<nettime> VW

["t byfield" <tbyfield@panix.com>]

A few thoughts about the VW scandal

The VW scandal may not seem very nettimish, but I'll argue that it is. 
This'll take a while, because it is, as they say now, #epic. If you're 
interested, read on.
Cheers,
T


There are a few 'immaterial' sectors we're used to thinking of as 
somehow uniquely privileged -- say, finance, communications, and 
genetics. Against that speculative backdrop, an automotive scandal 
probably seems more past-oriented than future-oriented. Cars and trucks, 
after all, are firmly grounded on dry land rather than the fluid seas or 
skies. let alone the gaseous clouds of networks. And for many people --
most in many areas -- that's not just airy-fairy associations. They 
know how directly cars rely on petrochemicals because they have to pump 
them full on a regular basis in stations that can never stray too far 
from the grime of the repair shop. But try as we might to imagine 
otherwise, the futurity of those 'immaterial' sectors still depends 
entirely on transportation to move around everything subsumed under the 
phrase 'bricks and mortar,' from the raw materials to the detritus --
people included. So simplistic assumptions and associations about the 
automotive industry won't prepare us very well to think through this VW 
scandal. And, anyway, why bother? It's not that surprising -- just 
another corporation lying, right?
I think it's much bigger than that.

In a nutshell, over a period of at least a decade, VW systematically set 
about designing, testing, implementing, maintaining, and upgrading an 
undisclosed system that enabled its diesel cars to deceive environmental 
regulators. The core of this system was software that enabled a car to 
'know' when it was being tested for emissions and to dramatically reduce 
its emissions. VW claimed that it possessed some magical technology that 
allowed its diesels to achieve high mileage and low emissions without 
the need for a urea-based additive -- a liquid that, like gasoline or 
engine oil, requires its own special tank. Compared to diesels made by 
other manufacturers, VW's cars were cheaper and less of hassle to 
operate and maintain, and their resale value remained much higher.
So, right there, VW diesel owners have a pretty ironclad case for what 
boils down to speculative financial compensation: the difference between 
what the cars 'would have been worth' if this flaw hadn't been exposed 
and what they *are* worth -- which is zero, if only because no one in 
their right mind would buy one (and in many cases reale may now be 
forbidden by law). For many purposes, this group also includes VW 
dealerships, which are stuck with inventory they'll never be able to 
sell, furious owners who will look to the dealers for satisfaction, and 
little incentive to trust that sticking with VW will serve them well. On 
the contrary, many may be thinking about how quickly they should sue VW.
The flipside of VW's software trick is hardware -- or, rather, the lack 
of it. VW can patch the software, but doing so won't give their diesels 
the hardware needed to integrate urea additives: not in the engine, not 
in the fuel system, and not in the body panels. Recalling all those cars 
to retrofit such a system is almost certainly impossible: it'd be 
prohibitively expensive *and* far beyond the capability dealers' repair 
shops. So those vehicles -- 11 million of them and counting -- are 
damaged goods. They will *never* be able to meet environmental 
regulations. That means either (a) they'll need to be taken off the road 
or (b) environmental regulations will need to be rewritten to include a 
carve-out for VW diesel owners. Setting manufacturer-specific rules like 
that would be a disastrous precedent with huge political opposition, but 
to in effect 'reward' VW's systematic malfeasance would be a 
catastrophe. And who would support it? The other manufacturers? Not 
likely. Owners of non-VW cars? Not likely. The incentives for 
politicians and administrators to be seen as coming down hard on VW seem 
much greater than the incentives to come up with a flexible interim 
solution.
And then there's the minor matter of *how* to patch these cars.

If VW patches the software so that cars *always* run in 'dishonest' but 
comparatively clean emissions test-mode, their performance and mileage 
will immediately be seriously degraded. Owners will have little 
incentive to comply with that, if only because of the cost. And in most 
setting car inspections are still a pretty grimy, results-oriented 
business, so the automated machinery isn't up to the task of confirming 
software patches. Alternatively, if VW patches the software so that it's 
'honest' but dirty, the cars won't pass emissions inspections. Given the 
fact that compliance inspections are usually an annual process, there's 
a *very* short window for resolving this issue. That window will open, 
if you like, as regulatory agencies at different levels begin to issue 
ad-hoc rules and procedures over how noncompliant VW diesels should be 
handled. And it'll close a year later, when the same cars come up for 
re-inspection. If they don't pass, they can't be registered and licensed 
for use.
But maybe worse than the short time frame is the question of *who* will 
be in charge of this. In the US, for example, environmental regulations 
are imposed at the federal, state, and in some cases municipal level. In 
particular, the federal Environmental Protection Agency oversees 
congressional mandates like the Clean Air Act (CAA), but most 'retail' 
administration and enforcement for automobiles is delegated to the 
*state* level -- and some states impose regulations that are tougher 
than federal requirements. In this respect, the VW scandal poses a 
jurisdictional nightmare within the US alone. It might make sense for 
the US federal government to negotiate a solution, but implementing and 
enforcing it -- in particular, the expense for doing so -- will fall to 
the states as an unfunded mandate.
So here we have another kind of claim, from state and maybe even some 
city governments with a legitimate grievance and fiscal demands. Their 
ire will be directed both at VW itself as well as at federal regulators. 
How viable their various legal cases may be will depend on many factors, 
but the process of determining how viable they are could itself consume 
immense amounts of time and money. And that's just in the US. Analogous 
conflicts, claims, and processes could be unleashed in dozens of 
countries. VW doesn't have -- *could not have* -- a legal staff large 
or capable of addressing these conflicting legal demands and 
requirements.
And we haven't even gotten to the fines that are on the law books for 
this kind of behavior -- which in the US alone could amount to US$18B or 
more. Presumably, any country in the world with analogous environmental 
and corporate laws could levy immense fines. As is often the case, when 
multiple parties in an amorphous field are competing for dwindling 
resources -- and VW's resources will quickly dwindle to nothing -- the 
conditions are ripe for parties to see a 'first-mover advantage.' Now 
add individual political and financial ambition to the mix.
It's hard to see how VW would survive even the beginning of this 
process. Every aspect of its business has been frozen, with no prospect 
at all of thawing out again -- no 'recovery,' no 'green shoots,' no 
nothing. Everyone who depends on it -- *everyone*, from raw materials 
suppliers to parts suppliers to used-car dealers -- will be moving as 
quickly as possible to minimize their exposure. In that respect, if VW 
is lucky -- which remains to be seen -- it's facing something along the 
lines of the 2009 General Motors bailout. But that bailout was based on 
the assumption that GM's problem was mainly one of liquidity. VW's 
perfidy was so systematic that it has no prospect whatsoever of becoming 
liquid in the near future. On the contrary, it's radioactive, and the 
resulting crisis may well look more like a cross between Fukushima and 
Lehman Brothers.
At the heart of this all is the same old question or, rather, the same 
old questions: Who knew? And when did they know it?
Let's start with some hypotheticals. The automotive business is 
intensely competitive, but in other respects it can also be very 
cooperative -- for example, when it comes to establishing and complying 
with safety standards or third-party vendors of things like tires or 
fuel. VW claimed to have some magical diesel technology that obviated 
the need for urea-based additives. It's possible that its competitors' 
response was, like, "Wow, that's cool -- good on you!" But it seems more 
likely that some time over the last decade they would have been pretty 
curious about what went on under the hood, as they say -- for example, 
by scrutinizing relevant patents and by disassembling and reverse 
engineering actual cars. And, of course, there's a certain amount of 
professional circulation as engineers and managers move from jobs with 
one manufacturer to another -- or are poached. It's conceivable that 
VW's competitors were all just totally stumped, didn't notice any 
disparities in VW's numbers, and didn't make any further efforts to 
figure out what was going on. I think it's much more likely that VW's 
shenanigans were, if not an open secret, at least strongly suspected by 
quite a few people in different aspects and contexts of the the 
business. I don't think it's hard to see how other companies would 
decide *not* to follow VW's example *or* to rock the boat, given that 
doing so would likely involve tighter scrutiny.
Within VW, there's no doubt that many people knew -- not suspected, 
*knew*. The vast majority of VW employees wouldn't have known, really. 
But lots of people knew some of the basic facts: (a) that VW claimed to 
possess a magical technology, which (b) no competitor could figure out, 
and (c) didn't involve any discernibly different systems of parts. This 
had been going on for a decade, and it touched every aspect of the 
design, manufacture, and service of VW's diesel cars. There are 
*certainly* software developers who knew exactly what was going, as did 
their managers and their counterparts dealing with hardware integration. 
And they talk. But there are also chemists and physicists who knew the 
math simply didn't add up. There are designers and prototypers and 
engineers who deal with the physical properties and behaviors of their 
materials and knew that the specs didn't mirror the claims. There are 
analysts and actuaries who knew the numbers were bullshit. And so on, on 
an 'iterative' basis driven by intensely competitive seasonal sales 
cycles. It wasn't just a rogue few who knew -- it was a much messier, 
large-scale process of many people who sort of knew, saw it as normal, 
sought approval and promotions in that context, and so on. You could 
even call it all *banal*.
But where or how exactly we draw the line of 'knowledge' or 'complicity' 
doesn't matter, because now everyone who works for VW -- 600,000 of them 
-- is at risk in one way or another. As then there are all the dependent 
businesses and towns. It's not just the diesel-oriented divisions: 
people who just days ago were looking to buy a VW will be looking 
elsewhere now, and people who just bought one will be looking for ways 
to return it. And that's just the retail activity. What about the owners 
of 11 million cars that, if they're allowed to run at all a year from 
now, will be patched to the point of sucking? The company's revenues 
will plummet toward zero as its liabilities mount, in some contexts 
maybe exponentially.
It wouldn't be too hard for investigators to make some basic 
determinations about who knew what and when, because all of the software 
in question is archived -- every version, every commit, going back well 
beyond this scandal. So, given enough forensic expertise and political 
will, they can walk through that process step by step from the very 
beginning, identify the lowest-level culprits, and start from there. 
There is a bright line to be drawn between people who were responsible 
in a managerial sense and people who were responsible in a labor sense, 
and I hope that investigators observe that bright line. But...
...who gets to decide who the investigators are? The US government? The 
EU? The German government, which (a) is a substantial equity 
stakeholder, and (b) is staring down the barrel of a very *material* 
TBTF fiasco? Above, I talked a bit about the jurisdictional nightmare 
that such a large car manufacturer faces. Conceivably, one could 
compound that by overlaying 'network'-oriented jurisdictional issues -- 
for example, the use of telecom systems to transmit information (from 
software to managerial decisions) with an intent to deceive and defraud. 
As a result, investigators in countless jurisdictions and entities 
could, conceivably, have legitimate claim to see these supporting 
materials. Presumably, as various responses get rolling, some people in 
positions of power may feel that the German government is the one entity 
that shouldn't dominate this investigation. Given that that government 
will almost certainly be called upon to bail out VW, there may be people 
in the German government who agree -- or at least rue very deeply their 
conflicted position.
Given all the jurisdictional and sectoral issues involved, the situation 
could be complicated and contradictory that it could make sense to 
condense all these claims and adjudicate them in a single framework. But 
for one thing: there's no doubt that this involves criminal activity, 
not just civil infractions. And since ferreting out the 'individuals 
responsible' will be necessary because the stakes of letting them off 
would be too high, both in terms of how it's seen by different publics 
and the precedents it would set. We can begin to see how an 
international tribunal might make sense, but the precedent *that* would 
set -- criminal trials of corporate officers in international officers 
-- isn't likely to happen quite yet. Yet.
In 2008 it was easy to claim that the problem was abstract financial 
flows, and that the endless parking lots full of unsold cars, the 
factories that ground to a halt, and all the rest were just symptoms and 
side effects. But VW presents a very different situation: at root, the 
problem is an everyday machine that violates environmental laws by 
several order of magnitude -- a very different sector of national 
governments from financial regulators. And rather than mystifying 
algorithms and legal-financial entities, the problem is plain-old 
software. It may be really complicated, but it doesn't merit the 
mystifying estimation 'complex.' It's not very hard to understand what 
happened or how, and in any case VW fessed up -- and ousted its CEO. So 
there's no question that crimes were committed, and no doubt about 
guilt.
I'd be curious to hear from people who have a more proximate sense of 
how this is playing out in Germany, and how the government seems like 
it'll respond.

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