Posted on August 09, 2017 by Charles Morris
The dirty diesel debacle has entered a new chapter. All five of the the major German automakers are now under investigation by European and US authorities, accused of participating in a cartel that thwarted competition and stifled innovation. As the German news magazine Der Spiegel reports, not only did Daimler, BMW, Volkswagen, Audi and Porsche all game emissions testing systems, but they did so as part of a pattern of illegal collusion that has been going on for years.
Above: Groundbreaking story at Der Spiegel uncovers collusion (Source: Der Spiegel)
“The diesel scandal would not have taken shape as it did, and perhaps not even at all, without the agreements among German automakers,” write Frank Dohmen and Dietmar Hawranek. “It is not the work of a few criminal managers in the Volkswagen Group, but ultimately the result of secret agreements within the entire German automobile industry.”
The European Commission has launched an investigation, questioning witnesses and seizing records from the companies. Some of the five little birds have already begun to sing. Back in July 2016, Volkswagen confessed to its “participation in suspected cartel infringements,” and told authorities that the automakers cooperated in more than 1,000 secret meetings. VW and Daimler have provided agendas and minutes of these meetings to the authorities.
They have not done so out of public-spiritedness, but in hopes that blowing the whistle on their partners in crime will help them to avoid massive fines. In antitrust proceedings, the European Commission and Germany’s Federal Cartel Office can provide immunity from prosecution to companies that cooperate. In 2016, truck manufacturers Daimler, Volvo/Renault, Iveco and DAF were hit with €2.9 billion in fines for coordinating pricing for their trucks. Munich-based MAN, which was also part of the truck cartel, received no punishment, because it had offered its services as a witness early in the game.
Volkswagen and Daimler are now jockeying to be seen as the first company to come clean to the authorities. Under German cartel law, the greatest penalty reduction is granted to the company that confesses first and provides the most extensive documentation. As Der Spiegel wryly notes, at least this is one case in which Daimler and VW are truly in competition with one another.
Above: Although VW was at the center of the diesel scandal, it appears they have not acted alone (Image: Extreme Tech)
Meanwhile, two antitrust lawsuits have been filed in the US. As reported by Bloomberg, a class-action suit on behalf of drivers was recently filed in New Jersey federal court, alleging that the automakers created an anti-competitive culture in the US and conspired to increase prices of luxury vehicles while sharing technology to skirt emissions norms. A similar complaint has been filed in San Francisco federal court.
“These coordinated actions enabled the manufacturer defendants - the self-named Circle of Five - to impose a German automobile premium on consumers premised on superior German engineering, while secretly stunting incentives to innovate,” the suit alleges. The supplier of VW’s cheat software, Robert Bosch, was also named as a defendant in both lawsuits.
Last week, executives from the five German carmakers, plus Ford, met with ministers and state leaders at the Transport Ministry in Berlin, a meeting that Bloomberg described as “a last-ditch play to save diesel.” Protesters forced the meeting to be moved down the road to the more secure Interior Ministry.
The Circle of Five
Der Spiegel describes the relationship among Audi, BMW, Daimler, Volkswagen and Porsche as a cartel that coordinated the activities of the five brands, in order to avoid competition and maximize profits at the expense of customers, suppliers and taxpayers. “The collusion over diesel engines is the most spectacular case, but only one of many in which the five German carmakers may have violated cartel law. The system of collusion encompassed almost all areas of automobile development.”
Above: Germany's 'circle of five' embroiled in cartel allegations (Image: Newsonia)
Der Spiegel tells the story of how the companies coordinated the development of their vehicles’ convertible tops. Company representatives agreed that there would be “no arms race” when it came to the maximum speed at which a driver could open or close the top. Has anyone ever wondered why the soft tops on the convertibles sold by Daimler, BMW, Audi, Porsche and Volkswagen can only be opened and closed at speeds of up to 50 km per hour? It was a decision of the “working group for mechanical attachments.” There were many other such groups, including working groups for braking control systems, seating systems, air suspensions, clutches, gasoline engines and diesel engines.
The agreements among the German automakers, which “likely constitute one of the biggest cartel cases in German industrial history,” began in the 1990s and were expanded to include more and more issues, as industry executives viewed violations of competition law as harmless rule violations. Only recently has the European Commission begun imposing substantial penalties on companies that secretly collude on pricing or technology.
The seeds of the diesel debacle were also sown in the 1990s, as the automobile industry began to come under pressure to limit CO2 emissions. Toyota was already selling the Prius hybrid, which offered considerably fuel consumption and carbon emissions. The European Commission discussed imposing a mandatory quota for hybrid drives, but the German automobile industry wasn’t having it. Instead, it chose a 100-year-old technology - diesel engines - as its answer to the threat of climate change.
Diesel engines emit less CO2 than gasoline engines, but they produce nitric oxides, which contribute to air pollution, especially in cities. Under pressure from US regulators to reduce nitric oxide emissions, the automakers adopted a technology that was already being used in trucks, and touted it using the now-ridiculed slogan “clean diesel.”
Above: Tailpipe emissions for diesel cars (Image: Shaw High Students)
Many have asked why the German auto industry was not able to find the technical means to comply with emission limits for diesel cars. The answer is that, because there was no competition among manufacturers, they didn’t bother to try.
So-called clean diesel technology relies on a substance called AdBlue, a urea mixture that is used to split nitric oxide into water and nitrogen. Rather than compete to develop the most efficient version of the technology, the automakers got together and discussed the issue in their working groups, seeking a way to harmonize their efforts. As Der Spiegel reports, the individual carmakers were using different tank sizes for AdBlue, and, at a meeting in Sindelfingen in April 2006, the working group of chassis managers concluded that this was unacceptable.
The larger the tank of AdBlue, the more effectively nitric oxides can be reduced, and the less often the driver has to refill the tank. However, a larger tank is naturally more expensive, and takes up more room. The automakers agreed to standardize and limit the size of the AdBlue tanks to 8 liters, which left enough space for golf bags in the trunk. The only problem is that 8 liters of AdBlue is only enough for a range of about 6,000 kilometers. Meanwhile, US regulators were demanding tanks that would only have to be refilled during an inspection at 16,000 kilometers. Following heated debates in the secret Circle of Five meetings, in June 2010 the companies agreed that the 8-liter size would remain the standard in Europe, while 16-liter tanks were planned for the US market. Later, stricter environmental regulations in the US and Europe required the amount of AdBlue to be increased further, so now the tanks were much too small. No one could expect customers to refill the tank every 2,000 to 3,000 kilometers.
Rather than installing larger tanks, and making the cars cleaner, the companies got together to figure out how to get by with the smaller ones. If one manufacturer had installed larger AdBlue tanks, regulatory authorities would have asked questions. In a May 2014 email, an Audi employee warned against any company seeking its own solution. Using larger amounts of AdBlue could “expand into an arms race with regard to tank sizes, which we should continue to avoid at all costs.”
Above: A look at how AdBlue works (Image: Fuelogic)
Some of the automakers had already begun to deceive licensing authorities and customers about the true amount of their vehicles’ emissions. VW installed software that detected when a car was in a testing facility and injected a sufficient amount of AdBlue during that short period of time. Audi used similar software.
US authorities discovered the scam in September 2015, and eventually presented a bill to the Volkswagen Group for €20 billion for fines, compensation for US customers, and electric vehicle infrastructure. The company will be paying out similar amounts in Europe.
The Stuttgart public prosecutor’s office is investigating allegations that Daimler implemented similar software. The company recalled 3 million cars for a software update to improve emissions control, but Der Spiegel reports that this is unlikely to satisfy the public prosecutor’s office and the US authorities, which are also investigating Daimler.
The effects of the collusion go beyond theoretical damage to the free market system that Western democracies supposedly revere. The millions of owners of diesel cars are the most obvious victims of the criminal behavior. They have already seen the resale value of their vehicles plummet, and now face the prospect of not being allowed to drive their cars in some cities. Shareholders have seen the value of their investments erode. Suppliers are also getting the short end of the stick - if the five German automakers agree to buy from only one company, others stand no chance of winning orders. Anyone who breathes in crowded cities is a victim, and so are taxpayers, who will end up footing most of the bill for increased pollution.
Above: An infographic looking at the scandal unfolding (Image: Dhaka Tribune)
Stockholders and employees have been making their displeasure known. Shares of Volkswagen, Daimler and BMW have been battered since the Der Spiegel article appeared. Michael Brecht, head of Daimler’s works council (roughly the equivalent of a labor union) told Bloomberg that “workers are rightly horrified and angry” by the antitrust allegation, and “there must obviously be consequences” if they’re confirmed. “Management has the duty to thoroughly inform the supervisory board. That hasn’t happened yet,” the Volkswagen works council said in a statement. “Trust in company leadership is dwindling more each day.”
The scandal has become an issue in the German national elections, which are scheduled for September. After Britain announced a plan to ban internal combustion vehicles by 2040, reporters have been asking if Germany plans to make a similar move, but that doesn’t seem to be on the table. Chancellor Angela Merkel has been called the German auto industry’s de facto chief lobbyist. She once complained to California officials about the state’s strict nitrogen oxide limits, and her administration lobbied the EU to provide subsidies for diesel fuel.
“[Chancellor Merkel] has often warned against demonizing diesel motors - diesel motors emit less CO2 and are therefore more environmentally friendly, but of course we need to work honestly and of course we continue to look for other solutions,” German government spokeswoman Ulrike Demmer told Reuters, adding that Merkel was also promoting electric vehicles.
Above: Germany's Chancellor Merkel seen to be close with country's automakers (Image: Cicero)
Others in Merkel’s Christian Democratic (CDU) party favor quicker action. “We need to start getting rid of combustion technology in the short term,” Oliver Wittke, a CDU transport expert, told Deutschlandfunk radio, saying that it was unacceptable to let Britain lead the way while Germany’s auto industry fell behind.
“If the antitrust violations were to prove true - and there’s a lot to suggest that - then one must really say the clear sentence: the rule of law also applies to the car industry,” said CDU caucus leader Volker Kauder.
Diesel is doomed
Whatever happens to the companies involved, the future is not bright for diesel cars. As the New York Times reports, “Sales of diesel vehicles are in free fall. During the first six months of the year, sales of diesels declined 10 percent in Britain, 9 percent in Germany, and 7 percent in France.”
Above: Diesel sales are falling as scandals threaten its future (Image: Phys Org)
As The Guardian puts it, “diesel technology has been a dead duck since the emissions-cheating scandal erupted, followed by the revelations of how polluted London’s atmosphere has become, with emissions of nitrous fumes from diesels being blamed for much of the problem.” In January, UK registrations of new diesel cars were down 4.3% compared to the previous year, while petrol car sales were up by 8.9%. “Ultimately, the game is up for the internal combustion engine.”
Numerous cities in Europe, including Madrid, Paris, Stuttgart (the headquarters of Daimler) and Munich (the headquarters of BMW), are considering banning older diesels. Customers fear they may be prohibited from driving into city centers.
On the other hand, ditching diesel is a painful proposition. Germany’s auto industry provides a fifth of the country’s exports, and supports around 800,000 jobs. Massive fines or other penalties that substantially weaken the companies seem unthinkable. Automakers are hoping that they’ll be able to make a few software updates and keep cranking out the diesel engines. “The manufacturers will play their part to improve air quality in cities and make diesel fit for the future,” said Matthias Wissmann, head of the German auto lobby VDA. “Diesel is enormously important for climate protection as well as prosperity in Germany.”
Above: More into the accusations of a German automaker cartel (Youtube: TRT World)
However, with pressure building on so many fronts, elected officials are realizing that diesel has become a political liability. A return to business as usual seems increasingly unlikely.
“The political system, the parties, the government in Germany has part of the responsibility for the current situation,” said Ferdinand Dudenhoeffer of the University of Duisburg. “Our politicians and our car industry want to save the past [but] diesel is a mess, and they need to find a solution for the future.”
The only long-term solution may be for the government to force automakers to do what they should have done two decades ago: start investing in electrification.