Dirty business: VW’s “Dieselgate”


I have to admit, I have been off my blog for nearly a year (my last post was in October). Mainly because I have never got myself round to writing, secondly because I had too many fingers in too many pies, and finally – because there were too many things to talk about and none that I thought about writing about…until last week.

VW Diesel

For those of you who have no idea what so many car nuts are losing their heads about and why the VW Passat unveiling was not over the news (like if it ever would be. A “Passat” is like saying “A4 paper”. It’s the same kind of reaction), Volkswagen Group got into a bit of trouble over their 2.0 litre TDI engines. Volkswagen advertised their engines as being the benchmark for power and efficiency and having exhaust gasses that are cleaner than white clouds in a Summer sky over Iceland. Because of that their new customers all over the world bought loads of cars with these engines in them, around 11 million between 2009 and last Friday, in fact. But now it seems that this number won’t increase for some time. All is because Volkswagen were lying. Not about them being reliable or anything, but that they are actually not as clean as clouds over Iceland. They are actually dirtier than a Smog over London in the 1960s. But why it was unnoticed? Why nobody screamed about it before? Because they couldn’t tell.

THE PROBLEM

Oh if only everybody knew it then

Oh if only everybody knew it then.

They couldn’t tell because VW, being the “Dr. Evil Enterprise” installed a device which basically when engaged turns the cleaning systems in the engine on, making exhausts as clean as advertised in the brochure. This device was programmed to start automatically, when it detects that an emissions test is in progress. After the emissions test is over, this device turns all of the cleansing systems off and the engine burns dirty fuel mixture. And how much dirtier is it? If you’re going to say “twice”, I’d say “don’t be too humble.” Five times? Nope. It emitted BETWEEN 10 TO 40 TIMES OVER THE ALLOWABLE EMISSIONS NORM. So that means if you have a VW Golf, Audi A3, Seat Leon or any other car with a 2.0 litre 4 cylinder Diesel engine and think that you’re actually saving the planet, you’re probably making the air dirtier than a footballer in a 6.0 litre W12 Bentley Continental GT. Maybe even four footballers.

THE INITIAL RESULT

The prime suspect: VW group's 2.0 litre 4-cylinder TDI engine.

The prime suspect: VW group’s 2.0 litre 4-cylinder TDI engine.

Nobody knows exactly who blew the cover first – either United States Environmental Protection Agency (EPA, America’s environment agency who sets the emissions targets and do the testing. They probably don’t feel to well after realising they’ve been fooled right under their eyes) or some automotive company, who, like many others, buy competitors’ cars, disassemble them and see what makes competitors’ cars better. What we do know is that this has been the biggest PR disaster Volkswagen group have ever experienced. Because of that, and because of a very powerful and overly-sensitive nature of an average American consumer, the sales of diesel cars and loads of other VW Group models in the U.S. stopped overnight.

And it’s not like they are going to go and buy them anyway. So Volkswagen, who so far have handled it quite humanly, paid the dealers for diesel cars standing in dealer lots, as they know they will not be selling them anytime soon, if not at all. It has not been specified how much, but I believe it will be enough to keep these dealers afloat for some time, because VW really needs their dealer network now more than ever, as after this scandal it is hard to believe that anyone else will step in to help to sell their cars. VW also told them to stop selling them until the issue will be fully resolved with the EPA.

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Speaking of EPA, Volkswagen are shaking nervously while they await their verdict on what fine they will have to pay. If the worst case scenario happens (which seems like it will, as Americans will see another opportunity to protect their local car industry against foreign competition), then VW will have to pay $37,500 per car in fines, which results in a total fine of $18 BILLION. That’s a fifth of their profits gone. However, VW still have the 10.5 million diesels elsewhere with the same device and the same mistake made by them. So…it could skim Volkswagen until they have no money in them. A massive risk.

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Further, adding to their problems, VW saw $26bn of shareholders’ money just flying away in front of their eyes, as their share prices dropped from around $1.40 per share to 60 cents. That’s more than a half of company’s value gone. Adding more to that, their share prices could go further down in the future until the sales figures will be revealed for this quarter, showing actually how many cars they have actually sold less than before, especially diesels, which made 20-25% of their total U.S. sales. Shareholders would run faster than sprinters from the company, selling their worthless shares left and right. It scares me imagining what will happen next to them. All I know now is this: there is a chaos in the company.

First, their CEO, Martin Winterkorn, resigned just today (23rd September, 2015). The captain jumped ship before it sank. Everyone knows it was his fault, himself included, but you fix the problem and only then go. Second, VW aimed everything for their goal to become the biggest car company in the world by 2020, beating GM and Toyota in Sales, profits, and share prices. Looks like that goal is gone.

Shortly after the "Dieselgate" hit the fan, VW removed all of their "clean diesel" adverts, including these "Old Wives' Tales" commercials, which even I saw on TV when I was in the States.

Shortly after the “Dieselgate” hit the fan, VW removed all of their “clean diesel” adverts, including these “Old Wives’ Tales” commercials, which even I saw on TV when I was in the States.

Worse still, VW’s credibility as a reliable manufacturer is seriously damaged. Last time someone had this much damage from a bad publicity cos of a diesel engine was Oldsmobile, the very reason why Americans don’t like diesel. In 1970s Oldsmobile, after the oil crisis, thought they could earn money on customers looking for a cheap, efficient car. A diesel was a perfect bet, as it consumes less fuel and is as powerful as petrol cars. However, because of typical GMness, the design for the diesel engine was simple and rushed. All they did was replace petrol spark plugs with diesel ones, rearranged spark plug timing and hey presto. It wasn’t – the engines used to blow up or not start at all, so by the time they solved the problem, diesel sales stopped completely and the reputation of a diesel engine was forever ruined for Americans. Same as now.

POSSIBLE OUTCOMES (MY PREDICTIONS)

Firstly, let’s look at this graph:

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As you can see, VW from all brands contribute the least to their profits, yet earns most for their revenues. That means either they’ve allocated a huge chunk of money into development of new models, or they’ve reallocated it elsewhere to cover some losses or development of other projects, such as Bugatti Veyron’s successor, Bugatti Chiron. Then you see some higher value brands such as Audi (which are united with Lamborghini, because Audi branch exclusively own the brand) which are mechanically almost the same as VW, but here they pay that extra for the brand. The best example is Porsche/Bentley. According to Bloomberg, Porsche makes $23,000 on every car they sell, so they earn a VW Golf on each car they sell. Stronger on the brand spectrum than them is Bentley. I already talked about it in my previous blog post about VW’s badge engineering – Bentley Continental Flying Spur is nothing more than a VW Phaeton with a Bentley badge. The difference in price between VW and Bentley for this model is $100,000. Of course, Bentley has better leather and some wood, but in other ways it’s exactly the same. So Bentley earn an Audi A8 over every car it sells on top of the earnings of a VW Phaeton.

On the other end of the spectrum you have smaller brands like Škoda and Seat. For Škoda I could argue in favour more than against. They are the more differentiated than Volkswagen, as they have the Yeti and Rooster, which sell like cupcakes (at least until recently). However, the same cannot be said about Seat. For years VW executives have complained about how difficult it is to sell Seats and no matter how hard they’ve tried, they just don’t sell. Partly because they’re only sold in Europe, but mainly because they are just too similar to Volkswagens and Audis. I already showed this in my blog before, but they once actually made a Seat that’s exactly the same as an Audi A4. If you covered their brand logos up with sellotape, you could easily mix them up. There hasn’t been badge engineering this severe this side of GM.

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So my guess is this: if Volkswagen will have a massive chunk bitten off their finances (which, at this moment in time, it looks like it most certainly will), Seat will be the first brand to leave VW. As you see in the graph above, they make a loos on every car they sell, which in every sensible business would be a case for a closure of the brand. They could do two things: either sell the brand to a different manufacturer, or sell just their factories and get rid of the brand completely. The problem with the former one is, to Volkswagens own regret, Seats are just too similar to every other VW group model out there, so every Seat will hold an answer to every mystery of VW Golf, Polo, Scirocco, Audis etc etc. It would be a goldmine for other manufacturers and a death sentence for VW, who would give away the competition a huge market share. On the other hand, the latter version could not bring in enough cash and bring in a huge outrage in Spain, as the brand is part of country’s history. It’s their own, SPANISH brand, a national pride (I know the feeling, living in a country that used to make Fords for Eastern Europe in late 1930s). Also, who would want to have an empty factory in Spain? Ford? They already have one. Jaguar Land Rover? They have factories under construction in Brazil and will be in the U.S. GM? They have Opel in Germany which nearly went under in the Financial Crisis. So there’s no demand. One thing for certain, though, is this: they will keep Porsche and Bentley. They bring in too much money to get rid of them.

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If their efforts to raise cash quickly by selling brands will fail, then they will have to tighten their belts in the R&D department. Not only it will mean a reduced superiority over other brands, it will also mean a fall in reliability. So far they have been built really well, but as the graph before shows, they do not have a lot of profit cash to use to mend those problems, so they will have to use more of that revenue to cover their problems. That will further impact their sales globally, which is a real shame.

THE BRUTAL AUTOMOTIVE INDUSTRY

I am a fan of VW cars. But what I found most disgusting in this story is this: VW with this fault polluted the atmosphere more than initially everybody thought and they lied about it, but they killed nobody. General Motors, on the other hand, because of their lies and neglect, killed 31 people and injured 244. VW are facing extinction, yet all GM have done so far is pay mere $1.4bn in fines to shareholders and in fines to the U.S. Federal Government. In comparison, GM got away by paying pennies, yet their clueless, manipulated customers still buy their cars. Their sales actually were not affected by much. And VW are facing extinction. RIDICULOUS! Absolutely disgusting, that human lives are worth less than company’s integrity and truthfulness. All GM did was blame it on “Old GM”. Excuse me, but that’s exactly the same company. There is no difference. You screwed it up? You are responsible for it. That means VW’s new CEO has to say “that was Winterkorn’s VW. We’re different now” and prosecutors will forgive them? That is how it looks like.

But this shows how horrible the automotive industry can be – you never know what you’re gonna get (like Forrest Gump said). Whatever happens, I wish Volkswagen all the best of luck in the coming months, because that is what they will need most. They cannot hope on anything else for now but survival.

Autobahn: what would I do if I was Volkswagen Group’s boss


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I follow car journal websites every day. Not because just to see car reviews and read some bribed car magazine “unbiased” opinions on some brands’ futures, but also because they give me some inspiration and idea on what to write about on my blog next. This time it is about two articles I found on Volkswagen group brands (Škoda and Seat) because they made me think and to come up with some radical, cost saving moves for the brand. The article about Seat said that they have been struggling to find their place in the market and they hope that their latest models which look very pretty will gain some attention. The other one was Škoda stating that their top priority for brand’s development is….design. Sounds barely like strong plans of a large automotive corporation, doesn’t it?

Just a little background info. Volkswagen Group consists not just of Volkswagen, but of Audi, Seat, Škoda, Lamborghini, Porsche, Bentley and even that God damned Bugatti. And many of you don’t know that VW group have a target set for 2015 which states that the group will be THE BIGGEST CAR MAKER IN THE WORLD. Not just in global market share (where it now is about 1% shy from GM), but also revenue, profits, customer satisfaction and so on. Typical German target. However, what is not typical just recently is VW gradually makes the bad signs of being a large car company apparent even to those who are not car enthusiasts. These signs are very typical for GM, which is a bit of an insult for this great group. The thing I am talking about is “heavy badge engineering”.

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To those who don’t know what “badge engineering” means, let me draw your attention to the picture below:

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What VW group says about these cars is this: these are two different models. However, to me and you it is clearly obvious that this is not the case. Clearly they look exactly the same. The reason for that is to save costs and to gain massive advances in increasing market share all over the world large car companies tend to not do much to the car apart from changing the badge, alter the design only slightly and changing the design of the interior, including “distinctive features that characterize the brand” (the kind of thing SAAB got obsessed with in their final years and something that scared potential customers away, as they were nothing more but rebadged Vauxhall/Opel Vectras (or Saturn Auras, if you’re from America) with some odd designs and ridiculous sticker prices). Everything else in the car (engines, drivetrain, chassis, electronics, software etc) is exactly the same. Then they price them differently which is when it gets weird.

Why does VW make two cars that are essentially the same when only Audi A4 (one on the left) is the one that sells more  and makes money for the VW group. Seat Exeo is just there with tiny production numbers and no reason to explain why it was created at all.

Why doesn’t VW do something Chrysler did recently – set out main purposes of brands – what are they going to do, who they are for and what will be their strength – for example they stated loud and clear that Dodge from now on will be the performance brand of the Chrysler Corporation. But for VW like for GM there are way too many badge-engineered cars that don’t sell as well as their originals, wasting money and resources for the group. To understand what I’m talking about, let us look at VW group’s consumer brands – Audi, VW, Seat and Škoda.

 

ŠKODA

 In my view the biggest victim to Volkswagen empire’s sinister badge engineering are Czech car makers Škoda. For those who don’t know them, Škoda are a Czech car company that until 90s were an independent manufacturer, but because of the “successful” Communist experiment in Eastern Europe, because when the Eastern Bloc broke free from Communism and the #1 Capitalist business idea for Eastern bloc in the 90s was selling off everything they could get a hand on (including manufacturing equipment) and because all Communists cared about was having everyone employed (even those who have no idea how to build a car whatsoever) the quality of Škodas in those days wasn’t good. So when Capitalism came into Czech Republic in 1990s suddenly an ordinary Czech citizen could buy a more reliable car. Luckily for them in 1994 Volkswagen saw an opportunity and decided to try their luck by developing a car together with them. Their first car was a Škoda Felicia. Instantly it was a big surprise in the west, because in 1998 Škoda in Britain became the best manufacturer. Quite a change for a car company from an ex-Communist bloc country.

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Seemed like a good start for the brand that got its rebirth under German control. But as soon as old Škoda platforms were replaced by VW ones. The design and parts became even more and more Volkswagenish. No issues with that but why would they waste money on creating cars that look, drive and sound the same?

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SEAT

Seat is the second biggest victim to Volkswagen’s badge engineering malarkey. Unlike Škoda, Seat was not doomed because of changing political winds. After long disputes with Fiat which deteriorated their quality Seat went into talks with Toyota, Nissan and Mitsubishi (who in 80s seemed to collaborate with every single manufacturer in the world, especially Chrysler Corporation). During these talks Volkswagen came to Seat and asked: “would you be very kind and build our Passat and Polo?” By September 30th of 1982 Volkswagen were in and Seat started assembling their cars.

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The only time Seat tried to do something different and not obey Volkswagen’s design language was in mid-2000s when they started designing fishbowl-shaped cars like the Leon (above). But soon after they went back to designing cars that resemble Golfs and Passats. They even had a car called Seat Exeo which looked EXACTLY like an Audi A4. Inside and out. I once took a cab ride in one and I was surprised on how precisely Seat have copied the Audi. In 4 years of its production Seat produced just over 75 000 Exeos. It is weird that actually so few people bought it because it essentially was a discounted Audi A4. In all fairness I am surprised it was made at all because of it being a perfect copy of another, more successful car.

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BENTLEY

Oh, are you surprised? Well you should be. Because Bentley is yet another victim of Volkswagen’s badge engineering. Example – Volkswagen Phaeton which had its VW badges removed, some interior pieces changed and rebranded as Bentley Continental Flying Spur. Yes, a Bentley that has underpinnings of a Volkswagen. Even BMW don’t do that with Rolls-Royce don’t do that.

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Whenever I see one Bentley parked just outside our University’s international school I think “the owner is such a moron.” He is, because he’s spent tens of thousands more for exactly the same car just because it has a fancier badge on the nose. Besides he could’ve saved even more if he bought one second-hand. Seriously, VW Phaetons are laughably cheap. You can pick up a good one with a 5 litre diesel engine for just about €7000!!!! Not kidding. There’s one being advertised on Latvia’s top car advertising pages:

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Don’t get me wrong. VW Phaeton is a fantastic automobile. In fact this is the best bargain you can possibly get because a) it’s made by Volkswagen which means it is reliable; b) Ferdinand Piech, then chairman of VW, set out targets for the Phaeton that many engineers thought were impossible to meet, yet they were met, which means this car is massively over-engineered; c) it is super comfortable for everyone. But when a car that wears exactly the same badge that the Beetle wore in 1940s, this questions why would the maker of “People’s cars” (translating from German, volk – “the nation”, “people” and wagen – “car”, “carriage”) would introduce their production methods and the car to an old, rich-herritage British automaker? When even engines have been “masked” to fool these crazy buyers? Clearly they are THE SAME ENGINE. A VW W12 engine!!

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They might have done something what one owner of a Phaeton did and nobody would notice – put some Bentley ornaments on it and disguise it as a Flying Spur. Trust me, these rich buyers would not notice that they are wasting thousands on a Volkswagen.

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WHAT WOULD I DO?

Now at last, after I’ve got everything off my chest I can finally let you know what I would do if I would lead this big empire.

1) GET BENTLEY TO MAKE INDEPENDENTLY ENGINEERED CARS: no more Volkswagen nonsense, no more badge swapping. It’s not like Volkswagen group can’t afford to design a whole new car. If they could afford to waste millions on every Bugatti they made they can afford to engineer brand new platforms for new Bentleys.

2) VOLKSWAGEN IS A PEOPLE’S CAR AND IT SHOULD STAY THAT WAY: let them keep the Polo and let them keep the Golf hatch. Those should be biggest cars they should be making to live up to their name. Make the UP!, make anything you can, but quit making the Phaeton, stop selling Passat (nobody would care, it is boring enough to leave the scene unnoticed) and invest in smaller cars. Because of such quick depreciations such big cars should be made by other brands because depreciation for an average customer matters.

3) ŠKODA – MAKER OF YOUR AVERAGE JOE’S GETABOUTS: now Škoda does a fantastic job with the Superb and Octavia (which are badge engineered VW Passat and VW Golf saloon/estate) that they are more reliable than their VW and Audi counterparts. Also Škoda’s “worker’s cars” such as Roomster and Yeti (which Jeremy Clarkson loved a lot) must stay, which means VW could stop making the more expensive Caddie, saving even more money and increasing more revenue when those indecisive buyers who couldn’t decide between Caddie and Roomster would start buying Roomsters which could use the money surplus from unproduced Caddies to improve it.

4) SEAT – THE HOT BRAND: I love the principle that Fiat Chrysler realized when they announced their “Five Year Plan”. One of them was to make Dodge to be strictly a performance brand. VW should do the same with Seat. They have already left their mark in motorsport and their recent designs are very sharp and sporty. Why not? VW could keep the Golf GTI, but all other performance versions of other VW lineup cars could be made in Spain. Why not? Maybe even develop new performance cars for middle classes? A rival to a Mazda MX-5 perhaps? The closest offering from VW group is a Porsche Boxster but that’s a luxury brand.

This might be just a small step for a larger reorganization, but I believe that these four steps could give a big kick that VW needs to become the biggest car group in the world. I understand that you use badge-engineering to save time and costs on developing new models, but what’s the point of creating 5 cars under different brands that are in many ways exactly the same.

There’s not much time left until the end of 2015, so if anyone from VW sees this, discuss this in your boardroom meetings. It can work out well!