The Emissions Scandal That Cost Volkswagen $70 Billion Is Still Unfolding. How Did It Start? A New Book Tells the Story

A $70,000 test run by university students exposed Volkswagen's cheating scandal.

In the spring of 2013, Hemanth Kappanna and Marc Besch were driving a strange-looking Jetta down a California highway.

The car had nothing resembling comfort or driving feel. The trunk was stuffed with a tangle of hard and soft tubing that drew exhaust from the tailpipe and fed it into a gray box wired with an assortment of cables. Next to the gray box sat a portable Honda generator that powered the whole rig.

Plenty of passersby, drivers, even police officers were curious about the Jetta. But the two men inside had no time for that. The whole way, they had to put up with the noise and the thick fumes the rig threw off.

The two weren't inventors testing new equipment. They were graduate students at West Virginia University's Center for Alternative Fuels, Engines and Emissions, and they had $70,000 in funding to rig up the car. The project was meant to test whether the nitrogen oxides coming out of Volkswagen diesel cars in real-world driving really met America's strict Clean Air Act standards, as the company claimed.

What they didn't know at the time was that their project would end up costing the Volkswagen Group $22 billion in direct payouts and more than $50 billion in market value over two years. Several Volkswagen employees would end up in court as defendants, and the CEO would resign over it.

Their research showed that Volkswagen had installed defeat devices on the diesel cars it sold in the US so the cars could pass emissions tests.

Nitrogen oxide is one of the harmful substances in vehicle exhaust and the main pollutant from diesel engines. Besides contributing to global warming, it worsens conditions including asthma and bronchitis.

Volkswagen admitted to cheating in 2015. Its market value dropped by a third, about $33 billion, within two days, and it faced at least $22 billion in fines and settlements.

Volkswagen understood the risk all along. But an entrenched corporate culture pushed the company toward quick wins and led it to underestimate, and even misjudge, that risk.

Jack Ewing, a business and economics reporter at The New York Times, has tracked and reported the story for years. Drawing on sources inside Volkswagen, court documents and public statements by the people involved, his new book Faster, Higher, Farther: The Volkswagen Scandal lays out in detail how Volkswagen's corporate culture produced the lie.

Ewing argues that Volkswagen had a toxic organizational culture — toxic in the sense that, chasing the company's ambitions, it abused power until thousands of innocent Volkswagen employees were put at risk and drawn into the crime.

The book came out this May. Its account runs through this past January, when Christine Hohmann-Dennhardt, the Volkswagen board member responsible for compliance, left the company.

The affair is still unfolding, and far from over. The people involved still face trials, and German prosecutors keep opening investigations.

What exactly was the diesel emissions scandal?

Before Volkswagen's downfall, people thought of diesel as a clean fuel, more economical than gasoline. Europe had long had a reputation for being greener, and half the new cars sold there were diesels.

Gasoline engines ignite fuel with spark plugs; diesel engines burn fuel by compressing it. Inside the engine, the highly compressed fuel-air mixture of a diesel burns more completely than in a gasoline engine. That is why diesel engines get better fuel economy.

But before the 1970s, diesel engines were generally used only in machines like tractors, construction vehicles and tanks. The extra torque diesel combustion produces is both an advantage and a drawback: it puts greater pressure on the engine's moving parts, so diesel components have to be built stronger, which also makes them heavier.

The way diesel burns made diesel cars shakier and louder than gasoline cars. More important, early diesel engines produced more harmful substances than gasoline engines, including nitrogen oxides and PM2.5 particulates. To put a diesel engine in a passenger car, all of these problems had to be solved.

The oil crisis that began in 1973 pushed average gasoline prices up 40%, giving consumers a reason to buy fuel-efficient diesel cars and carmakers a reason to develop them. In 1976, Volkswagen offered a diesel version of the Golf, but for most buyers the car was too loud and too shaky.

In the 1980s, Ferdinand Piëch — a descendant of the Porsche family, then working at Volkswagen's Audi brand — set out to improve the diesel engine. He was Ferdinand Porsche's grandson.

Piëch's idea was to use direct fuel injection, which allowed more precise control over when fuel reached the cylinders and how much of it. At the same time, turbochargers improved the delivery of air to the cylinders.

Paired with an onboard computer running the engine control system, the turbocharger and the injectors could adjust the air-to-fuel ratio on the computer's orders. Whether the car was idling, climbing a hill or running down the highway, fuel and air could reach the best mixture for combustion. The improved engine still roared, but it no longer belched the black exhaust that older diesels did.

Mercedes-Benz and BMW were doing similar research, and had started even earlier than Volkswagen and Audi, but they used it only in expensive high-end models, so the technology never spread.

Volkswagen spent 11 years on the research, named the result TDI, and showed the first TDI-equipped Audi 100 at the 1989 Frankfurt Motor Show. Piëch claimed it used 2 liters less fuel per 100 kilometers than the same model running on gasoline.

By the early 2000s, Volkswagen's command of diesel technology had won it a dominant position in Europe. Diesel became a symbol of environmental virtue, and it squeezed out rivals such as General Motors' Opel brand. David J. Herman, Opel's former chairman, later recalled: "Market share shifted dramatically over the years, largely on the back of diesel."

But diesel engines still hadn't solved the pollution problem. A 2008 study by King's College London found that long-term exposure to airborne nitrogen dioxide particles was ending nearly 5,879 lives a year early in London, more than twice what had been believed.

The report found that Oxford Street had the highest nitrogen dioxide concentration in the world, mainly because of the density of diesel buses there. London's mayor later called for a diesel scrappage scheme to deal with the capital's pollution.

MIT ran a similar study, but narrowed it to the people affected specifically by Volkswagen's emissions cheating. It concluded that the excess emissions from the roughly 482,000 affected vehicles sold in the US would cause about 60 premature deaths in America, and that the excess emissions from the affected vehicles sold in Germany between 2008 and 2015 could cause 1,200 premature deaths across Europe.

The New York Times reported that monitoring stations in European cities including Stuttgart, Munich, Paris, Milan and Rome had recorded high levels of nitrogen oxides and particulates or soot, which could be pushing air quality down.

European emissions rules had always set explicit limits on pollutants from gasoline and diesel cars. The Euro 3 standard, in force from 2000, required diesel cars to emit less than 0.05 grams of particulates per kilometer and set no such requirement for gasoline cars — a sign that diesel particulate emissions really were worse and had to be controlled. For nitrogen oxides, Euro 3 capped diesel cars at 0.5 grams per kilometer and gasoline cars at 0.15 grams.

But as The Economist pointed out, the EU's nitrogen oxide requirements were not as strict as America's. Europe cared more about fuel efficiency and carbon dioxide emissions, where EU standards were the toughest in the world — "the trouble is that these tough standards had almost nothing to do with how cars actually performed on the road."

Enforcement was another matter. "In Europe, enforcing emissions rules is basically a farce — there's essentially no enforcement at all. If you get caught there's barely any penalty; the worst that happens is a recall. It's almost an invitation to break the rules," Ewing said.

American environmental officials also worried about keeping the growing number of diesel vehicles on the road clean. In 1990, a sweeping revision of the Clean Air Act won broad support on Capitol Hill from Republicans and Democrats alike. The act required each area, according to its air pollution grade, to cut emissions of volatile organic compounds, nitrogen oxides and other pollutants by 50-90%. Particulates, for instance, could not exceed 0.0625 grams per kilometer. In Europe at the same time, the limit was 0.14 grams.

Some manufacturers took the risk anyway. In 1993, US environmental testers found that General Motors' Cadillac had installed a computer chip that raised the ratio of gasoline to air in the cylinders whenever the air conditioning came on, keeping carbon monoxide emissions under the test limit. That let the Cadillac pass the lab test at 3.4 grams of carbon monoxide per mile while emitting 10 grams per mile on the road. In 1995, GM agreed to pay $45 million to cover the fine and the cost of recalling and repairing the cars.

American rules were stricter, but not impossible to meet — as long as carmakers were willing to spend more.

This was the moment Volkswagen chose to gamble.

The cheating started from the bottom up

Volkswagen's US sales began sliding in 2003. Piëch, by then the company's chief executive, wanted Volkswagen to become the largest carmaker in the world. To get there, it had to be strong in America too.

But in the US, Volkswagen was being beaten by Toyota. In 2000, Volkswagen sold 300,000 cars in America, a fifth of what Toyota sold.

Volkswagen was looking for a distinctive selling point to win back share in the US. It settled on diesel. Because American diesel fuel was lower quality than Europe's, diesel caused worse pollution in the US, and American regulators leaned toward restricting its use.

Volkswagen wanted to make diesel an environmentally friendly technology and win over the customers who would otherwise buy a Toyota Prius. It decided to develop an entirely new diesel engine.

By 2006, Volkswagen's engineers realized the new engine could not meet the stricter American emissions standards. That meant the Environmental Protection Agency would not certify the car, and the car could not be sold.

Volkswagen later admitted in court filings that its experts could not hit both the fuel economy and the emissions targets within the time frame and the budget they had. An engineer who worked on the new engine put it more bluntly: "It was a bad plan," he said.

Volkswagen could have built a car with better emissions technology. Facing a similar problem, BMW sold diesel SUVs in the US that carried a range of emissions technologies: exhaust gas recirculation, NOx traps and SCR systems. But for less affluent customers, that would have added hundreds of dollars to the cost of a Volkswagen and taken up valuable space, without making the car any more appealing. Emissions technology is not what a dealer talks about when he is trying to sell a car.

Volkswagen took a different road.

At the end of 2006, about fifteen people responsible for diesel engines and engine electronics gathered in a conference room on the top floor of the R&D building at the Wolfsburg plant.

The most senior manager in the room was Rudolf Krebs, head of powertrain development. Software engineers showed the executives a three-page deck. One slide was a diagram of the procedure the Environmental Protection Agency used to measure the volume of pollutants coming out of a car's tailpipe.

In a lab, a test car runs on rollers while regulators try to reproduce the conditions a car meets on the road, including simulated city and highway driving. This so-called test cycle follows a predictable pattern. The presentation explained how code embedded in the engine control software could recognize the pattern and switch on a device to cut emissions while the test was running. The rest of the time, the pollution controls would be switched off to protect the particulate filter.

"What was described in that slide deck fits the definition of a defeat device, which is illegal in both the US and the EU," Ewing said.

Everyone in the room understood how much risk they were taking, and a fierce argument followed. Some worried that American regulators might find the software; some thought cheating was simply wrong. Others genuinely believed they were working to build a cleaner engine.

But the meeting lasted only half an hour. After talking it over, Volkswagen decided to install the illegal device and software that would cut emissions whenever a car was submitted for testing.

As people filed out, Krebs, the most senior person there, said one thing: "Don't get caught."

Krebs later denied that he had knowingly approved software to manipulate emissions results, at that meeting or at any other time. He insisted that the managers in charge of diesel engine development had assured him they could build an engine that met American standards.

Yet people inside Volkswagen clearly already knew they were about to break the rules. Stuart Johnson, the executive in charge of emissions compliance at Volkswagen's American arm, wrote a memo noting that in the late 1990s American truck engine makers including Cummins and Caterpillar had been caught using defeat devices, "a clear violation of the spirit of emissions regulations and certification testing procedures."

A few days later, Leonard Kata, another Volkswagen manager responsible for American emissions rules, reinforced Johnson's message in an email.

Volkswagen cheated anyway. The compliance executives did nothing further to stop it. Johnson is still at Volkswagen today.

In late 2008, Volkswagen launched its "clean diesel" marketing push in the US, positioning the Golf, Jetta, Beetle and other models as green alternatives to hybrids like the Prius. It also put $1 billion into a Passat production line in the US.

In 2010, Volkswagen's US sales stopped falling and began to recover.

After the scandal broke, Volkswagen faced a criminal investigation by the US Justice Department, a lawsuit from the Federal Trade Commission and an inquiry by the attorneys general of 42 states, the District of Columbia and Puerto Rico. Germany, South Korea and other countries opened investigations of their own, and investors, including Norway's sovereign wealth fund, sued the company.

Last September, James Liang, the first engineer charged in the Volkswagen emissions case, pleaded guilty to taking part in developing the cheating software and misleading regulators. This past January, US prosecutors charged six former Volkswagen executives separately.

Everything Volkswagen did here was both illegal and unethical. But ordinarily, employees are just working for a company — they shouldn't have to gamble on lawsuits and prison time for it.

This behavior came out of Volkswagen's internal culture

The whole emissions scandal happened on Piëch's watch. The Porsche and Piëch families are tied directly to Volkswagen's founding.

In 1934, Hitler wanted every family to own a car, and set out to found Volkswagen. In German, Volks means "people" and Wagen means "car." The full name means "the people's car."

He went to Ferdinand Porsche, then a working automotive engineer.

When Porsche reported his progress to Hitler in 1935, Piëch's father was standing next to him: Anton Piëch, a Nazi party member and Porsche's son-in-law.

Volkswagen's first car was priced at 990 marks, and a buyer had to pay another 250 marks in insurance and delivery charges to drive it away. Even so, if the car could actually be built, 1,240 marks was cheap — the cheapest car on the market then cost 1,700 marks. Germans could pay in installments: 5 marks a week, and after six months of payments they could drive the car home.

German households all over the country paid in. But before the people's car could be built, the country got the war that everyone took part in.

Five million Germans died in the war Hitler started. Ferdinand Porsche himself was not a Nazi, but he cooperated with the Nazis readily, bidding on tank designs including the famous Tiger.

"Porsche's defenders have long insisted he had no love for the Nazis. But when it was necessary to realize his engineering ambitions, he was willing to use his relationship with Hitler," Ewing wrote.

After the war, West Germany rebuilt the Volkswagen Group, and it grew into a major carmaker on the strength of the Beetle, which had been designed before the war.

British Army Major Ivan Hirst did a great deal to make that happen. It was he who found the Beetle's design amid the ruins and pushed to put it back into production.

In 1946 and 1947, Volkswagen built at least 10,000 Beetles and began exporting them. To persuade countries Germany had once occupied to take the Beetle, Hirst also set up a 12-person council.

The Beetle was a hit in the postwar market: simply designed and cheap, exactly what people needed then. In the 1950s it was sold in the US, Brazil, Australia and elsewhere. Louise Piëch, Ferdinand Porsche's daughter, helped the company build the dealer and service networks its foreign markets depended on.

By the late 1960s, Volkswagen was the leading brand in the American import market, selling hundreds of thousands of cars a year there. At one point a third of Volkswagen's output went to the US.

In 1972, the 15,007,034th Beetle came off the line, passing the Ford Model T to become the most-produced civilian car model in history at the time.

But the Beetle was bound to grow obsolete. It accounted for 80% of Volkswagen's sales, and once it hit its ceiling, the company was in trouble. In the early 1990s Volkswagen ran heavy losses and came close to bankruptcy. Warehouses filled up with cars that came off the line and could not be sold.

By then the Porsche-Piëch family had come back, Ferdinand Piëch among them.

He was a genuine automotive genius, the inventor of Audi's quattro all-wheel-drive system and of the TDI diesel engine. The first is still one of Audi's signature technologies on its high-end cars; the second made the Volkswagen Group one of the first companies to turn diesel into a fuel for ordinary drivers.

But several of Volkswagen's best-known scandals also happened on Piëch's watch.

Domineering, arrogant, aggressive, combative — all of it became the dark side of the way he ran the company.

In 1992, Piëch began meeting secretly with José Ignacio López, then General Motors' 55-year-old star purchasing manager, and asked him to hand over GM's development materials. In 1993, López joined Volkswagen in Germany, carrying with him a set of important GM documents: new model plans, supplier prices and detailed plans for a production line about to open. GM sued both Volkswagen and López. Volkswagen ended up paying General Motors $100 million.

There were also repeated scandals over bribing union leaders with cash and prostitutes.

Piëch also judged his engineers strictly: miss the deadline and you were fired.

Miss the deadline and you're fired, while the CEO on down had no qualms about illegal means to hit a target. So when the order came down to build a car that would pass American emissions standards no matter what, the result should surprise no one.

In the end, a $70,000 experiment exposed Volkswagen

By 2012, Piëch was no longer Volkswagen's CEO, but he stayed on as chairman of the supervisory board, a job with real power.

The International Council on Clean Transportation (ICCT), an NGO, gave West Virginia University $70,000 for the test.

It wanted the researchers to work out how Volkswagen's diesel cars were passing America's strict emissions standards under its "clean diesel" program, so it could promote the same approach in Europe.

They picked Volkswagen because the company had claimed to fit its cars with technology that stripped nitrogen oxides out of the exhaust, and had spent millions of dollars trying to convince Americans that diesel cars were a green alternative to Toyota's hybrids.

The road tests showed that the Jetta's nitrogen oxide emissions ran 15 to 38 times over the American limit across different conditions, from highway cruising to congested city traffic. The same tests on a Passat gave similar results, with nitrogen oxides 9 to 20 times over the limit. In the lab, both cars came in well under the standard.

The students were puzzled. They did not know exactly what had gone wrong, only that something looked suspicious. They published their report. At first, outside the small circle of people who follow vehicle emissions testing, almost no one noticed.

In 2014, California's Air Resources Board noticed, and opened an investigation.

"If Volkswagen had been smart, they could have admitted fault right then — 'We were wrong, we did something bad, we're sorry, we'll fix it,'" Ewing said.

Volkswagen did not. It covered the problem up and made excuses for a year and a half, and fed regulators misleading and false information. Volkswagen kept saying this was a technical issue that would be fixed. It recalled cars to update the software, but that did not solve anything.

"All of that was just stalling for time," Ewing said. "Once they get into the habit of lying, the habit is very hard to break."

Because the recalled cars still showed no real improvement when they were retested, California's Air Resources Board stepped up its investigation. It set up a compliance program aimed at Volkswagen, formed a dedicated Volkswagen team and ran intensive tests.

Faced with evidence that kept coming out, Volkswagen finally admitted in September 2015 that it had installed illegal software on 11 million cars worldwide so they could pass emissions tests.

Even the pricier luxury brands, Porsche and Audi, and Volkswagen's own high-end Touareg, turned out to have cheated.

In 2015, Volkswagen CEO Martin Winterkorn resigned over the emissions cheating scandal.

The affair has kept unfolding. Investigators found that Volkswagen, Audi, BMW and other brands had been discussing the cost of diesel emissions treatment systems together since 2006, which raised suspicions of improper collusion.

This past March, German prosecutors raided Audi's offices to investigate the company's wrongdoing in the US.

That same month, Matthias Müller, the chief executive brought in after the scandal, told an annual investor meeting that the fraud had been the personal work of lower-level employees, and that no current member of the management board was involved.

Graphics: Feng Xiuxia

Cover image/taken by the author, Visual Hunt