Saturday, 26 September 2015

Volkswagen emissions scandal: Blow to a nation's pride and global standing

The Straits Times, 25 Sep 2015

BERLIN • As Germany has emerged as the dominant actor in Europe, it has lectured Greece and other debtor nations on the virtues of thrift and lately wagged its finger at countries that baulk at receiving a share of refugees from the killing fields of Syria. Its right to lead, based on a narrative of self-sacrifice and obedience to rules, was generally acknowledged.

That is one reason the Volkswagen scandal has shaken the country's very core. More than just a tale of corporate misdeeds, the disclosure of systematic cheating by one of Germany's most iconic companies has delivered a sharp blow to its conception of itself as an orderly nation and tarnished its claim to moral leadership of the continent.

It was perhaps inevitable that Volkswagen's chief executive, Mr Martin Winterkorn, would quickly step aside on Wednesday after disclosures that the company deceived regulators over emissions from its diesel cars. But the effects on Germany are likely to play out for some time, even as it copes with a huge influx of migrants attracted by its reputation as Europe's beacon of opportunity and as it continues to find its footing as an often-ambivalent global power.

Further, the timing puts Germany in an awkward spot ahead of the global climate conference in Paris in December, where it had hoped to hold out its transformation as an industrial power reliant on a lower-carbon energy system as a model to the world.

In the immediate aftermath, Germany's leaders scrambled to distance themselves from the scandal and to mitigate the damage to the auto industry, which accounts for one in seven German jobs.

"The damage that a few people have caused for the firm and its workers is huge," said German Vice-Chancellor and Economy Minister Sigmar Gabriel as he toured the annual car show in Frankfurt on Wednesday. But, "we must take care that doesn't unleash a whole debate about the auto industry in Germany or the German economy," he continued.

In fact, it may be too late for that. Germany is very closely aligned with its car industry. Indeed, the state of Lower Saxony, where Volkswagen is headquartered in Wolfsburg, owns about 20 per cent of the company. Any governor of that state is deeply involved in the company's affairs.

"The saying is, when Wolfsburg has a sniffle, the whole state gets sick," said Ms Rebecca Harms, a prominent deputy for the Greens in the European Parliament, who grew up in Lower Saxony. Now "its reputation is really damaged. This is a catastrophe, not just for Lower Saxony but for a global enterprise" with 600,000 employees, she said.

So far, there is no evidence the government knew about the deception, though it was aware there could be deviations between emissions on the road and in the laboratory. But the matter is not just about jobs, market share or corporate reputations. The scandal captures Germany at a moment when it has been trying to hold onto values it always saw as defining, but that have become increasingly difficult to maintain as it becomes drawn into the messy problems of Europe and the world.

The Volkswagen blow came after months in which Germany seemed to go out of its way to bolster devotion to rules by imposing austerity measures on Greece, as a condition for a third bailout. Berlin insisted that European partners stick to what it said were the rules of the euro currency union.

Yet no sooner was it gaining a reputation in Greece and in other southern European nations as, at best, a strict taskmaster and, at worst, a heartless bully, than Germany and its Chancellor Angela Merkel were transformed.

By opening its doors to migrants from Syria and other troubled spots in the Middle East, admonishing other European nations to do their fair share and showcasing its immense volunteer network to make the newcomers feel welcome, it has in recent weeks been seen as the soft heart of Europe - a reputation it seemed to cherish, given its history.

The refugee crisis has revealed weaknesses in the German system. Many blamed the latest surge in refugees - particularly from war-torn Syria - on a Twitter post from a German government agency that appeared to offer asylum in the nation to any Syrian who made it to German soil.

Dr Merkel's hugs and assurances that Germany would accommodate all those worthy of asylum proved a step too far. With systems taxed and chaos advancing on its borders, Germany reimposed border checks this month.

Perhaps even more harmful in the long run, the Volkswagen scandal also comes at a time when Germany is trying to set an example for the rest of the world on lowering carbon emissions. Its ambitious policy of shifting away from carbon-based fuels to alternative energy like wind and solar has driven up costs for German business and consumers. Yet Germany has stayed its course.

As the immediate shock has subsided, Germans have sought a way to explain the Volkswagen chapter. "The biggest problem of VW is that this giant concern has become ungovernable," Sueddeutsche Zeitung, the German newspaper, wrote on Wednesday. "VW is led centrally from Wolfsburg. Just a few people have a say - everyone else just receives orders. Doubts or, even, resistance, are unwanted."

Ms Harms, who has campaigned for years on environmental issues, said Volkswagen could easily have complied with the standards imposed by the Environmental Protection Agency in the United States. "Why they decided instead to bet on manipulation" is incomprehensible, she said.

But the very fact that Germany's leaders in politics and industry felt compelled to try to control the damage indicated the depth of the wound to the nation's pride and standing. "Trust is part of the lust for innovation in a country," said Mr Volker Kauder, a key member of Dr Merkel's Christian Democrats. Its loss "could really cause us economic problems".


VW scandal will speed up diesel's demise
By Leonid Bershidsky, Published The Straits Times, 24 Sep 2015

The Volkswagen (VW) emissions scandal has broader implications than the potential damage it can do to Europe's biggest carmaker. It is the result of Europe backing the wrong emissions-reducing technology on a regulatory level. There is now an opportunity to reverse that error and force the continent's car manufacturers to concentrate on hybrid and electric vehicles. They have the technology and resources to reshape the market.

The scandal is about VW's bad business decision to cheat testing equipment so it could rush new engine models to market in the United States. It is also about a failure of regulatory oversight and testing technology.

Most of all, however, it's about diesel engines: They were the ones performing so badly on the tests that VW engineers had to look for a workaround so marketers could trumpet the advent of "clean" diesel. VW had an advantage in diesel technology, which it wanted to leverage in the US, for a reason.

In the mid-1990s, the European Commission and European Union (EU) member countries' governments started a campaign of massive intervention to stimulate the use of diesel engines in cars.

At the beginning of that decade, Europe and Japan had about 10 per cent of diesel automobiles on the road.

After 1995, the trends diverged widely: In a 2013 paper, researchers Michel Cames and Eckard Helmers estimated that without the government intervention, diesel automobiles would have accounted for about 15 per cent of vehicles on the road in 15 core EU countries, but now they make up 35 per cent of total cars.

This is the result of lower excise taxes on diesel than on gasoline throughout most of Europe and relatively lax environmental standards for diesel engines, allowing higher emissions of nitrogen oxide and harmful particles.

Some countries, such as Belgium, France and Spain, have long imposed lower taxes on diesel cars. In France, Peugeot even obtained a government guarantee of such a tax policy before prioritising the development of diesel engines over gasoline ones.

As a result, most core EU countries have more diesel cars on the road than any other kind. Only the Netherlands, and, to a limited extent, Germany, have bucked the trend by avoiding diesel-stimulating policies: It is possible that the incentives were the result of oil industry lobbying - as the sales of fuel oil fell, refiners needed to sell more diesel fuel, which is a similar type of product. But they probably stemmed from a misunderstanding of the environmental consequences.

"Green" regulation in European countries has centred on CO2 emissions, and diesel exhaust contains relatively little of that gas. Smog-creating NOx and soot particles were overlooked until the ultra-strict Euro 6 standard came into effect this month.

The French authorities have now realised this. It would have been hard not to: Paris now has a smog problem, which it did not have in the 1990s.

"In France, the diesel engine has long been privileged," Prime Minister Manuel Valls told an environmental conference in November last year. "That was a mistake."

The government now wants to move towards a diesel ban, which will force Renault and Peugeot to make a difficult transition as about two-thirds of the cars they now sell in Europe are equipped with diesel engines.

In fact, most European carmakers have a bad case of diesel dependence: Modern diesel engines are capable of keeping emissions below levels permissible under Euro 6.

Implementing the necessary technology, however, makes the cars more expensive, may affect their performance and requires the owner to watch the level of yet another liquid - urea, used to reduce NOx.

So even the cars sold today do not meet the emissions standards on the road, regardless of how they do in tests. Following the VW scandal, testing is likely to become more rigorous both in the US and in Europe, and more producers will be caught and fined for non-compliance.

There will be only two paths for them to take: making sure the emissions performance of all new diesel cars is irreproachable - which is not easy in the real world - or shifting production towards hybrid and electric vehicles, as Japanese companies did when they decided diesel was on its way out.

In 2013, according to the International Council of Clean Transportation, Japan had 21 per cent of hybrid and electric vehicles in its fleet - more than any country in the world.

The European leaders in the technology, Norway and the Netherlands, had 12.8 per cent and 11.3 per cent, respectively. Germany had just 1 per cent. European automakers have the technology to compete in the electric vehicle market: Their models outsell Japanese and American ones in EU countries where electric powertrains are popular.

In business terms, however, the move away from diesel - which should accelerate now - will be extremely costly, much more expensive than the regulatory fines the industry will probably face in the aftermath of the VW scandal.

There is light at the end of the tunnel, though.

Once the transition is completed, the Europeans, with their engineering strength, will make the hybrid and electric market much more competitive. In the US, too, Volkswagen will be back: After all, its e-Golf outsells the Tesla Model S in Norway today.


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