Dieselgate | Running on Fumes | 2

0:09Spring 2013. A Volkswagen Jetta flies down a freeway in Northern California. A mess of pipes and hoses peek out of the trunk. One of the tubes is duct taped to the tailpipe. The other end feeds into a makeshift plywood box in the back of the car. And the box is hooked up to a portable generator. It makes such a racket the two young men piled into the jetta can barely hear themselves think. Pull over. Pull over. What? Pull over. The wire came out again. Again? Man, it's so hot in here, the super glue is probably melting. Where's the duct tape? It's in the thing behind the seat. God almighty. A police cruiser pulls up behind the car.

0:56An officer gets out, eyeing the equipment sticking out of the trunk with confusion. The young man in the driver's seat rolls down the window as the officer approaches. Are you gentlemen all right? Hey, yes sir, just some equipment trouble. What's all this? It's a portable emissions measurement system. Uh, who now? Sorry, we're researchers from West Virginia University. West Virginia? You guys are a long way from home. What are you doing all the way out here in NorCal? The researchers explained their project. They've won a grant to study the real-world emissions from diesel vehicles sold in the U.S.

1:33They had to rig together their own equipment to make that possible. Typically, emissions are only tested in the lab. not on the road. And how's it working out? Well, it's supposed to be a simple project. The clean transportation group that gave them the grant assumes the cars will pass muster, and the results will stand as proof that diesel really can run clean. But when the data comes back, it's not what the researchers expected. The Volkswagen Jetta emits up to 35 times the legal limit of nitrous oxide. The Volkswagen Passat is almost as bad. The students assume they've made a mistake. Their equipment is less than sturdy.

2:16The portable generator keeps breaking down. Wires keep coming detached as they drive. But they double-check their procedures, test and retest, and they still can't get the Volkswagen's real-world emissions to match the figures they see in the lab. They drive in city traffic at rush hour, on empty highways, up and down Mount Baldy. For their final test, they drive the Passat all the way from L.A. to Seattle and back. But no matter what they do, the numbers still aren't adding up. Once the run-in with a police officer is sorted, the researchers refocus on the task at hand. I don't understand. What are we doing wrong?

2:57Maybe we're not doing anything wrong. What do you mean? We're not having this issue with a BMW, so maybe it's not an us problem. Maybe it's a Volkswagen problem. Their emissions system. He doesn't dare finish his thought aloud. I'm going to say something that sounds like heresy here, but there are two kinds of truths. There's lab truth, and then there's the real world. Customers don't drive in climate-controlled rooms. They drive up mountains, sit in traffic, idle in the rain. When businesses test their products only in perfect lab conditions, they risk setting themselves up for disaster once those products hit the road.

3:42Here, there's no escaping it. In the real world, the Volkswagen emissions system was built to fail. And that's the real truth.

3:58When planning for your future, you want someone with a history of keeping their word year after year. For nearly 160 years, Pacific Life has been a trusted name in the industry. But that isn't just a number. It's experience that matters. It's 160 years of promises held, helping generations retire with confidence, protect their loved ones, and plan for whatever comes next. Whether you're looking for life insurance, employee benefits, or retirement income solutions, when your future is on the line, you want history on your side. And believe me, Pacific Life has been there, always there through changing times, always focused on your needs.

4:37Ready to secure your tomorrow? Ask a financial professional how Pacific Life can help you feel prepared for what's next. Pacific Life Insurance Company, Omaha, Nebraska, and in New York, Pacific Life and Annuity, Phoenix, Arizona. because with Pacific Life, you're not just planning for the future, you're partnering with trusted experience. The WNBA playoffs are in full swing, and Tommy Alter's The Young Man in the Three brings you closer to the game. Get complete WNBA playoff coverage as Tommy sits down with the game's biggest stars and delivers unmatched analysis. The Young Man in the Three's WNBA playoff coverage is presented by Quest Nutrition.

5:17From irresistibly crunchy protein chips to rich chocolatey protein bars, these treats make giving in feel so good. Quest, big on protein, low on sugar, huge on flavor. Shop Quest on Amazon at amazon.com slash questnutrition and enjoy all the WNBA action on the Young Man and the Three wherever you get your podcasts.

5:45From Wondery, I'm David Brown, and this is Business Wars.

6:11In the last episode, Volkswagen found a way to cut corners on regulations by using a defeat device to mask their diesel engine's emissions. For years, it worked like a charm. The cars even won awards for being environmentally friendly. Now, the company's at its peak, and there's nowhere to go but down. And when the truth comes out, Volkswagen's survival is on the line. This is Episode 2, Running on Fumes.

6:46It's April 2014. Volkswagen's top U.S. compliance officer, Oliver Schmidt, is looped into an email about a study from West Virginia University that's about to be published. Schmidt, who was born and raised in Germany, is in his mid-40s with a bald head and icy blue eyes. He was transferred to Michigan two years ago to run Volkswagen's emissions office. It's his job to make sure the company's cars meet U.S. regulations. And this study, which is coming out next month, suggests that they absolutely do not. The results show that Volkswagen's diesel cars emit up to 35 times more NOx on the road than they do during emissions tests.

7:31The EPA is sure to have some questions. It's Schmidt's job to figure out how they'll respond. Schmidt taps his pen against the desk. He knows how seriously the EPA takes its job. If the truth gets out, they won't get off with a slap on the wrist. Someone will be going to prison. And with his job title, it just might be him. He takes a deep breath and types out a reply all to the Volkswagen managers on the email thread. It must first be decided whether we are honest. If we are not honest, everything stays as it is.

8:14The West Virginia University study is published in May, and a week later, Volkswagen's quality control exec, Bant Gottweis, aka the fireman, writes a memo about it directly to CEO Martin Vinterkorn. The memo says, very carefully, that Volkswagen can't give the EPA a thorough or convincing explanation for the discrepancy in emissions. And if they can't explain what's going on, Gottweiss assumes the regulators will look at the engines to see if there's a defeat device installed. He attaches the memo to a cover note by another Volkswagen executive, and it's delivered to Vinterkorn's office. If Vinterkorn didn't already know about the Defeat device, he certainly does now.

9:04Gottweiss is right. Soon after the study is published, the EPA and California Air Resources Board, or CARB, get in touch with Volkswagen. California is the largest auto market in the U.S., So keeping CARB happy is do or die for Volkswagen. The regulators ask a series of increasingly specific questions about the diesel engine's emissions. The orders from Volkswagen management are clear. Do not, under any circumstances, tell the regulators about the defeat device. Instead, the engineers are supposed to obfuscate the truth while appearing to cooperate. In a series of meetings with U.S. regulators, Volkswagen engineers do their best to discredit the results of the WVU study.

9:54They poke holes in the methodology, complaining about calibration problems and unexpected in-use conditions. They hand over results from their own internal tests, which, surprise, surprise, show that nothing is amiss with the engine's emissions. But the EPA and CARB aren't buying it. They push back with more questions, and they run their own tests that contradict what Volkswagen is telling them. Finally, in December 2014, Volkswagen's engineers admit that, yes, there are issues with the engine software, but they insist it's a simple error with an easy fix. To throw the regulators a bone, they even agree to voluntarily recall hundreds of thousands of affected cars, so the software can be patched.

10:45Within a month or two, CARB's engineers test that software patch and find that it doesn't do anything to reduce emissions. There must still be another issue, and they're getting tired of hearing excuse after excuse from Volkswagen while the problem goes unresolved. Volkswagen tries to stall them for as long as possible. Now, more than ever, they can't afford any setbacks.

11:17In December 2014, a gaggle of reporters gathers in a top-secret showroom at Volkswagen headquarters. Staff call the showroom Valhalla, after the majestic hall of Norse mythology where the souls of slain warriors go after death. The Vikings believed there was nothing more glorious than dying in battle, and CEO Martin Vinterkorn, for one, is ready to participate in that tradition. He invited the reporters here for a buzz-worthy press event, a sort of sleight-of-hand trick to distract them from the avalanche of issues Volkswagen is facing. The reporters crowd Vinterkorn as he enters the showroom.

11:57One bold journalist shoves a recording device into his face. Mr. Vinterkorn, do you have anything to say about your slipping U.S. sales? We're not slipping. We sold over 10 million vehicles this year. Globally, but I'm talking about the USA. 10 % drop year over year. That's a heck of a slump. All manufacturers are at the mercy of their customers. Consumer tastes change. That's business. The key is to change with them. The reporter's referring to the fact that as the U.S. economy rebounded from the Great Recession, Consumer preferences veered back to gas-guzzling SUVs. Volkswagen's lean, green, compact cars fell out of favor, and the company's once skyrocketing sales numbers began to fall.

12:44Expanding Volkswagen's SUV offerings could be the solution. To that end, Vinterkorn leads the reporters to a shiny new SUV prototype, a diesel hybrid called the Cross Blue. He leans across the hood. It's as wide as his entire wingspan. The Americans like things big. When the Cross Blue launches in 2016, it will run on our tried-and-true clean diesel engine, the same model already beloved by hundreds of thousands of our loyal customers. He's playing it cool, but there's a good chance the Cross Blue will never make it to production. This moment highlights a timeless business principle. Meet the market where it is, not where you wish it were.

13:36This is especially true in the auto industry, where long-term planning and forward thinking aren't just valued, they're essential. Volkswagen wanted Americans to fall in love with small, clean diesels. But U.S. buyers wanted big SUVs. Companies that ignore consumer behavior usually learn the hard way. No amount of corporate vision can override what people actually put their money toward. Car consumers tend to be driven by passion, and the auto industry is one of the most heavily regulated in the world. By the next summer, U.S. regulators are tired of getting the runaround. They go into nuclear mode.

14:18The EPA threatens to withhold authorization for all of Volkswagen's 2016 diesel cars until they get a straight answer about what's going on with the emissions. And this setback could bring the entire company to its knees.

14:40Ready or not? Yep, the holidays are coming, and I'll be honest, I love having friends and family over. But I don't love realizing at the last minute that my serving pieces look like they've been through one too many dinner parties. Or that the guest room is more college dorm chic than holiday cozy. Know what I mean? Well, that's where Wayfair comes in. We just ordered some new serving plates, a new wreath for the door, a set of crisp new sheets, and suddenly the house feels just about guest ready. Even better, it didn't feel like a chore. It felt fun. But I've been here before, I'll be honest.

15:14My secret? The Wayfair app. What I love most is how Wayfair has literally everything you need. That's no exaggeration. I was surprised to find high-quality cookware that's perfect for hosting those big family dinners. And let me tell you something. Delivery was a breeze, free and fast, even for the larger items. Whether you're looking to spruce up your kids' rooms with festive touches or need new bedding for the guest room, Wayfair's got you covered. From Christmas trees and wreaths to inflatables for the yard, they're truly a one-stop shop for holiday prep. And the best part? There's something for every style and every budget.

15:50I can't wait to tackle more of my holiday home goals with Wayfair. It just makes getting ready for the season so much easier. Leaving more time to enjoy with the family. That's what it's all about. Get organized, refreshed, and ready for the holidays for way less. Head to Wayfair.com right now to shop all things home. That's W-A-Y-F-A-I-R dot com. Wayfair. Every style. Every home. You hear it all the time on Business Wars, the battles between brands, the bold moves, the breakthroughs. But behind every winning business, there's something less talked about. Great IT. That's where Manage Engine comes in.

16:30Manage Engine offers a comprehensive suite of AI-powered IT management solutions that give you complete control over your IT operations. Your employees can collaborate securely. Your IT admins can easily monitor and manage devices. And you get full visibility of your data hygiene. ManageEngine also integrates well with most popular IT software programs out there. So, if you're a growing business or an organization looking for enterprise-grade IT management and cybersecurity solutions, visit ManageEngine.com to take control of your IT. That's www.m-a-n-a-g-e-e-n-g-i-n-e dot com.

17:26It's 2015, and Volkswagen has reached its ambitious goal of becoming the world's top automaker several years ahead of schedule. Volkswagen has overtaken Toyota in car delivery sales for the first half, making it the world's largest automaker. The magic barrier of 10 million car deliveries has already been broken four years earlier than anticipated. Volkswagen's CEO released a statement Sunday saying,

17:55The company blows past Toyota and GM in global sales in the first half of the year. One in every four cars sold in Europe is now from Volkswagen's family of brands. And Martin Winterkorn is the highest-paid CEO in Germany. It seems like there's nothing that could slow them down. Here's something that may be familiar to longtime Business Wars listeners. It's so very tempting to think short-term wins justify bending the rules. Volkswagen hit its 10 million car goal years ahead of schedule, but those numbers, they were inflated by deception. History seems to bear this out. Leaders often forget that success built on sand collapses quickly.

18:44Growth at all costs. It can feel intoxicating, but if integrity isn't machined into the frame, the wheels are bound to come off. Maybe not today or tomorrow, but almost inevitably, and sooner than anyone's expecting.

19:06It's July 27, 2015. Oliver Schmidt presents a slideshow to a room full of Volkswagen executives at the company's Wolfsburg headquarters. Schmidt had run Volkswagen's emissions compliance office in the U.S. until a few months ago, when he transferred to a new role in Wolfsburg. An American named Stuart Johnson took over his old role in Michigan. But in a week, Schmidt will be flying back to Michigan to help Johnson through a high-stakes meeting with a top regulator at CARB, the California Air Resources Board. Their goal is to quash any suspicions that they're cheating on emissions tests and convince the regulators to approve Volkswagen's 2016 diesel cars.

19:49But first, he has a meeting with his fellow VW executives. Schmidt flips slowly through the slides in his PowerPoint. The slides lay out exactly what's been disclosed to CARB so far, what's still being kept secret, namely the entire existence of the defeat device, and what the consequences would be if their cheating is discovered. A flowchart outlines two possible outcomes. If the meeting goes well, they'll get approval for model year 2016. If it goes poorly, an arrow points to another possibility. Indictment. Vinterkorn's hand curls into a tight fist around his pen. Indictment is not, in fact, a possibility.

20:36Not one he's willing to consider. The meeting ends with Vinterkorn and the other senior execs agreeing on a course of action. Keep lying through their teeth. Schmidt will offer partial disclosures about the problem, essentially admitting that there are issues with the engine's emissions without revealing anything about the defeat device.

21:03A week later, on August 5, 2015, Schmidt flies out to Michigan with a thick binder full of technical details and test results. He's arranged an informal meeting with Alberto Ayala, a senior CARB official who's in town for an industry conference. Schmidt waits in the lobby of the hotel where the conference is being held. When he sees Johnson enter, he beckons him over for a quick pre-meeting. I have some talking points we drafted in Wolfsburg. I'll do the heavy lifting if you can just... Keep my mouth shut? Johnson hasn't been fully briefed on the plan. In fact, until now he's been kept entirely in the dark about the defeat device.

21:45But he has his suspicions. I would just like to know point blank. What's going on here? Are we cheating? I deserve to know what I'm getting into. Schmidt clenches his jaw. He grabs a cocktail napkin and draws a diagram of the emission system, explaining the exact details of how it actually works. Johnson quickly puts together the pieces. So, there is... Yes, there is a defeat device installed, and we are not at liberty to disclose this today. I decide what we do, and do not disclose. Understood? You will sit there and smile and nod. Is that clear? Johnson nods, but Schmidt can tell it doesn't sit well with him, lying to regulators.

22:36He can only hope his colleague is able to push down his ethical qualms for the next half hour. The two men head down the hall to a meeting room where Ayala is already waiting for them. It's showtime. Schmidt sits down and slides the binder across the table. You're right. Our Gen 2 diesel engines are programmed to behave differently during testing than they do on the road. That's where the truth ends. Schmidt claims that the intention wasn't to cheat during testing, that they were just trying to lower the dose of fluid the emission system uses so it won't have to be refilled as often. They didn't realize that doing this would have so much of an effect on the NOX emissions.

23:22But we've done more testing and found that if we improve the dosing, we can cut emissions drastically, both on road and in the lab. Right, Stu? He nudges Johnson with his elbow. Right. We've already found the fix. Right here. He points to a diagram. Ayala studies it carefully. Schmidt sits on the edge of his seat, unsure if Ayala will buy it. After a long moment, Ayala nods and closes the binder. Thank you, I'll share this with my staff. We should start working on a press release to announce this. Everyone will be very glad to hear we have a solution. They shake hands. Ayala takes the binder with him as he leaves.

24:05Once they're alone in the room, Schmidt turns to Johnson and exhales. See, that was easy

24:17When Schmidt gets back to Germany He calls another Volkswagen exec And discusses leaving Johnson Out of future meetings with CARB It will be better for everyone If he doesn't have to actively lie Meanwhile, Ayala flies back to California After the conference He has his staff at CARB Look over the documents Schmidt gave him just to make sure everything checks out. Their explanation looks credible enough to him, but he's not an engineer. His technical knowledge is limited. But when his engineers get a look at the binder, they inform him that it's a load of crap. From a technical standpoint, this explanation doesn't make any sense.

25:01Volkswagen must be hiding something. And after more than a year of shoddy excuses and failed fixes, the CARB engineers fear there's only one possibility left. Volkswagen has to be using a defeat device.

25:24In the following days, CARB barrages Volkswagen with even more questions and still no approval for their 2016 diesel models. Even worse, they inform Volkswagen that they've gotten their hands on one of those 2016 models from the shipping dock, and they'll be thoroughly testing it themselves to make sure everything's on the up and up. Volkswagen executives go into panic mode. They schedule one more last-ditch meeting with the regulators. The execs approve a script for the employees to follow, telling them exactly how to answer the questions they're likely to be asked. The main directive, once again, is to hide the existence of the defeat device at all costs.