Image from a former television ad from Volkswagen.  This ad and others are now under investigation by the FTC. — Image from a former television ad from Volkswagen. This ad and others are now under investigation by the FTC.

A few weeks ago we summarized a series of rumors that Volkswagen Audi Group (VAG) would enter Formula 1 in partnership with RedBull. The story went from rumor to confirmation by Sebastian Horner of RedBull as he had apparently met with VAG officials to discuss the possibility. It seemed almost too good to be true, that a company that has dominated sports car racing for over a decade would turn its sights to the pinnacle of motorsports, Formula 1. The possibility of the German giant entering F1 reached its zenith only days before, to use a car analogy, the transmission fell out on the freeway showering passersby with sparks and oil as VW announced (copped to) cheating emissions tests in the United States and Europe on their diesel vehicles. Like the emissions they covered up, the possibility of an F1 future went up in smoke (dirty dirty smoke). In the meantime, the sordid story has shifted from potential entry to F1 to the very survival of one of the three largest automakers in the world.

Sadly, the automotive press has done little to bring clarity to this issue. We hope that this article can answer some questions, and also highlight some larger issues for consideration.

Over a week ago, Volkswagen America CEO Michael Horn testified in front of the House Energy and Commerce Committee on what VW execs knew and when they knew it. It’s a scandal that has already made its way to "gate" status.

A Quick recap of the scandal:

"VW engineers" created a software program to cheat emissions tests so that the real world emissions from VW diesel engines would not show up during testing. This system was utilized because it allowed VW to appear to meet existing emissions standards without any drops in performance or gas mileage as might occur with the use of emissions control hardware. It is estimated that this allowed VW diesels to emit as much as 40x the allowable emissions. This multiplier has been used in the numerous media reports about this scandal but has no context as most readers don’t know what that really means, other than its real bad news. TLP reached out to our scientific laboratories* to get some insight on this. In California our science expert estimates around 40K vehicles affected. That many vehicles spewing out 40x the allowed emissions means they were polluting the equivalent of 1.6 million cars that meet emissions standards.

What will all of this costs VW? What will be the impact on the car industry? Around 11 million cars are affected worldwide with approximately 480,000 of those cars in the United States. In his testimony, VW's Horn revealed that some vehicles could be fixed via a software update while others would require software fixes and actual hardware changes...an estimated 7-10 hours worth of changes! Horn estimated that up to 70% of models would require both fixes. What will be the impact on the performance? That's the question we all want the answer to. Consumer Reports did some tests you can watch here. They tested two cars, a 2011 Jetta SportWagen TDI and 2015 Jetta TDI. On the 2011 Jetta TDI, 0-60 times increased from 9.9 to 10.5 seconds but the 2015 Jetta’s acceleration numbers were unaltered. The biggest changes occurred in fuel economy. Especially on the highway where the 2015 Jetta’s MPGs dropped from 53 to 50 and the 2011 SportWagen’s plummeted from 50 to 46 MPG.

Do the results signify the impact of VW's fix? Not really. The CR tests reveal the gains from having a cheat mode, but they don't demonstrate with any certainty what the full time elimination of that mode would do to performance. What if a VW owner decides not to repair their car because they don't want to lose performance? Will they be able to pass emission requirements in their state such as California, or do they get a pass? Basically, will the repairs be mandatory? It’s very likely that California will mandate the repairs.

How did this happen?

VAG is Europe’s largest automaker, and fully half of all cars sold in Europe are Diesels. European Union and U.S. Emissions goals diverged in 2008 with U.S. rules becoming stricter. The story goes that while other automakers worldwide produced hybrid models to meet mileage requirements, VW already invested massively in diesel and couldn’t or wouldn’t change. When U.S. standards became too difficult, they cheated to keep performance while minimizing costs. This same narrative contends that German automakers were so locked into diesel technology that they refused to participate in green revolution occurring in hybrid and full-electric technology. Some have pointed to the success of Audi's diesel technology in the 24 Hours of LeMans, but this ignores Audi's use of hybrid systems that generate electric power via the engine's flywheel that have proven just as vital to their sports car racing success.

Automotive News reported that the crisis began when then–VW brand chief Wolfgang Bernhard and engineer Rudolf Krebs began developing a new diesel engine for the U.S. market in 2005. They found that adding equipment, such as an AdBlue system would increase the cost at an estimated $335 per vehicle. VW finance heads decided this cost was too high, as the company was already in the midst of cost-cutting.

Let's get to the key thing that no one seems to really have a grasp on. What is the fallout? There’s no shortage of articles featuring pundits and automotive media publications pontificating and speculating on what may or may not happen. The automotive intellegencia can't get onboard the VW pain train fast enough. This has led to speculation on causes and outcomes.

It has become clear that VW will need both a software and a hardware fix for the vast majority of their diesel fleet in the US. If they only do a software fix the existing on board smog reduction equipment will require greater service more frequently. The lasting fix will be a change to software and installation of new equipment. Sounds expensive? That's because it is and also increases the chances of unreliability coupled with a decrease in performance and mileage.

Here is the real potential gut punch for VW. Obviously, VW diesels will have to meet the current emissions requirements in California and that alone is going to cost millions and perhaps billions of dollars, but that's not all. The California Air Resources Board can (most likely will) require VW to make up for the damage they have already done by putting vehicles on the road that emit even less than the current standards. Is that even practical? Maybe not, but the next best step toward mitigation is to require VW to produce heavily subsidized electric vehicles for California roads. VW have yet to calculate how much the repairs would cost per vehicle, but it's not going to be cheap (again, early estimates are 7-10 hours in labor alone). The swift fist of state government will also add to the costs with fines and penalties. Under California law an intentional violation is $75K per car separate from federal fines of over $35K per vehicle. In additional to regulatory fines, VW faces class actions suits and independent civil litigation and potential criminal charges. We know that the number of cars affected in California is 40+ thousand vehicles. If the maximum fine is levied for an estimated 45,000 cars then the regulatory penalty, just for California would be $3.3 billion. All of this to save $335 per car...

With rumors emerging that other cars (mainly outside the US) may be emitting more pollutants while driving than while being tested, it would not be a surprise if VW is made an example of in the short term. This scandal has potential ripples beyond this instance of software cheating system. The EPA, California's ARB and European officials have all said they are revising and upping their emissions tests for all cars. At this point in time, it seems realistic that if there is going to be a future in diesel both in the U.S. and Europe, no less than a total overhaul to the regulatory system is necessary if clean air is a priority. As of today, we know that whether we're talking about cheating software (the sin of commission), or because of the inadequacy of emissions tests to test for real world conditions (the sin of omission), there is a lot of work to do for manufacturers and regulators. We are hopeful that the revelations about VW aren't just an excuse for feigned outrage by lawmakers and regulators. This is a teaching moment for all involved. There is enough fodder to distribute lumps for both corporations and government. We just hope that an opportunity for positive change isn't squandered.

We'd love to see Audi/VW in F1, but we'd like to see some resolution to this situation a little more. In the interest of full disclosure, both of us have owned VWs in the past and would consider owning them in the future, but truth be told, VW has a long way to go to earn back the trust of (us and) hundreds of thousands of others before the credibility of the VW brand is fully restored.

*(We would like to thank our scientific source for making some of this more understandable and for insight on how California might 
respond to this issue)