|t byfield on Fri, 25 Sep 2015 21:09:58 +0200 (CEST)|
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A few thoughts about the VW scandalThe 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, TThere 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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