Why Volkswagen Cheated

New Volkswagen CEO Matthias Müller has to explain how and why Volkswagen cheated, and change the deeply entrenched corporate culture. Odd Andersen/AFP/Getty

On December 10, Volkswagen Chairman Hans-Dieter Pötsch made a public admission: A group of the company's engineers decided to cheat on emissions tests in 2005 because they couldn't find a technical solution within the company's "time frame and budget" to build diesel engines that would meet U.S. emissions standards. When the engineers did find a solution, he said, they chose to keep on cheating, rather than employ it. "We are not talking about a one-off mistake, but a whole chain of mistakes that was not interrupted at any point along the timeline," he said, announcing the preliminary results of an internal investigation at Volkswagen into the crisis at a press conference at the company's headquarters in Wolfsburg, Germany. Volkswagen admitted this past autumn to installing illegal cheat software into the engines of 500,000 U.S. vehicles and 11 million vehicles worldwide.

Noting that Volkswagen had suspended nine managers believed to be involved in the deception, Pötsch added that the scandal arose from "a mindset in some areas of the company that tolerated breaches of the rules." But Pötsch did not answer perhaps the biggest question of the scandal: Why did Volkswagen cheat on that particular engine at that particular time?

Greenpeace activists protest on top of the entrance to the VW plant in Wolfsburg, Germany on September 11. Michael Loewa/laif/Redux

Part of the answer lies, Newsweek has learned, in the unprecedented tightening of emissions standards by the United States Environmental Protection Agency (EPA) for model year 2004, when the agency dramatically raised the bar on how much pollution new cars in the U.S. would be permitted to discharge into the atmosphere—presenting a virtually impossible engineering challenge to the world's automakers.

Since the mid-1970s, the EPA has introduced progressively more stringent emissions standards for light-duty vehicles, including cars, sport-utility vehicles and small pickup trucks. But the requirements for model year 2004 were among the toughest ever. The federal agency slashed the amount of nitrogen oxide it allowed cars to emit from their tailpipes by more than 94 percent—from 1.25 to 0.07 grams a mile. Nitrogen oxide is a pollutant found in vehicle exhaust and cigarette smoke that, along with carbon dioxide, the EPA heavily regulates. Pollutants from tailpipe emissions can cause premature death, bronchitis, asthma and respiratory and cardiovascular illness.

The new standards posed an enormous challenge to automakers looking to offer fuel-efficient diesel vehicles to the U.S. market. Diesel cars get more torque, achieve better mileage and hold their long-term value better than most gasoline-burning vehicles, but the exhaust contains more nitrogen dioxide than most gasoline-powered engines. In Europe, where emissions standards are not as strict as in the U.S., more than 50 percent of vehicles sold are now diesels. Compare that with less than 5 percent of vehicles sold in the U.S. With so much room to grow, Volkswagen sought to crack the U.S. diesel market—and, in the process, become the world's top-selling automaker.

Volkswagen's rivals, including Mazda, Honda, Nissan and Hyundai, also had their eye on the U.S. diesel market—but they took one look at the new EPA standards and decided to scrap their plans. The main challenge, several of the companies said, was that it was too difficult to meet the new standards while maintaining engine performance and staying on budget.

But Volkswagen saw the 2004 EPA decision as an irresistible challenge—and an opportunity. The automaker rolled out its new-model diesels in the U.S. in 2008 and won the first Green Car of the Year award ever granted to a diesel at the Los Angeles Auto Show.

Volkswagen's remarkable feat of engineering was a sham. The cheat software, it turns out, was the primary reason for the car's apparently low emissions and excellent fuel economy. In September 2015, the company acknowledged to the EPA that it cheated. Engineers had inserted what the EPA calls a "defeat device" in the engine—in this case, software that concealed the true amount of nitrogen oxide Volkswagen's diesel engines were producing. When federal officials tested the vehicles with the cheat software in the lab to certify them for the road, they produced lower emissions than in real-world driving conditions, where they discharged emissions of up to nearly 40 times the legal limit, the EPA says.

Investigators inside and outside the company are now trying to get answers to two key questions: Why did the deception happen, and how many people were involved? Newsweek has learned that a combination of factors fueled the deception, and that the conspiracy is likely wider than previously reported.

As recently as October, the company was suggesting that the number of employees involved in the cheating was small. Michael Horn, chief executive of Volkswagen Group of America, told U.S. lawmakers in sworn testimony: "This was a couple of software engineers who put this in, for whatever reason." He then said that three engineers were involved. Then he said he did not know the exact number. He added, "To my understanding, this was not a corporate decision."

Newsweek has learned that Volkswagen engineers and technicians tried to alert superiors about the emissions-rigging activities as far back as 2011 but were ignored. "We have had several complaints about people saying they tried to warn the company about this, which is being checked by our external investigator," Volkswagen's head of external and investor relations, Hans-Gerd Bode, tells Newsweek. Volkswagen's external investigator, law firm Jones Day, which is overseeing an internal probe at the company, declined to comment.

Some Volkswagen workers told supervisors about the cheating in 2011, but were ignored; about 50 employees have admitted they knew something about the deception. Michael Loewa/laif/Redux

About 50 Volkswagen employees—mostly based in Wolfsburg—have confessed they had knowledge of activities related to the emissions scandal as part of Volkswagen's amnesty program. The program, which ended November 30, applies only to non-managers, but the large number of rank-and-file employees coming forward suggests there may have been more people aware of, or involved in, the deception than previously thought.

The number of engineers, technicians and managers needed to coordinate the vehicle functions with emissions-cheating software would likely be substantial. For instance, the cheat software that the EPA identified was "very sophisticated," says Christopher Grundler, director of the EPA's office of Transportation and Air Quality. The offending computer code incorporated sensors that tracked the positioning of the steering wheel and car wheels, as well as numerous emissions controls. "There are lots of different levers," he says. Writing the code could, in theory, have been the work of one person, but making it work with other parts of the engine is a more complicated task that would likely have involved more people.

Volkswagen hasn't suspended anyone from its lower ranks, Bode says. The nine suspended managers include members of the company's Audi, Porsche and supervisory boards, as well as quality-control managers, plant managers and engine designers, according to sources at Volkswagen .

A key reason engineers at Volkswagen may have thought they could get away with the deception is that detecting cheat code in a vehicle is nearly impossible if you don't know where to look, says Bruce Ricker, senior software engineer for Informatics Holdings in Plano, Texas. He wrote engine software code for Volkswagen and other automakers as a consultant for 18 years in Germany. "This one isn't shocking," he says. "A John Deere tractor has over 20 different computers, and vehicles can have over 50. That's millions of lines of code. The vast majority of developers in a company don't have the chance to look at that line by line. You don't have time to scrutinize every piece of code. That is a luxury we don't have."

Because software engineers are often wrangling enormous amounts of code, he says, it would be fairly easy to stuff cheat code into a vehicle's engine-control software and even replicate it millions of times over without it getting noticed. "It is highly likely that once the code was written, it could easily be installed in millions of cars," he says. "Really, if someone wanted to sneak it in, they absolutely could. It's programs all over the place in these cars. It's programs talking to programs. Literally, there are tens of thousands of programs. It's impossible for any one of us to look over the whole thing, even if we wanted to." Ricker returned from Germany in 2014.

The EPA's Grundler agrees. "A single vehicle has around 100 million lines of code," he says . In the case of Volkswagen, the cheat software was buried under millions of lines of code, which meant finding it, Grundler says, was extremely difficult.

It's even possible the code was not written by someone at Volkswagen, Ricker says. "The guy who wrote it could have been some third-party contractor," he says. "He could be sitting in the Bahamas right now and laughing at this."

While Volkswagen has not revealed the exact manner in which third parties may have played a role here, German company Robert Bosch GmbH, the world's biggest automotive supplier, admitted in the early stages of the scandal that it supplied the cheat software used by Volkswagen but denied any wrongdoing in a statement. "How these components are calibrated and integrated into complete vehicle systems is the responsibility of each automaker," it said.

The EPA, along with the U.S. Justice Department, is investigating Bosch, which reportedly warned Volkswagen in 2007 not to use the offending software in real-world driving conditions, which could be illegal, according to the German newspaper Bild Am Sonntag, citing an internal communication it obtained between the two companies.

But the ease with which VW's engineers could have perpetrated the deception doesn't explain why they did it. Engineers at any car company could have done the same thing. So why Volkswagen?

People familiar with the company tell Newsweek that the unique corporate culture of Volkswagen, inextricable from its headquarters in Wolfsburg—one of Germany's richest cities—led to an environment in which employees live and work under a highly centralized hierarchy that expects them to perform, no matter what the demands. "Volkswagen is completely different from the other automakers," says Ferdinand Dudenhöffer, director of the Center for Automotive Research at the University of Duisburg-Essen in Germany. "It's not democratic; it's autocratic. It's a system focused on its roots and Wolfsburg. It's not at all global in its thinking."'

A cyclist rides past the Volkswagen plant in Wolfsburg, Germany on September 23. Julian Stratenschulte/EPA

Volkswagen's top brass may never have directly instructed employees to install the cheat software, Dudenhöffer says, but the company's work environment is well known for eschewing debate and dissent. "Sometimes you can do things without explicitly ordering them," he says. "At Volkswagen, the management might say, 'Please think again on that, and if you don't find a solution, we may need to find another engineer.' You may find yourself in a situation where, if you want to keep your job, you have no escape."

Another reason many of Volkswagen's employees may have remained quiet about the emissions-cheating issue for so long—even if they didn't want to—says one Volkswagen executive, is the company's bonus system, which is unusually generous to all employees, from the assembly line to the CEO, and rewards consensus. Volkswagen pays bonuses not only for individual performance and company performance but also goes the extra step of rewarding team performance, he says, which creates financial incentive not to offer dissenting opinions. "Even assembly line workers get a bonus, but the higher up you go in the company, the higher the percentage of your remuneration is from your bonus," says the executive, who asked not to be named because he still works for the company.

In a letter to employees in September, Volkswagen's labor leader, Bernd Osterloh, acknowledged that the company needed to change its workplace culture and create "a climate in which problems aren't hidden but can be openly communicated to superiors, [and where] it's possible and permissible to argue with your superior about the best way to go."

The scandal is likely to change Volkswagen's culture and approach to doing business in numerous ways. It has also altered the way environmental regulators around the world go about their work. The crisis has shown many regulators how to spot cheat code, something many of them did not know how to do before, Grundler says. "This matter has taught us a lot," he tells Newsweek. "We know how to look for these types of defeat devices now. We no longer have to go through the haystack to find the needle."