The year was 1995.

I was 17, ready to purchase my first car. And I really, really wanted a Volkswagen Jetta. VW had just begun a great marketing campaign, with the slogan "Drivers Wanted." My dad drove me to a gentleman's home after we saw his used Jetta in the newspaper classified ads (remember those?).

It looked great. It drove great.

I've rooted for Volkswagen ever since. When the company announced their goal a few years back of becoming the world's largest automaker by 2018, I was skeptical. I knew the stronghold Toyota had in the U.S., despite the Japanese automaker’s own set of safety issues and scandals in recent years. But I was hopeful. I saw VW as David to Toyota's Goliath -- a great underdog story in the making.

Just two months ago it was announced that Volkswagen had accomplished its goal, three years ahead of schedule: It had overtaken Toyota to become the world's largest automaker. It seemed too good to be true.

It was.

Just last week, the unbelievable was revealed. Multiple channels broke the story: In recent years, Volkswagen has purposefully deceived environmental regulators in the U.S. to believe its "clean diesel" cars were much, much cleaner than reality.

To sum up the allegations:

  • Since 2009, Volkswagen has installed software (dubbed a "defeat device" by regulators) in certain cars sold in America that turned on emission controls only when being tested. On the road, cars were emitting from between 5 to 35 times as much pollutants as allowed by law. The number of cars affected? About 482,000.
  • Even after regulators smelled foul play (over a year ago), VW executives claimed the discrepancies between pollution tests in the lab and higher levels measured on the road were due to a technical error. After additional pressure from the Environmental Protection Agency (EPA), they finally admitted this month that the software had been intentionally installed to cheat on the tests. (As reported by The New York Times yesterday.)

Volkswagen CEO, Martin Winterkorn, has apologized profusely since the story went public. He readily admitted the company has "broken the trust of our customers and the public." (Now we know why he was so unusually quiet last week at the Frankfurt auto show. He knew what was coming.)

Why, VW? Why?

But many are wondering: Why would Volkswagen go to such lengths to deceive when relatively few American consumers own diesel cars?

The answer has to do with VW’s strategy. One reason the company was able to take over as the world's largest automaker was because it lead sales in China, the world's largest market. (VW is also the leading carmaker in Europe.)

But VW knew what has become abundantly clear over the past few months: China is a volatile market. The company had to hedge its bets, and the American market had the most potential for improvement (where VW currently holds only a 2 percent share of sales).

So, Volkswagen decided to focus on diesel technology. Americans are typically slow to buy diesel cars, despite the fact that diesel engines are more efficient and provide better gas mileage. This is because traditionally, diesel engines don’t perform as well as their gasoline counterparts. They also have a reputation for being "dirty," due to the fact that they emit more nitrogen oxides (NOx) and particulates, substances that contribute to smog and damage lungs.

But VW claimed to have solved these problems with its "clean diesel" technology. Engineers designed and implemented a four-cylinder turbocharged direct injection (TDI) engine that supposedly fell well within approved emissions levels and sported performance comparable to gasoline engines. (Brad Plumer's article on VOX explains it better than I can.)

Just check out this recent google search (the link now redirects to a 404 page):

 

 

These are the engines that were cheating all along.

The Fallout.

So, what does all this mean for the company? As you can imagine, nothing good.

On Friday, the EPA announced that Volkswagen’s actions were in direct violation of the Clean Air Act and ordered the automaker to fix all affected vehicles. Additionally, the EPA has authority to fine the company up to $37,500 per car -- an amount that could total up to $18 billion. (Last year, Volkswagen's pretax net income was about $4.7 billion.)

Volkswagen's share price has dropped 23% since Monday:

 

 

What about all the consumers who currently own these cars? Check out just two of the comments found on this article published in The New York Times:

"First, I bought my car six years ago because of it’s fuel economy and low-end torque. Now, both of those things are going to be taken away. Second, my guess is my car’s value has dropped 30 percent to 50 percent overnight. Third, this appears to have been a deliberate attempt to mislead both consumers and the government.

There is a clear and strong basis for a class-action lawsuit. The financial damages to consumers are real, measurable and substantial, and the fraud was deliberate and egregious. Sign me up."

And this one:

"As an owner of one of the cars in question, my demand is simple: I want my money back. All of it, with interest dating from the day I was duped, misled, and falsely sold a pollution-spewing machine that was marketed as 'clean.'"

Just how deep will Volkswagen’s pockets bleed before they can stop the hemorrhaging? Time will tell.

By the way, I never got that Jetta.

We didn't bring cash and the owner wouldn't accept a check. He promised to hold the car until the next day since the banks had already closed (and the amount he wanted for the car was more than we could get from an ATM.)

By the time I got home that evening, I received a message from the owner: He had sold the car to the next person who came to see it.

I couldn't help it: My heart was broken.

Now, all these years later, millions are experiencing the same feeling.

Published on: Sep 22, 2015
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