Dieselgate | Truth or Dare | 1

0:07November 2008, Los Angeles, California. Journalist Ron Cogan stands in front of a wall of blue drapes at the L.A. Auto Show. He's about to make a major announcement. And the winner for Green Car of the Year is the 2009 Volkswagen Jetta TDI. For the first time ever, the award is going to a diesel vehicle. Diesel? A notoriously dirty fuel known for its sky-high nitrogen oxide emissions. But not anymore. Or Volkswagen's state-of-the-art new technology cuts pollution so well, the 2009 Jetta TDI meets the most stringent emission standards in the world. The Jetta raises the bar in environmental performance, and at 41 miles per gallon, it rivals the fuel efficiency of a hybrid.

0:58Ladies and gentlemen, clean diesel has arrived. Stefan Jacobi, the CEO for Volkswagen North America, bounds onto the stage. This is a breakthrough for clean diesel as a real alternative to hybrids. It brings fuel consumption down, it's environmentally friendly, and most of all, it's fun to drive. This is Jacobi's victory lap. It's the Great Recession. Car sales are nose-diving. Every other major automaker is in a tailspin. But Volkswagen is on the rise. In the three months since the new Jetta hit the market, 8 ,000 have already been sold in the U.S. An impressive debut, especially during such a tough year for the market.

1:43But the phenomenal success is all based on a lie. VW wasn't just selling a car. They were selling a story. Clean diesel, great mileage, fun to drive. When customers buy the story, it boosts the brand. But if that story turns out to be fiction, trust crashes, and it's hard to tow that back. And something tells me the story of Dieselgate will go down as one of the ugliest crashes in corporate history.

2:18VW tried to develop a cheap, efficient system to cut emissions while keeping fuel efficiency high. But their engineers couldn't do it. Not on the timeline the top brass gave them, so they came up with a cheat for the Jetta and other so-called green diesel cars in their fleet. It's called a defeat device, a secret piece of software that can detect when the car's going through an emissions test. The barometric pressure, the position of the steering wheel, how long the engine's been running, when all these indicators are just right, The software essentially flips a switch and activates a kind of testing mode.

2:58The exhaust system kicks into high gear, reducing pollution enough to meet the strict U.S. limits. But when the car leaves the auto shop and actually gets on the road, it switches back to its regular mode, emitting up to 40 times as much nitrogen oxide. It seems foolproof. The clean diesel engine is hailed as a game changer. Millions of cars are driven off lots worldwide. While everyone else sinks, VW soars. And for years, no one suspects a thing. But how long can they get away with it? And will the company survive if they get caught?

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5:16From Wondery, I'm David Brown, and this is Business schools.

5:42Let's be honest. When pressed, most folks will confess to having cheated at one point in their lives, sneaking notes into a math test, perhaps, peeking at another player's hand in a game of cards. Okay, nothing to be proud of, but when the pressure sets in and time's running out, it can sometimes seem there are only two options. Either you bend the rules or you fail. At Volkswagen, failure wasn't an option. By 2007, the German car company was the third highest-selling manufacturer in the global market. But they were on a quest to top GM and Toyota to become the largest automaker in the world. It was an ambitious goal, to be sure.

6:22There was no way they'd get there without cutting a few corners. But that's a risk Volkswagen CEO Martin Vinterkorn is willing to make. And if the engineers working below them wanted to keep their jobs, they wouldn't dare to say no. Now, if you're the average high schooler glancing at a crib sheet during midterms, odds are you won't get caught. And if you do, you'll probably survive the consequences. But if you're one of the world's leading car manufacturers, cheating on hundreds of emission tests every day, well, you just might become a podcast episode. In this season, we're taking a look under the hood at Dieselgate, the most expensive automotive scandal in history.

7:08This is Episode 1, Truth or Dare?

7:20January 2007, a chilly winter day at Volkswagen headquarters in Wolfsburg, Germany. The sprawling riverfront campus is home to the world's biggest car factory, a 73 million square foot plant where hundreds of thousands of vehicles are made every year. Next door to the factory is a 13-story brick office building where Volkswagen's newly appointed CEO, Martin Vinterkorn, is addressing the company leadership. After 26 years with the Volkswagen Group, it's truly an honor to step into the role of CEO. The 59-year-old former physicist likes to be referred to as Professor Vinterkorn, even though the only professorships he's held were honorary.

8:01He's stocky, physically imposing, temperamental, and has a reputation for being very demanding. Everyone in this conference room is terrified of him. As we begin this new chapter of our company's history, I want to be very clear. The road ahead will not be easy. Times are changing. Tides are shifting. And to keep up, we need to move boldly. Winterkorn casts his gaze out the window. Right across the river is Autostadt, a billion-dollar tourist attraction that opened seven years earlier. Nestled among the rolling hills and lagoons are pavilions, showcasing Volkswagen's impressive family of brands.

8:43Audi, Lamborghini, Bentley, and Bugatti, to name a few. Since its founding in 1937, the Volkswagen Group has slowly grown to become the largest car manufacturer in Europe. But it's the 21st century. We're living in a global economy now. It isn't enough to be the best in Europe. We need to be the most profitable, fascinating, sustainable automaker in the world. And by 2018, we will be. He lays out his vision for Strategy 2018, a 10-year plan to blow past Toyota and General Motors and become the world's top automaker. To get there, they'll have to boost annual sales from 6.2 million vehicles to 10 million, all while raising profit margins from 6 % to 8%.

9:36The two executives share a concerned glance. That's a big ask. Yes? Uh-oh, he saw them. It's ambitious, that's all. That's good, ambitious is good. Yes. It's just that we're doing so well, we've already cornered the European market. The only way we could hit that target is if we, say, tripled our sales in the U.S. Yes. U.S. sales will need to reach one million cars per year. Yes, of course, sir. And we'll meet that target without ever sacrificing quality. Only the automaker with the most satisfied customers can really call itself number one.

10:29Vinterkorn's ambitious plan hinges on diesel. It's an area with plenty of opportunity for growth. Diesel cars are popular in Europe, but they only make up about 5 % of the U.S. market. There are a few reasons for that gap. Tax incentives, differing gas prices, and the fact that diesel engines have a bad reputation in the U.S.

10:55Back in the 70s, GM put out a line of diesel Oldsmobiles that were so loud and smoky, some believe they tarnished the name of the entire class of vehicles. After that, U.S. automakers never really tried again. But another big factor is that diesel engines emit way more nitrogen oxide than regular petrol engines. Nitrogen oxide, NOx for short, is a dangerous pollutant that causes asthma and other respiratory issues. And the U.S. has stricter NOx limits than most European countries. And those limits are really hard for diesel cars to meet. To make matters worse, the EPA recently tightened its NOx limits even further.

11:40All this to say, strategy 2018 hinges on making diesel happen in the U.S. But if Volkswagen has any hope of success, they'll have to build an engine that can meet the EPA's strict rules. And fast. Luckily, Volkswagen has had a new diesel engine in development for years already. It has an emissions system they licensed from Mercedes called Bluetech, which uses a tank of liquid solution to convert the dangerous NOx into harmless nitrogen and water. The downside? The Bluetech equipment is expensive, and it's too bulky for Volkswagen's smaller cars like the Jetta and the Golf. Plus, it was designed by their competitor Mercedes, which is a bit of an ego hit.

12:29For all those reasons, Vinterkorn has been opposed to using Bluetech from the beginning. And now that he's in charge, he's changing course. Soon after Vinterkorn takes over as CEO, he calls in the heads of Volkswagen's engine development departments, Jens Hadler and Richard Dornkamp. He tells them he's canceled the licensing deal for Bluetech. When Volkswagen rolls out its new EA 189 diesel engine next year, it's going to use the company's proprietary lean NOx trap system. They had that system in development before, but then it was backburnered for Bluetech. Now the engineers only have a few months to switch gears and get the NOx trap ready for production.

13:13It's a curveball. But if Hadler and Dorenkamp have any reservations about the timeline, they're smart enough not to express them. Everyone knows Venterkorn hates to be told no. We don't need to get too deep into the technical details of how the lean NOX trap works. Bottom line is, it doesn't work. At least not well enough to meet emission standards. The engineers have to supplement it with another piece of tech called an exhaust gas recirculation system. But the recirculation system puts too much stress on the particle filter and makes it wear out too quickly, which will be a problem for consumers as well as regulators.

13:56Basically, the engineers are straining against the limits of physics. They can't solve one problem without creating another. And the clock is ticking. The EA-189 engine is scheduled to be used in millions of cars for model year 2009. There's no way they'll be able to slap something together in the next few months that can get regulatory approval and keep customers satisfied. Well, there is one way. They can cheat.

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17:20Let's take a moment to talk about how Volkswagen first came up with that emissions cheat. Volkswagen's engineers didn't totally start from scratch on their diesel motor. They're adapting some of the software from an engine designed in 1999 by Audi, which is one of Volkswagen's subsidiaries. While rooting around in the control software, one of the engineers notices a piece of code labeled as the noise function. When it's flipped on, the engine is deafening, like those rackety Oldsmobiles that gave diesel such a bad name in America. When it's turned off, the engine is nice and quiet. But that's not all that's happening under the hood.

18:03Audi apparently made some tweaks to the engine that made it run more quietly, but in exchange, it produced significantly more pollution. So to get around that problem, they worked up a cheat code that would sense when the car was going through emissions testing and secretly disable the noise reduction mode, keeping emissions low enough to meet regulations. Once Volkswagen's engineers become aware of the noise function, someone whose identity is still a mystery pitches the idea of borrowing it for their new EA-189 diesel engine. According to U.S. investigators, Doran Kamp and Hadler, the executives who run Volkswagen's engine development departments, are in on the scheme from the beginning.

18:49In technical terms, it's called a defeat device, a piece of software that interferes with emissions controls to fool regulators. Internally, Volkswagen refers to it with coded names like pre-con recognition and emissions type mode. But it's safe to assume everyone directly involved in the engine's design would understand what it is and that it's illegal.

19:18Naturally, not everyone is on board with the defeat device. It's risky, not to mention unethical. In an October 2007 meeting between Hadler, Dorenkamp, and a team of engineers, those tensions begin to boil over. On a technical level, the emissions type mode works, but what happens if it's discovered? Dorenkamp shuts him down quickly. I already met with the EPA. They saw no issues with the design. Maybe the regulations are barely enforced here in Europe, but things are much different in the U.S. The fines could be in the billions. And do you know how much money we'll lose if we don't deliver this engine?

19:56It's set to be used in millions of cars. The marketing team has been pushing clean diesel for months. The entire future of the U.S. market depends on this. I'm not going to prison so we can meet a Q1 sales target. Then you're welcome to quit. The door is over there. Enough! Hadler bangs his fist on the table. The room falls silent. Dorenkamp is right. The emissions type mode is a stopgap. All that matters right now is getting the EA-189 into production. You're really letting this move forward? You can come up with a real fix for next year's model. or maybe you can't if you could we wouldn't be in this mess in the first place the engineer clenches his jaw he knows there's no use in fighting the defeat device is going into production whether he agrees with it or not he might as well shut his mouth and keep his job well you couldn't have missed the dynamics in that meeting the moment fear enters the room Honesty leaves it.

21:00Look, if your team is afraid to push back, or we're still afraid to tell you the truth, you've got a problem bigger than you probably know. This, this is how bad ideas survive and metastasize. I know a lot of managers think of corporate culture as a feel-good phrase, but think of it this way. It very well could be your first line of defense against disaster. And at this point, VW's headed straight for it.

21:31A week later, Hadler sits down at his desk and checks his email. There's a message from Dorenkamp. Attached is a draft of a PowerPoint Hadler is supposed to present to the senior executives to brief them on the engine's progress. Hadler examines it closely. The main body of the presentation doesn't mention the defeat device at all. But there are a few backup slides included in the document that make references to the pre-con recognition and emissions type mode. Hadler's mouse hovers over the slides. His pulse rises. He clicks delete. He sends the revised PowerPoint back to Doering Camp and writes, regarding the backup slides, We shall please never present this anywhere and will also not distribute it.

22:22A month later, Hadler flies to the annual Los Angeles Auto Show. California Governor Arnold Schwarzenegger is at the event to spotlight the upcoming green vehicles. As you all know, California has taken the leadership role in fighting global warming and cleaning our environment. Schwarzenegger is both an environmental advocate and a car guy. He praises automakers for stepping up and embracing new technology to meet the state's strict new emission standards. Every industry has to participate in this in order to keep our environment clean or to clean our environment and to keep our future generations protected.

22:58And this is why we also challenge the car manufacturers to come in and to do their part. He introduces the Tesla Roadster, an all-electric sports car, the BMW Hydrogen 7, which can run on hydrogen instead of gasoline, the Mercedes E320, a diesel car that uses good old Bluetech to cut emissions, And, of course, Volkswagen's Jetta TDI clean diesel, which is, allegedly, the carmaker's cleanest diesel car yet. Its EA 189 engine uses an innovative system to reduce emissions by up to 90%, and it gets 30 % more fuel economy than a gasoline model. Hadler smiles for a photo with Schwarzenegger and fires it off to Dorincamp.

23:43On stage, it's all applause and handshakes. Offstage, the green revolution the governor is selling is nothing more than a gleaming lie.

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26:25The Volkswagen Jetta TDI Clean Diesel