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Volkswagen's Latest Diesel Story Doesn't Pass the Smell Test

By John Rosevear - Oct 9, 2015 at 6:02PM

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VW's U.S. chief said that "a couple of software engineers" were responsible for the emissions-cheating scandal. That seems very unlikely.

Image source: Volkswagen

Volkswagen's ( VWAGY -1.85% ) U.S. chief told a U.S. House of Representatives committee on Thursday that "a couple of software engineers" were likely responsible for the emissions cheating scandal that has VW facing billions in potential fines.

"To my understanding, this was not a corporate decision," said Michael Horn, the CEO of Volkswagen Group of America. "This was something that individuals did."

Is this really going to be VW's defense?

This was a massive, high-profile development program within VW
Let's back up for a moment.

VW stands accused of selling millions of diesel-powered cars with a software system that turned on the cars' emission controls only when an emissions test was under way. In normal driving, the controls were bypassed, presumably to improve performance and fuel economy -- but the cars emitted toxins at levels far above U.S. legal limits. 

VW has essentially admitted the allegations and promised to fix the cars. But it hasn't yet explained why it decided to cheat -- or who was responsible for the decision. 

The "why" is not hard to figure out: VW needed "clean diesel" technology that would sell well in key markets (including the U.S.). In order to sell well, the cars needed to have sporty performance and great fuel economy. VW's engineers probably couldn't meet the performance and fuel economy targets with the emissions controls properly engaged; the cheating software was a workable (if illegal) solution.

As for the "who," we don't know yet. VW has "suspended" three top executives who were involved in the engine-development program. ("Suspended" essentially means "sent home with pay"; it's apparently hard to fire executives in Germany.) But the development of this engine family was a massive, high-priority effort for VW. Hundreds, maybe thousands, of engineers and other experts were involved. 

Horn's prepared statement to the committee began by acknowledging the existence of the cheating software, apologizing, and promising that VW would "make things right". That was all appropriate.

But under questioning, Horn floated the idea that a couple of software engineers came up with this idea all on their own and implemented it, presumably without telling anyone.

That part doesn't pass the smell test. Not yet, anyway.

Is this really how the decision to cheat was made?
Presumably, if Horn is to be believed, the sequence of events was something like this:

1. VW executives set targets for the new engine's performance, fuel economy, and cost.

2. VW engineering teams designed an engine around the targets and started testing it.

3. The teams found that they couldn't meet the targets with the design they had.

4. Someone, probably one or more mechanical engineers involved in the engine's development, determined that the emission controls were the element of the design that was holding them back.

5. A couple of software engineers took it upon themselves to "solve" the (hardware!) problem without telling anybody how they did it -- and nobody asked.

6. The engine was approved for production and millions were sold around the world.

Step 5 just doesn't seem very likely. 

If this is going to be Volkswagen's defense, I don't think it's going to hold water. They might be able to sell it to sympathetic regulators in Germany who are mindful that VW is the country's largest employer. 

(But they might not. If you were the software engineer who had the great misfortune to be VW's scapegoat, wouldn't you consider telling prosecutors every single thing you knew about what really happened?)

I don't think the U.S. government is going to buy it. At least, not without a lot of deep investigation. And I don't think they should.

VW needs to come clean -- soon
I'm willing to believe that Horn was just repeating what he had been told by senior executives at VW headquarters in Wolfsburg, Germany. He wasn't part of the program that created the engines and he may well not know any more than what he admitted to in his testimony on Thursday. (If he did know more, and it can be proven, then he could end up in a lot of trouble. He was testifying under oath.) 

But right now I'm not wiling to believe that this is what actually happened, and I'm not willing to believe that VW can indefinitely keep the true story secret. If VW doesn't come clean -- soon -- about what happened, in considerable detail, the eventual consequences will only multiply. 

And for investors: If you think that VW stock looks cheap now, I suggest you consider the possibility that things could still get a whole lot worse.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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