Group Audit will provide its findings to the external experts of Jones Day. The Supervisory Board has given this law firm a parallel mandate to completely clarify the facts and responsibilities—i.e., among other things, it has been asked to conduct a forensic investigation. In connection with its work, Jones Day is being provided with operational support by the audit firm Deloitte.

Origin, development and resolution of NO_x cheating. To recap, software installed in the electronic control module (ECM) on the affected diesel vehicles detected when the car was undergoing official emissions testing. The software sensed whether the vehicle is being tested or not based on various inputs including the position of the steering wheel, vehicle speed, the duration of the engine’s operation, and barometric pressure. (Earlier post.)

During emission testing, the vehicles’ ECM ran software which produced compliant emissions results under one ECM calibration. At all other times during normal vehicle operation, the vehicle ECM software ran a separate “road calibration” which reduced the effectiveness of the emission control system (specifically the selective catalytic reduction or the lean NO_x trap). As result, emissions of NO_x increased by a factor of 10 to 40 times above EPA-compliant levels in the US, depending on the the of drive cycle.

The information screened to date has largely explained the origin and development of the nitrogen oxide issue, Volkswagen said. It proves not to have been a one-time error, but rather a chain of errors that were allowed to happen.

The starting point was a strategic decision to launch a large-scale promotion of diesel vehicles in the United States in 2005. Initially, it proved impossible to have the EA 189 engine meet by legal means the stricter nitrogen oxide requirements in the United States within the required timeframe and budget. This led to the incorporation of software that adjusted nitrogen oxide emission levels according to whether vehicles were on the road or being tested.

Later, when an effective technical process was available to reduce NO_x emissions, it was not employed to the full extent possible. On the contrary, the software in question allowed the exhaust gas treatment additive “AdBlue” to be injected in variable amounts such that the NO_x values were particularly low when vehicles were in the test bay, but significantly higher when vehicles were on the road.

The Chairman of the Supervisory Board of Volkswagen AG, Hans Dieter Pötsch, emphasized that no business transaction justifies overstepping legal and ethical bounds. As a first step, nine managers who may have been involved in the manipulations were suspended.

I here and now guarantee that we will pursue our thorough investigation to its conclusion. I vouch for this personally, as does the entire Supervisory Board of Volkswagen AG.

—Hans Dieter Pötsch

Technical solutions, which have been positively evaluated by the German Federal Motor Transport Authority (Kraftfahrtbundesamt, KBA), are now available for the European variants of the EA 189 engine type affected. (Earlier post.) Volkswagen is thus ensuring that the models affected in Europe will meet all legal requirements in the future.

The costs of implementing these solutions will be manageable in technical, manufacturing, and financial terms, the company said. The software of the 2.0 and 1.2 liter TDI will be updated. For the 1.6 liter TDI, a flow transformer will be used that increases the measurement precision and, in combination with redesigned software, will optimize injection quantity.

Now that the technical solutions have been approved, Volkswagen is working intensely on plans to implement them:

• The recall in Europe of the highest-volume variant, the 2.0 liter TDI, will begin in January 2016.

• The recall of the 1.2 liter TDI is currently scheduled to begin in the second quarter.

• The implementation phase for the 1.6 liter models is planned to begin in the third quarter to allow time to prepare for the hardware modification.

• Under the current plan, the entire initiative will take at least all of calendar year 2016.

Volkswagen will not rest until this matter has been resolved once and for all to our customers’ satisfaction.

—Matthias Müller, Chairman of the Board of Management

Volkswagen will inform the owners of the affected vehicles individually as to when their vehicles will be updated. Volkswagen guarantees that the solutions will be implemented free of charge. The company waives any statute of limitations for the technical solutions, and will provide an appropriate replacement vehicle if required.

Due to the more stringent NO_x limits in the United States, it is a greater technical challenge to retrofit the vehicles such that all applicable emissions limits can be met with one and the same emissions strategy, the company said. To this end, Volkswagen is cooperating closely with the United States Environmental Protection Agency (EPA) and the California Air Resources Board (CARB). The solution designed for North America will be presented as soon as it has been approved by the responsible authorities.

Internal findings on processes. Volkswagen reported yesterday that extensive internal investigations, which were subject to external independent review, did not find irregularities during the CO₂ certification process. (Earlier post.)

Volkswagen has now made available the first significant findings in the investigation into the NO_x emissions issue—i.e., the diesel engine software defeat device. Group Audit’s examination of the relevant processes indicates that the software-influenced NO_x emissions behavior was due to the interaction of three factors:

• The misconduct and shortcomings of individual employees;
• Weaknesses in some processes; and
• A mindset in some areas of the company that tolerated breaches of rules.

In the past, Volkswagen said, deficiencies in processes favored misconduct on the part of individuals. This is true, for example, for test and certification processes affecting engine control devices, which were not suited to preventing use of the software in question.

Volkswagen is now concentrating on structuring these processes more transparently and systematically. For example, in the future, software for engine control devices will be developed more strictly in accordance with the 4-eyes principle (a requirement that two individuals review and approve some action before it can be taken).

In addition, the bodies responsible for the release of such software are being reorganized. They will be given more sharply defined and binding powers and responsibilities.

Audit also found deficiencies in reporting and monitoring systems. The main problem there was that responsibilities were not sufficiently clear. Volkswagen will now further sharpen them.

Group Audit also found deficiencies in some areas of Volkswagen’s IT infrastructure. These deficiencies will also be remedied. Volkswagen will introduce IT systems that allow individual processes to be monitored with greater efficiency and transparency. This will simultaneously reduce dependence on individuals when problematic processes have to be identified and, if necessary, escalated.

Group Audit’s investigation is producing valuable findings, which will help us create a structure that, rather than favoring breaches of regulations, will prevent them, or at least allow them to be detected early on.

—Hans Dieter Pötsch

The company has already drawn a key conclusion based on Group Audit’s findings: its testing practice must undergo comprehensive changes.

Volkswagen has decided that in the future emissions test will be evaluated externally and independently. In addition, randomly selected real-life tests to assess emissions behavior on the road will be introduced.

More time required for the external investigation. Although Group Audit’s analysis of the processes will be concluded shortly, Jones Day will need well into next year in order to finish its work, the company said. The external investigators will need more time for their investigation for two reasons:

1. There is a massive volume of data to screen. At present, 102 terabytes of information have been secured, which is the equivalent of the information contained in approximately 50 million books. More than 1,500 electronic data storage units have been collected from approximately 380 employees.

2. The investigation of the facts takes legal responsibility into account. Therefore, the findings must not only be plausible and consistent, but must also hold up in court.

Volkswagen plans to provide a status update on the external investigation at its Annual General Meeting on 21 April 2016.

Implementation of new Group structure. Parallel to overcoming the crisis, Volkswagen is also instituting a comprehensive new alignment that affects the structure of the Group, as well as its way of thinking and its strategic goals.

Volkswagen will be managed in a more decentralized fashion in the future, and its brands and regions will be granted more independence. The Group’s Board of Management is fully focused on its core task: advancing the major, global issues for the future, as well as synergies, controls, and strategy.

Volkswagen will have significant input to the technical changes that have a major impact on its own business model, becoming more agile, and streamlining its decision-making processes. In addition, Volkswagen will become leaner and improve cost efficiency. All these structural changes are intended to reduce managerial complexity and to ensure that the Group can be effectively led over the long term.

At an organizational level, with the appointment of Dr. Christine Hohmann-Dennhardt (earlier post), the Integrity & Law area will be represented as its own department on the Group’s Board of Management in the future—a clear indication that these issues are extremely important to Volkswagen. Significantly more importance will be attached to digitalization, which will report directly to the Chairman of the Board of Management. Overall, direct reports will be reduced from more than 30 to 19.

Since the beginning of 2015, the Group’s Board of Management has seen six new members join, seven of the brands have had their top personnel changed, and eight departments falling within the CEO’s area of responsibility now have new heads. The details of the new structure are to be worked out in the first quarter of 2016. The new structure will be in place Group-wide by the start of 2017.

We can have the best people, and a great organization, but we can do nothing without the right attitude and mentality. We don’t need yes-men, but managers and engineers who make good arguments in support of their convictions and projects, who think and act like entrepreneurs. I am calling for people who are curious, independent, and pioneering. People who follow their instincts and are not merely guided by the possible consequences of impending failure.

In short: the future at Volkswagen belongs to the bold. We need a little more Silicon Valley, coupled with the competence from Wolfsburg, Ingolstadt, Stuttgart, and the other Group locations.

—Matthias Müller

New strategic target under development. In addition, Volkswagen has initiated development of a new strategic target: “Strategy 2025”, with which Volkswagen will address the main issues for the future, scheduled to be presented in mid-2016.

We are realigning Volkswagen strategically and technologically. Our goal is to courageously and decisively participate in shaping the future of mobility.

—Matthias Müller

Among other things, the Group aims to achieve a significant expansion of its sales outside of its current core business. Furthermore, a digitalization and an electrification offensive are being prepared.

In parallel, Volkswagen is currently doing everything it can to limit the effect the current situation has on its business performance. The operating business is meeting expectations, and the 2015 annual forecast, which was updated at the end of October, remains unchanged. The sales figures are very mixed as regards the various markets and brands.

Overall, the situation is not dramatic, but, as was to be expected, it’s tense. Although the current situation is serious, this company will not be broken by it. We have a clear mission: we will create a new, better, and stronger Volkswagen. A company that uses its strengths to make the transition to the new world of automobiles. A company that now releases new forces, and takes better advantage of its huge potential. And, last but not least, a company that will be successful over the long term on the basis of strong values.

—Matthias Müller