Virginia University’s (WVU) Center for Alternative Fuels, Engines and Emissions (CAFEE) published a report commissioned by the International Council on Clean Transportation (ICCT). CAFEE and ICCT, apparently, would routinely conduct emissions tests on vehicles and their report in May 2014 revealed unusually and unexpectedly high NOx readings from two cars: the 2012 VW Jetta and the 2013 VW Passat. The EPA and CARB began a dialogue with VW. The EPA writes:
“Over the course of the year following the WVU study, VW continued to assert to CARB and the EPA that the increased emissions from these vehicles could be attributed to various technical issues and unexpected in-use conditions.”
CARB gives more (highly technical) detail on these technical issues which, as far as I am able to understand them, appear to relate to software calibration of two particular engine components relating to emissions control.
VW conducted a voluntary recall in December 2014. According to the EPA, “testing showed only a limited benefit to the recall.” CARB observes that “the recall calibration did reduce the emissions to some degree but NOx emissions were still significantly higher than expected.”
CARB conducted more in-depth tests, designed to pin down the problem. They devised a new form of testing which, presumably, hadn’t been anticipated when the ‘defeat device’ had been installed in the engines. These tests found that the engine in question simply wasn’t controlling NOx emissions in the way that was required to bring emissions within regulatory limits. The EPA’s letter gives the clearer explanation of what happened next:
“None of the potential technical issues suggested by VW explained the higher test results consistently confirmed during CARB’s testing. It became clear that CARB and the EPA would not approve certificates of conformity for VW’s 2016 model year diesel vehicles until VW could adequately explain the anomalous emissions and ensure [sic] the agencies that the 2016 model year vehicles would not have similar issues. Only then did VW admit it had designed and installed a defeat device in these vehicles in the form of a sophisticated software algorithm that detected when a vehicle was undergoing emissions testing.”
According to CARB, this admission was made by VW during a meeting between VW, the EPA and CARB on 3 September 2015, fifteen days prior to the two published letters.
A certificate of conformity (COC) is a document issued by both state and federal authorities and a vehicle cannot be sold in the US without a COC. The COC confirms that the vehicle satisfies federal and state environmental protection regulations. According to the EPA, it was only when it became clear that VW’s 2016 diesel models would not obtain their COCs – and so could not enter the US market – that VW revealed the presence of the ‘defeat device’ in the engines.
Since the EPA and CARB letters, VW has made a number of public apologies; it has said that it is investigating the matter internally with great speed; it has revealed that about 11 million cars may be affected worldwide; its share price has dropped, as the estimated potential liability – through regulatory penalties and recalls – runs into the tens of billions of dollars; and its chief executive, Martin Winterkorn, has resigned in the face of a collapse in confidence from VW’s board and major investors.
Conspiracy, not cock-up
Let us assume that VW is sincere in its claim to be investigating the situation thoroughly and equally sincere in its commitment to make public its findings. Let us also assume that the board of directors and at least some of the senior management team at VW (including, quite possibly, the chief executive) were unaware of the defeat device until some time around the meeting of 3 September. At some point either before or very soon after that meeting, whoever attended the meeting on behalf of VW (and we do not know who that was) would, I expect, have notified the senior management team that – pardon my French – the shit was about to hit the fan. I would imagine that the internal investigation would have been launched within a very few hours of that message being sent.
Because I know nothing about car design and manufacture, or about VW’s organisation, I cannot predict what the outcome of VW’s investigation might be. But I can make some educated guesses about what appears to have happened, and about the questions that the investigation is seeking to answer.
For the purposes of this exercise, I’m going to make some guesses as to how car engines are designed. My guess is that a car engine is treated by a car manufacturer as a major project, with its own large dedicated team working on it over several years. I would expect that this large team would be organised into a number of smaller specialised sub-groups, each focusing on different aspects of engine design and performance. I imagine at least one sub-group was dedicated to the engine’s computer control systems; at least one other was perhaps focused on emissions control, although this would probably have been a factor in a multiplicity of aspects of the engine. For the engine to work, no sub-group could work in isolation – there would have been close co-operation between groups and careful co-ordination of the whole team.
The Type EA 189 engine must have been a very significant project for VW. Due to go into 11 million vehicles over 6 years across a number of different models in the VW and Audi range (the EPA lists seven), the engine would have been the keystone of VW’s global product strategy for an important segment of its business. Failure to deliver for the 2009 models an engine that offered both superior performance for drivers and compliance with the full array of environmental standards around the world would have been a huge blow to the group’s global strategy, as well as being highly disruptive to VW’s financial planning. The pressure would be on – but this would probably be usual within the organisation. There’s always going to be a lot of pressure.
From this speculation on the internal working of VW – about which I actually know absolutely nothing – I draw two conclusions about what I imagine any investigation is going to find. Both are almost statements of the glaringly obvious.
The first is that what happened was deliberate, not accidental. Sometimes, compliance failures happen by mistake, often due to working under extreme pressure and doing something that was unintended. This does not appear to be one of those times. The level of complexity of the failure – what the EPA described as “a sophisticated software algorithm”; the level of effort and co-ordination apparently involved in its execution and deployment; and the scale of its deployment (11 million cars over 6 years) all suggest to me deliberate and willful action by someone within Volkswagen. Someone made the decision to implement the defeat device, carried through on that decision by having the device designed, coded and installed, and then additionally made the decision to conceal its existence from regulators and, quite likely, some of their own senior colleagues.
My second conclusion is that this was a conspiracy – in the strict meaning of the term, namely that it involved multiple people, all working together towards the same objective. I consider it unlikely that a lone ‘rogue’ individual created and installed the defeat device. I reach this conclusion for two reasons. The first, again, is the complexity and scale of the defeat device. I imagine it would have taken an array of skills and know-how to accomplish – from coding, to knowledge of all the factors affecting emission levels, to detailed knowledge of vehicle testing conditions. While it is possible that one person might possess all of these skills and knowledge, to the requisite level of expertise and detail, I think it is more likely that this was a team effort involving a number of specialists in the relevant fields. The other reason I think this was a conspiracy is the question of motivation. I think that lone actors tend to be motivated by self-interest, by personal gain. The primary beneficiary of VW’s defeat device was VW itself – the device ensured they could launch a range of apparently compliant vehicles that they could sell to environmentally-conscious consumers and propel themselves to the status of world’s biggest car manufacturer. This strikes me as a strategic decision, designed to increase VW’s global competitiveness. I accept that there might have been an individual who feared losing their job if the team failed to deliver a compliant and marketable engine, and that’s a pretty powerful motivating force. But I’d be surprised if a company like VW would hold an individual personally responsible for that kind of obviously collective failure. I’d equally be surprised if any individual were capable of making such a significant alteration as a defeat device to such an important product as the Type EA 189 without detection by anyone else in the company.
Who knew what and when?
So, the big unanswered question right now is: who knew what and when? Who made the decision to implement the defeat device? Who was put in charge of its execution? Who was in the loop?
What about the people who represented VW at all those meetings with the EPA and CARB? Did they know? Was the December 2014 recall just a ruse – and, therefore, another example of VW deceiving the regulators? Or were those people all kept in the dark, and thus as baffled as the regulators about why their cars were failing these new inspections? Was it only after CARB published its test results in August 2015 that those individuals were brought into the know?
Again, even with no knowledge of how VW is organised or how it operates, some intelligent guesswork is possible. Assuming my suppositions so far are vaguely accurate (not a very safe assumption, I accept) it would seem likely that someone was put in charge of overseeing the implementation of the defeat device. That someone would have had to have the authority – both organisationally and personally – to ensure that their instructions were followed by others, and that any qualms or unease about the compliance questions would be overcome. I would guess that there wouldn’t be too many people who fit that description, and that the key individual(s) were identified by VW’s internal investigation within 48 hours of its launch, probably much less. Someone in Auburn Hills has probably been absent from work for a couple of weeks or more and they’ve been bringing their own lawyer to meetings with their future ex-employer and the lawyer’s job is to shift as much responsibility for the whole affair away from their client and onto VW.
Those who are two or three management layers above that person will also not be enjoying a lot of job security at the moment. If they knew what was going on, they will be held partially culpable for it. If they didn’t, the effectiveness of their management oversight will be called into question. Either way, they will probably take their share of responsibility for the scandal and, if I’m right, be clearing their desks very soon. For similar reasons, expect further heads to roll in the senior management team.
I think you really would need to know about VW’s organisation and about how car engines are designed to know how contained this conspiracy might have been. The question is: what’s the smallest number of people who must have known about the defeat device in order to get it made and deployed, but who could have kept it secret from everyone else, including their own colleagues and bosses?
A word on corporate culture
I don’t doubt that Winterkorn was sincere when he said that “the irregularities with these engines contradict everything for which Volkswagen stands”; or when he said that “we do not and will not tolerate violations of any kind of our internal rules or of the law.” I don’t know what the corporate culture is within Volkwagen nor how it is shaped and influenced. However, I believe, in part from my own experience in regulation and compliance, that conspiracies only survive in cultures that tolerate them; and a culture that has little genuine respect for regulatory compliance is more likely to see a major compliance failure.
Let me elaborate. Successful conspiracies are extremely rare – which is why we regard ‘conspiracy theorists’ are being so potty. They fail because they rely on the absolute co-operation and complicity of everyone involved. Everyone has to be equally motivated and equally in agreement with the objectives of the conspiracy. It only takes one person to choose not to co-operate – or, worse, turn whistle-blower – and the whole thing collapses into failure. What’s remarkable about what happened at VW, assuming that there were multiple people involved, is for how long the conspiracy was effective. That suggests to me a culture that, Winterkorn’s beliefs to the contrary, held regulatory compliance to be of secondary importance.
In a culture of compliance, everyone in the organisation regards regulatory compliance as an essential expectation – a vital aspect of their professionalism. I have seen organisations that lack this culture. They are sometimes organisations with well-resourced compliance departments and extensive compliance processes. Their failure to establish a culture of compliance leads to compliance failures in spite of the effort they believe they have made to avoid them. In these organisations, compliance is seen as separate from the core functions of the business – someone else’s (the compliance department’s) job – rather than integral to it. The compliance team is a frustration to the rest of the business, their elaborate processes seen as bureaucratic, cumbersome, and an insult to the professionalism of everyone that has to work with them.
In organisations that become highly focussed on a very specific objective – usually around volume of sales – employees become unconsciously motivated to cut corners on everything not conducive to that short-term objective. Product quality, customer service, after-sales support, product safety – anything that wasn’t directly helpful to achieving that immediate goal might find itself relegated to secondary importance and vulnerable to compromises and corner-cutting. Compliance – often perceived as an obstacle to achievement – can easily become inimical to reaching that sales goal. If there is no established culture of compliance – and so compliance is not just seen as an obstacle but an unnecessary obstacle – then you have a culture in which you can conduct a conspiracy to deceive your regulators with minimal risk of anyone inside the company sticking their neck out to question you, let alone stop you.
VW was, by some accounts, very focussed on becoming the world’s number one car manufacturer. All the incentives within the company would have been geared around that objective. Successful delivery of the Type EA 189 may well have been a core element of the ‘get to number one’ strategy. Regulatory compliance may have become a nuisance, and one that no one was incentivised to take seriously.
Finally, the question will undoubtedly arise as to how much this cultural attitude, to the extent that it applied in Volkswagen at all, was unique to it. Journalists and regulators are already asking if there might be a broader, industry-wide problem here. Some reporters are even beginning to claim that they have evidence of other manufacturers installing defeat devices similar to VW’s (but, clearly, I’m not going to repeat those claims given the high likelihood that some or all might be libellous).
BBC Newsnight editor Ian Katz tweeted earlier today a report by Technology Editor David Grossman made, interestingly, in December 2014. It’s about how car manufacturers manipulate emissions tests and it includes an industry expert (who, presumably, was named in an on-screen caption when the piece was broadcast but this is missing from the video posted online) who details what you take from the piece to be widespread industry practice. He talks about special tires run at very high pressure, expensive engine lubricants and removing the offside wing mirror to reduce drag. Then he says this:
“The car is actually able to detect that it’s being tested because it’s on a standard test cycle and they can use that to put the car into a mode in which the engine is ultra efficient or to reduce the sort of pollution that’s coming out of the exhaust pipe during the test.”
“Wait, wait, wait,” Grossman interrupts in disbelief. “The car will know it’s being test, and will therefore perform in a completely atypical way?”
As for my own car, I will have to see what happens. I have no way of knowing if it has a Type EA 189 engine or what might happen to it if it does. I bought it at a time when we all thought diesel cars were greener than petrol – because of the fuel efficiency and reduced CO2 emissions. Knowing now that diesel cars are not remotely green, and that my VW in particular may be significantly less green than I had been led to believe, I’m feeling increasingly embarrassed to be driving it. I can’t afford to replace but, one day, when I do, I doubt I will feel much enthusiasm for another Volkswagen. It may turn out that the entire company has a defeat device installed.