Why VW still has not fully confronted its diesel scandal past

Growing up the son of a mechanic in a small German town near Audi’s plant in Neckarsulm, Bernhard Jung began teaching himself to drive at the age of 10 in an empty junkyard with scrap-ready cars barely worth more than the fuel still in the tank.

“Having my parents take away my driving privileges for a week was far worse than losing my television rights,” he recalled of his times behind the wheel of models such as the Volkswagen K70 and NSU Prinz.

As a kid his father showed him how to employ electricity for torque after hooking up a windshield wiper motor with a 12-volt cell to the front wheel of his bicycle.

Now an adult, Jung is among the inaugural pre-bookers set to receive a special edition version of the battery-powered VW ID3. He is due to take delivery in mid-September -- almost five years to the day since the U.S. government uncovered a decade-long diesel-emissions fraud.

The Golf-sized electric vehicle symbolizes CEO Herbert Diess' attempt to put the scandal behind VW Group. To restore the automaker’s reputation, he will require the help of loyal customers such as Jung and more than 20,000 others like him who bought a car they had never taken for a test drive.

"We need emissions-free mobility that doesn’t come at the cost of a compromise," said the 49 year old, who sold his auto dealership in Sinsheim nearly three years ago and now invests in real estate. "This car could be the breakthrough everyone has been waiting for in Europe’s volume segment."

Green production

No car among the roughly 350 models offered by the Wolfsburg-based group better encapsulates what management calls "New Volkswagen."

Fully upgradeable, capable of over-the-air updates and equipped with a head-up display that uses augmented reality, the ID3 is the first affordable, all-new zero-emissions car for the masses to come out of Germany. The hatchback even got plugged by U.S. Commerce Secretary Wilbur Ross, who unwittingly advertised the car over his social media account.

The ID3 is also the first car claiming to be produced without any net new CO2 emissions because of stringent use of renewable energy and the purchase of carbon offsets.

The eastern German city of Zwickau, where the ID3 is manufactured, was once famous for building the heavily polluting Trabant.

Converted into an EV production hub for the entire group, the factory is now home to VW’s most technologically advanced car to date.

The origin of the ID3 is inextricably entwined with the diesel scandal, which erupted on Sept. 18, 2015, when U.S. regulators went public with their accusation that VW had manipulated engine management software to cheat diesel pollution tests.

Instead of an expected contract extension, then-VW Group CEO Martin Winterkorn resigned in disgrace days later along with a number of senior engineers.

Within a few weeks, VW executives approved development of a high-volume EV platform known by its German acronym MEB, in which it has spent about 7 billion euros. VW Group is now investing an additional 33 billion euros through 2024 into a range of zero-emissions cars. One-third of that is earmarked for further ID-named models from the VW brand such as the ID4 crossover and the ID Buzz minivan.

Diess has staked his company's reputation and future on this risky project, betting it will rehabilitate the automaker’s image even though sales of EVs accounted for just 2.3 percent of the broader European market last year.

Not blind to the scandal’s damage to the automaker, VW’s influential German unions went along with the shift away from labor-intensive combustion engine cars to the more streamlined assembly of EVs in exchange for job guarantees and investments to in-source more components including battery cells.

The crisis "gave Diess the opportunity to push this into the foreground enormously," said a source close to the supervisory board. "It wouldn’t have been possible without the scandal."

For VW, everything has been counting down to this month. A new ID model family, a new dedicated EV platform, a new electronics architecture utilizing a new software system, a new CO2-neutral supply chain, and a new sales concept that required a fundamental overhaul of existing dealer contracts. Even the VW logo received a makeover.

Five years since it was conceived at the height of the crisis, the first ID model will finally see the light of day. But the past keeps catching up to Volkswagen, even as the group is set to exit its over three-year monitorship agreed with the U.S. Department of Justice.

"Much like the Holocaust forms an integral aspect of Germany's identity, we must accept this will never go away," said Hiltrud Werner, member of the executive board responsible for integrity and legal affairs, told Automotive News Europe.

Huge costs

The scandal has so far cost VW Group more than 30 billion euros in fines, settlements, recalls and legal costs. In a worst-case scenario, it might have financially overwhelmed the company, given 8.5 million of the 11 million vehicles equipped with the fraudulent EA189 diesel engine were sold in Europe.

When the first German customers began to sue, the Brunswick district court, which has jurisdiction for VW’s Wolfsburg headquarters, was so swamped with casework that it had to employ more personnel as claims stacked up ceiling-high in its storage rooms, according to officials. Altogether half a million individuals tried to sue in various German civil courts for damages.

Volkswagen and its Freshfields legal team built a formidable defense that prevented what might have been enormous compensation payments.

Citing an expert opinion from Deloitte, they argued there was no empirical evidence of damage for the owner, since affected VW Group cars were sold at prices comparable to other second-hand diesels. Moreover, anyone who wanted to ensure their car was fully compliant was offered a fix free of charge.

In February VW settled a German class action suit that cost it only 830 million euros. Participants not satisfied with one-off payments might still pursue damages on their own if they file claims prior to November. The chances that they will be reimbursed anywhere near the value of their vehicle when they bought it are slim to none. In May the German Federal Court of Justice in Karlsruhe judged claimants were entitled to damages, but any financial sum awarded would importantly deduct the value from using the vehicle.

As many as 160,000 of the half-million claimants may not even qualify for any compensation as they had, for example, sold the car prior to September 2015.

Not admitting guilt

The legal cases elsewhere in Europe are more complicated due to diverging jurisprudence. According to the company, however, the combined figure of pending diesel claimants in the rest of the world is no more than the figure for Germany alone, further limiting risks.

By comparison, the half million U.S. owners who sued were rewarded with roughly $10 billion. While VW points out that the company received an asset in exchange -- their fraudulent diesels -- it admits scrapping a number of them since it could not recoup the cost of retrofitting them to be compliant.

Anti-corruption advocate Hartmut Bäumer, chairman of Transparency International Germany, feels VW got off too lightly in Europe. "Volkswagen hasn't owned up to its crime or atoned for it. Up to the bitter end, it still argued in German courts the company did nothing wrong," he told Automotive News Europe.

Sources familiar with the matter admit all references to words such as "scandal" or "fraud" in public communications were deleted by the legal department and replaced with the sanitized "diesel issue" (Dieselthematik in German), which is still the officially sanctioned term in VW parlance. All to avoid admitting any guilt that might weaken the automaker’s legal position in court, they say.

"Those who don't confront their past cannot credibly talk of reform," Bäumer concluded. The former judge is himself one of the hundreds of thousands of European customers who regret having unknowingly bought a fraudulent diesel from the company and sued VW for damages.

Looming legal risk

The biggest outstanding legal risk VW faces is a German class action lawsuit brought by investors, which could take years to ultimately resolve. Claimants demand 9.6 billion euros in damages, arguing they would not have bought their VW shares had they known of the fraud earlier.

Since Volkswagen believes it informed markets in a timely manner and any ruling would likely therefore be favorable, the company has not set aside any provisions on its income statement. Even in a worst-case scenario, though, insiders estimate contingent liabilities of roughly 3.4 billion euros. 

Judging by the oversight work performed by its non-executive directors, risks clearly appear to be diminishing in the eyes of the supervisory board. The six-person Special Committee on Diesel Engines convened just four times in 2018 and only twice last year, as opposed to the 10 meetings held in 2016 and 11 in the following year.

When it comes to dispensing criminal justice to the individuals who perpetrated the fraud, German courts have not proved to be transparent. Public attorneys are in the process of prosecuting VW managers, but identities by law are protected from the public for all but the most prominent of executives.

Petabytes of documents were seized by investigators -- enough to circle the earth six times if arranged next to each other according to VW officials. Yet no one was able to find a smoking gun.

In June 2018, Audi’s then-CEO, Rupert Stadler, was accused of obstructing an investigation and will stand trial in late September.

The state is only expected to make the case he should have stopped the sale of affected cars when learning of the fraud in the summer of 2015.

When it comes to Stadler's former boss, lawyers says public prosecutors face an uphill battle because the case hinges on proving Winterkorn knowingly and intentionally failed to stop the fraud.

Three judges in Brunswick debated for months whether to allow a trial to proceed at the city’s district court, where Winterkorn's case had languished since last April.

Burkhard Fassbach, a white-collar crime expert and attorney at the Schneiders & Behrendt law firm, told ANE in August he was worried the court would reject the case in the hopes a settlement might be reached.

This week, however, the court ruled that Winterkorn must stand trial for organized commercial fraud.

Winterkorn also faces criminal charges in the U.S., where he is accused of conspiring to cover up the automaker's diesel-emissions cheating.

Trivializing the scandal

The question remains then whether the scandal led to any wider changes at the company beyond its ambitious shift toward electric cars.

Winterkorn successor Matthias Müller made reforming VW Group’s corporate culture one of his top five priorities during his brief term in office.

In March 2018, however, the frustrated CEO admitted openly this was the area where he had made the least amount of progress.

Unethical behavior has "concrete consequences and a measurable impact on our reputation, capital market ratings, financing costs, active risk management, and ability to attract the best young talent around," Müller warned at the time.

A former senior manager involved in the internal investigation fears little has changed: "When I talk to some of the people in engine development today, I still get the feeling they trivialize the scandal and don’t understand the damage they caused."

Critics say part of the problem might be just how lightly VW also got off in the courtroom of public opinion. Consumers in Europe remained loyal while China, its largest market by far, barely took notice of the scandal.

In 2016, VW Group passed Toyota as the world's largest automaker by vehicle sales. That year also marked VW's return to the black following a historic loss, and the company's subsequent annual accounts never reported a net profit below 11 billion euros from 2017 onward.

Even in the U.S., where VW continues to bleed red ink following a heavy beating to its reputation, things are looking up because of a focus on SUVs such as the Atlas.

"Our market share is stable, more than 75 percent of our Atlas volumes are conquests from rivals, and the brand image is continuously recovering after the hit in 2015," VW brand sales chief Jürgen Stackmann said at the end of July. "We're very optimistic we've overcome the diesel crisis in the U.S."

Given VW's recent results, Müller’s message that ethics and compliance were no esoteric "wellness" principles, but vital for the commercial success of the company may still be ignored.

Werner would not say whether she felt VW’s problems were systemic, but approaches her job as head of integrity and legal affairs as if they were. Every department could be the source of the next scandal, Werner said.

"Corporate culture is inherently instable: every minute it is either deteriorating or it improves. And as soon as you lose focus, it begins to degrade," she told ANE.

Impervious to criticism

Company insiders say the problem can be found in Wolfsburg’s sprawling development, production and administrative operations -- around which a city was literally built.

The atmosphere at VW’s headquarters had long been deeply authoritarian and intrinsically tribal, they say Management and unions were hostile to criticism from outsiders and impervious to external pressure, often exhibiting a siege mentality.

This made VW more susceptible to the actions of morally gray individuals quick to rationalize unethical behavior by convincing themselves it is for the greater good of the company, the insiders say.

Werner acknowledged internal employee surveys show a large minority of subordinates still fear openly informing their superiors of risks.

Nonetheless, she believes the workforce is beginning to understand the scandal is a permanent part of the company’s history, even if there is more work ahead reaching all 670,000 employees worldwide.

"Now that we are transitioning into a new phase without the monitor, the next 24 months will be important to see how the company behaves and what actions are taken when issues arise. Then you can judge whether things have really changed," she said.

Ironically just as New Volkswagen is becoming a reality, the company's ambitious EV model offensive may be under threat like never before.

"Volkswagen is currently experiencing its most difficult year since Dieselgate, and there has been a high concentration of product-related problems, which is unusual for the company," said Jürgen Pieper, autos analyst at Metzler Bank.

VW brand is also undergoing a major shake-up of its top leadership.

• The brain behind the MEB platform, Christian Senger, lost his job as head of the new, high-profile vehicle software unit, CSO.
• Production boss Andreas Tostmann was sent to Munich to restructure the parent's underperforming German truck subsidiary, MAN.
• Finance chief Arno Antlitz, like Diess a keen cost cutter, was swapped out for Audi colleague Alexander Seitz earlier this year.
• Purchasing boss Dirk Grosse-Loheide also moved to Audi in April.
• Sales chief Stackmann, who overhauled dealer contracts and designed the VW brand campaign, is under fire internally and expected to leave, according to media reports.

Finally, Diess lost direct control of the VW brand after accusing the company’s supervisory board of acting unethically. He no longer has an official role in the brand's day-to-day operations, causing industry watchers to question how long he can cling to his post as head of the group.

Since July, the new VW brand CEO is Ralf Brandstätter, a native of the Wolfsburg area who trained as a shopfitter in Brunswick. When the scandal hit, he was a manager in group purchasing responsible for new product lines and unknown outside of the company. Thanks in part to the help of the automaker’s influential trade unions, he has had a meteoric rise since, with three straight promotions culminating in his new role.

For the German works council, high-paid managers are replaceable -- backpacking through the world as they build a career for themselves, they come and go all the time. The one constant are the assembly line employees clocking in every day for their shifts, and they feel more comfortable with a person from the area such as Brandstätter who started at the bottom.

As far as Wolfsburg’s unions are concerned, the demanding Diess has been neutralized.

"The System Volkswagen is so fortified and self-contained that attempts to reform it will, at best, only conceal the problems. The fault lines run too deep," a former VW manager said. Asked whether Werner’s integrity efforts will have any material effect, he laughed: "Give it another five, maybe 10 years, and we’ll probably see the next scandal."

Both management and unions alike, however, agree they need many more consumers like Jung to ensure their all-in bet on electromobility will pan out.

All together, VW Group hopes to sell 26 million EVs broken down into 75 models during the decade. The aim is to stop building combustion engine cars by 2040.

A quintessential early adopter, Jung counts himself as one of the rare owners of a 2014 Volkswagen XL1. With its distinctive dolphin-shaped design for optimum aerodynamics, aluminum rear axle and magnesium rims to help slash weight, the limited-series diesel plug-in hybrid was developed under Winterkorn to shatter fuel consumption records.

When VW invited customers to reserve their launch edition of the ID3, Jung had to have it. "I put my name down as soon as they began taking down pre-orders," he said.

Ironically, Wolfsburg will be the only plant to lose a battery-powered electric model once the ID3 eventually replaces the uneconomical e-Golf.

As plans currently stand, Wolfsburg will be the brand’s only passenger car plant in Germany without an ID electric model. When the 10-year anniversary of the scandal rolls around, diesel cars will likely still be running off its assembly line.