The Butterfly and The Tsunami. Volkswagen Chaos Theory

Area: Regulatory Compliance
Author: IN DIEM Technical Team
Date: November, 2015

“The flapping of a butterfly’s wings can cause a Tsunami on the other side of the world” (Edward Norton Lorenz, mathematician and meteorologist of Chaos Theory, 1973)

Rarely can one find a more metaphorical quote that manifests in a reality as precise and evident as it has been reflected in the VOLKSWAGEN CASE.

Colombian researcher Francisco Posada and the team of engineers from West Virginia University, with a budget of 62,000 euros, represent the butterfly.

The Volkswagen Group worldwide, with a minimum estimated cost of 22,500,000,000 euros, represents the Tsunami.

The figures are correct and exact: a research project that cost 62,000 (sixty-two thousand) euros will cause the Volkswagen Group a projected cost of 22,500,000,000 (twenty-two billion five hundred million) euros in fines and compensation alone. This amount may presumably increase in both scope and quantity, meaning that just 1 euro invested in the aforementioned project has transformed into an effective cost of 362,903.2 euros for the Volkswagen Group.

The story of this real and current event, which reveals how investing very little capital can lead to, or, with proper advice, prevent such notable and significant outcomes, begins as follows.

The International Council on Clean Transportation (ICCT) of the USA is an independent non-profit organization established under Section 501 (c) (3) of the United States Tax Code that provides technical and scientific analysis to environmental regulators.

After studying and analyzing the report published in 2011 by the European Commission’s Joint Research Centre, which warned that emission levels in real driving conditions for motor vehicles in Europe “substantially” exceeded laboratory data, this entity decided to verify whether such a situation and contingency also occurred in motor vehicles circulating in the USA.

The ICCT, a non-profit organization funded by foundations such as Hewlett and Packard, put $70,000 on the table (about 62,000 euros) to determine if diesel vehicles circulating in the USA met nitrogen oxide (NOx) emission criteria. This task was entrusted to Colombian researcher Francisco Posada and the team of engineers from West Virginia University.

The plan consisted of a nearly 4,000-kilometer round trip expedition between Los Angeles and Seattle with 3 vehicles: a Volkswagen Passat, a Volkswagen Jetta, and a BMW X5, all 2012 and 2013 models. A Mercedes could not be added due to budget constraints. Each vehicle carried a silent passenger in its trunk: the PEMS, a device connected to the exhaust pipe capable of recording the vehicle’s polluting emissions while driving, without needing to be on a laboratory test bench.

The project lasted 39 hours and 31 minutes, covering the route at an average speed of almost 101 kilometers per hour. In June 2013, data collection ended, and the analysis phase began.

The ICCT asked the California Air Resources Board (CARB), the state agency that measures air quality in California, to conduct the laboratory tests, while the ICCT and West Virginia University performed the real-world driving tests.

The comparison between the two would indicate if NOx emissions were as different in the USA as in Europe.

Almost a year later, the ICCT presented the research results at a symposium and alerted the US Environmental Protection Agency (EPA): NOx emissions in the Jetta exceeded permitted levels by up to 35 times, by up to 20 times in the Passat, and remained within limits in the BMW.

It should be noted that the ICCT did not detect the software; it merely measured in the laboratory and on the road and compared the results, proceeding to inform the EPA. The EPA, after confirming the data, contacted Volkswagen to notify them that they were exceeding the limits, without at that time mentioning the existence of an illegal device. This relationship extended for several months during which correspondence was maintained, and the company made corrections that proved insufficient to comply with regulations.

On September 18, 2015, the EPA publicly launched the accusation: “Volkswagen has violated the Clean Air Act.”

The entity further stated: “It allegedly used software to circumvent emissions tests in the laboratory,” quantifying 482,000 vehicles with the device installed in the United States since 2008.

Hours later, Volkswagen admitted the deception and gave it a global scale: 11 million cars were deceiving authorities with their emissions.

Volkswagen’s head in the United States, Michael Horn, reacted using a graphic expression to make clear the executives’ state of mind regarding the magnitude of the problem: “We have totally screwed up.”

To address such a problem, Volkswagen has created a fund of 6.5 billion euros.

Added to this situation is the corresponding penalty that the US Government will impose on the aforementioned entity, which is already valued to date at a minimum of 16 billion euros.

And to all this is added the latest event of 11/4/15, consisting of Volkswagen’s acknowledgment of the existence of “irregularities” and “unexplained inconsistencies” in the carbon dioxide (CO2) emissions of approximately 800,000 vehicles in its group, of which 98,000 are gasoline-powered. For this, it has created a fund of 2 billion euros to address this contingency.

In turn, the number of affected brands and vehicle types continues to increase, and as a result of the investigations, the brands SEAT, AUDI, SKODA, and recently PORSCHE have also been implicated, as well as both diesel and the recently discovered gasoline engines.

Consequently, the 62,000 euros that the ICCT project cost, on which the EPA based its investigation and sanction—that is, the butterfly—have become a real and tangible problem for Volkswagen, valued at 22.5 billion euros—that is, the Tsunami.

And to the above is added the brand’s stock market discredit, evidenced by the fact that the company’s shares in the US closed with losses exceeding 5% in a single session, plummeted 9.5% on the Frankfurt stock exchange on 11/4/15 alone, and in terms of sales in October (and therefore prior to the latest statement on the existence of “irregularities” in carbon dioxide (CO2) emissions), with a 0.7% drop in sales in Germany, a 3% decrease in France, and a weak improvement in the United States of 0.24% compared to double-digit growth for its rivals.

In Spain, this situation already has its first direct judicial consequences, manifested in one of the first judicial imputations of a company carried out in accordance with the new Organic Law 1/15 amending the Penal Code, specifically in Preliminary Proceedings No. 91/15 processed by Central Investigating Court No. 2 of Madrid, in which, by Order of 10/28/15, the VOLKSWAGEN GROUP is notified as a legal entity to which a punishable act is attributed, initiating this criminal procedure against it.

Seville (SPAIN), November 2015.
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