Photo Gallery: Something Fishy in the Car Industry
The Cartel Collusion Between Germany's Biggest Carmakers
Sometimes big things are hidden behind much smaller things. For instance, one of the biggest secrets of the German automotive industry lies behind the mechanism that opens and closes a convertible top at the push of a button.
Daimler, BMW, Audi, Porsche and Volkswagen are engaged in cutthroat competition to produce the best cars. At least that's the story often told by auto company CEOs, economists and politicians. It's a narrative about the beneficial effect of the market economy, which is based on competition among companies. But the narrative is wrong, and this is reflected in the convertible top.
Daimler, BMW, Audi, Porsche and Volkswagen did not in fact compete over which company could offer its customers the best top. On the contrary, experts with the five automakers coordinated their actions in numerous meetings. For instance, they determined the maximum speed at which a driver could open or close the top.
"No arms race when it comes to speeds," read the minutes of a meeting in Bad Kissingen. Arguments against an arms race, according to the minutes, were "costs, weight, increasing technological risk and crash relevance." The result of that meeting is that the soft tops on the convertibles sold by Daimler, BMW, Audi, Porsche and Volkswagen can only be opened and closed at speeds of up to 50 kilometers per hour.
It was an agreement that suspended both competition and the market economy. It was reached by the "working group for mechanical attachments." There were many, many other working groups involving the five German automakers, including working groups for braking control systems, seating systems, air suspensions, clutches, gasoline engines and diesel engines. The major issues were discussed and arranged in these groups.
Reporting by DER SPIEGEL into the anti-cartel authorities in Brussels and Bonn, and automakers in Stuttgart, Munich and Wolfsburg, and conversations with current and former executives, provide a previously unknown image of Germany's most important industry. The conclusion is that Daimler, BMW, Audi, Porsche and Volkswagen often no longer compete with one another. Instead, they secretly cooperate, very closely, in fact, in the same way one would normally expect of the subsidiaries of a single company to work together, as something like a "German Cars Inc." -- or a cartel.
Daimler, Volkswagen, Audi and Porsche have already admitted as much to the European Commission and the German Federal Cartel Office. In a brief dated July 4, 2016, Volkswagen issued what amounts to a voluntary declaration of its "participation in suspected cartel infringements." According to the VW statement, Daimler, BMW, Volkswagen, Audi and Porsche have coordinated matters relating to the development of their vehicles, costs, suppliers and markets "for many years -- at least since the 1990s and to this day."
It is not just a matter of the establishment of an exclusive club of the five German automakers with the goal of attaining economic advantages over the competition. The secret agreements are also detrimental to customers, who buy German vehicles because, among other things, they expect to be getting the best possible products from a technical standpoint. But how can a company produce the best if competition is curbed, and if the engineers stop doing their utmost to outdo the engineers working for other brands?
And then there are the millions of owners of diesel cars. In an almost bizarre way, they too are victims of the German auto cartel. For the first time, there is proof that it was agreements among these five automakers that ultimately ensured that emissions from diesel vehicles were not cleaned as effectively as would have been technically possible. This all began with the cartel of the five automakers.
Diesel buyers are now left with the damage. They face the prospect of no longer being allowed to drive their cars in cities, and of suffering significant losses when selling the vehicles. Shareholders are also among the victims. Penalties for cartel violations weaken the companies in which they hold shares and can lead to declining share prices. Suppliers are also adversely affected, as is almost always the case with cartel agreements. If the five German automakers agree to buy from only one company, others stand no chance of securing orders.
The agreements among the German automakers likely constitute one of the biggest cartel cases in German industrial history. They began in the 1990s and were expanded to include more and more issues, probably in part because industry executives long viewed violations of competition law as harmless rule violations, on a par with parking tickets.
It is only in recent years that the European Commission has begun imposing drastic penalties on companies that secretly collude on pricing or the technology they use. In 2012, manufacturers of cathode ray tubes were ordered to pay 1.5 billion euros in fines. In 2016, a 2.9-billion-euro penalty was imposed on commercial truck manufacturers.
The cartel of German automakers could also face fines in the billions. And the industry's image, which has already suffered considerably from the diesel scandal, will be damaged even further.
The exposure of the club of five strikes the companies at a time when they need all of their strength and financial assets for other things: the transition to electric cars and their transformation into mobility service providers. It is also a time when they are being challenged by new competitors from Silicon Valley and China.
But now VW, Audi, Porsche, Daimler and BMW must first address a problem in their most recent past. It is a painstaking process, because the agreements extend across such a long time period and so many managers were involved.
The development experts at the German auto companies met "regularly several times a year." They met in Stuttgart, Munich, Ingolstadt and Wolfsburg, and at the major auto shows in Geneva, Frankfurt and Paris. There is "the suspicion," as Volkswagen stated in its brief, also speaking on behalf of subsidiaries Audi and Porsche, that there was "behavior in violation of cartel law."
When a car company itself voices the "suspicion" that it may have violated laws, the evidence must be very clear. And it is.
Sometimes the cooperation among Daimler, BMW, Audi, Porsche and Volkswagen worked more effectively than cooperation among various departments within a company. The automakers' experts were assigned to working groups and sub-working groups, classified according to the following development areas: "engine," "car body," "chassis," "electric/electronic" and "total vehicle." Because five brands were involved, the groups were known internally as the "groups of five."
The VW Group's self-incrimination offers a new look at the diesel scandal and its evolution. It also provides a surprising answer to the question of why the German auto industry was only able to comply with emission limits for diesel cars with tricks and deception, and why VW, Audi and Porsche even used fraud as a tool: The manufacturers were not competing to achieve a Vorsprung durch Technik, or "technical edge," as Audi likes to tout in its British and German advertising, by effectively cleaning exhaust gases. On the contrary, they largely removed competition from this area.
At numerous meetings, they coordinated the size of tanks for AdBlue, a urea mixture used to split nitric oxide into its harmless components of water and nitrogen. Large tanks would have been expensive, so Daimler, BMW, Audi and Volkswagen agreed to use small tanks. However, at some point the amount of AdBlue the tanks contained was no longer sufficient to adequately clean exhaust gases.
The European Commission is currently examining the auto cartel case. It has seized records from the participating companies and has begun questioning witnesses. Last Wednesday, DER SPIEGEL extensively questioned the participating companies about the cartel accusations.
BMW stated: "Please understand that we cannot process your extensive list of questions. We do not participate in such speculations."
Daimler responded: "Please understand that, as a rule, we do not comment on speculations."
Volkswagen wrote: "We have no comment on the speculations and presumed circumstances that you have mentioned."
The article you are reading originally appeared in German in issue 30/2017 (July 22th, 2017) of DER SPIEGEL.
The cartel authorities face a Sisyphean task in their investigation of the auto cartel. There were more than 60 working groups in which the automakers cooperated. "We assume," Volkswagen wrote in its statement to the authorities, "that more than 1,000 relevant meetings took place in the last five years."
More than 60 working groups and more than 1,000 meetings.
At this point, it makes sense to pause for a moment and ask: Excuse us? What exactly was going on in an industry that, for decades, was considered a symbol of the strength of German industry? Weren't the heads of these auto companies constantly pointing out how fantastic the competition was, especially among the German automakers?
Commenting on the fact that Audi, BMW and Mercedes together hold about 80 percent of the global market share in the premium segment, Daimler CEO Dieter Zetsche said that one of the reasons was that "as neighbors, we are constantly stepping on each other's toes. In this sense, competition is an incredibly good thing." BMW CEO Harald Krüger said: "This competition constantly motivates us to achieve excellence." VW CEO Matthias Müller praised the competition among brands. And Audi CEO Rupert Stadler said that competition had "given us all a technological advantage."
Was it all just for show?
Of course there is still competition among German carmakers. Each of them strives to ensure that its latest model has either the most comfortable or the sportiest chassis. Each of them aims to design an especially safe vehicle that performs well in crash tests. And each company wants to be at the forefront when it comes to offering the first fully self-driving car.
There are cases in which the German carmakers do officially work together. For instance, Mercedes-Benz and BMW cooperate in buying certain auto parts. This is allowed if the parts are not relevant to competition, that is, if they do not constitute a distinguishing feature between a BMW and a Mercedes -- windshield wiper blades, for example.
But beyond this known cooperation, apparently the companies, in their groups of five, secretly shut out the competition in many areas of vehicle development for years, thereby violating the basic principle of the market economy.
This has already come back to haunt them, and in dramatic fashion. The diesel scandal would not have taken shape as it did, and perhaps not even at all, without the agreements among German automakers. It is not the work of a few criminal managers in the Volkswagen Group, but ultimately the result of secret agreements within the entire German automobile industry. DER SPIEGEL has already reported on the initial signs of collusion.
The companies have been coordinating their efforts in numerous meetings and conference calls since 2006. There were agendas and minutes of these meetings. And sometimes the participants even joked about the aspect of confidentiality. One Audi email, for example, reads: "Hello everyone, here is the information on the 'secret' meeting in Munich."
The starting point was the debate over the increase in the greenhouse gas CO2 and the resulting global warming. Calls for limits on CO2 emissions became more and more vocal worldwide. After heavy industry and energy producers, the automobile industry also came under fire.
A Japanese carmaker had a response to the criticism. Toyota was already selling vehicles with hybrid drives, in which a classic combustion engine is supported by an electric motor. Fuel consumption and, as a result, CO2 emissions declined considerably. It was considered a pioneering technology. The European Commission, under then President José Manuel Barroso, even discussed imposing a mandatory quota for hybrid drives.
The German automobile industry had nothing comparable to offer in this area. Instead, it chose to back the more than 100-year-old diesel technology. Diesel engines, which emit less CO2 than gasoline engines, were to become their answer to climate change.
How Collusion Created the Diesel Scandal
But a diesel engine has one drawback. It produces nitric oxides, which contribute to air pollution, especially in urban areas. Lawmakers decided to reduce nitric oxide limits. Officials in the United States threatened to withhold approval of large Daimler and Audi models. This was probably one of the reasons the five German automakers decided to go on the offensive. Under the motto "clean diesel," nitric oxide emissions were to be reduced with a technology that had long been used in trucks, namely the injection of urea.
But this realization did not trigger a race among Daimler, BMW, Audi and Volkswagen over which company could employ the technology in its vehicle faster and more effectively than the others. Instead, the developers did what they had done so often before: They discussed the issue at length in their working groups.
They focused on harmonizing the various developments of the individual manufacturers. A review of the situation had shown that the individual carmakers were using different tank sizes for AdBlue. This was absurd, the working group of chassis managers concluded at a meeting in Sindelfingen on April 5, 2006. According to a report, the companies urgently needed a "coordinated approach" on tank sizes. It was unacceptable that each manufacturer simply did as it pleased when it came to this issue.
There is a reason for the agitation among the chassis managers: The tank, a simple plastic part, performs a key function in cleaning nitric oxides. The larger the tank, the more AdBlue can be injected, and the more effectively nitric oxides can be reduced. This reduces the number of times the driver has to refill the AdBlue tank. These are the advantages of a large tank. It would also make it easier to comply with stricter nitric oxide limits, not just on the test bench but also on the road.
But the large tank also has its drawbacks. It is more expensive than a small tank and takes up more room. This was why the sales experts opposed the use of a large tank. They preferred to use the space for the loudspeakers of high-end stereo systems, which could be sold to customers as expensive options.
The managers of the German automakers quickly agreed that it made sense to coordinate their efforts. If AdBlue injection were to become the technology of the future, millions of plastic tanks, pumps and brackets would soon be installed in vehicles. If the companies agreed on the tank size, they could "save up to 80 euros per vehicle," according to a presentation by the working group.
The size of the tanks and the manufacturers' related diesel strategy became an ongoing topic in the working groups. A first fundamental decision was reached in April 2006, when the heads of development decided to limit the size of the AdBlue tanks in the future. According to a VW email, it was agreed that AdBlue tanks with a "target size of 17 to 23 liters" would be developed for Europe. If at all possible, the tanks were to be produced by only two manufacturers and designed so that customers would not have to refill them.
But the carmakers appeared not to be overly committed to this first guideline. In October 2007, the companies' development heads met to discuss the same issue. Audi had prepared an overview of all tank sizes being used in the cartel.
It showed that in 2007 Daimler, Audi, VW and BMW had installed tanks with volumes of "between 17 and 35 liters." This resulted in "ranges of between 16,000 and 30,000 kilometers," according to the document. The managers found fault with the fact that the automakers could not even agree on a single manufacturer for the tanks. For this reason, there was an "urgent need for cooperation among the companies. A uniform escalation logic should be agreed to," according to the minutes of the meeting. To ensure that nothing would go wrong, the individuals responsible for the next steps were named: "The responsible individuals are, first, the drive managers and, second, the chassis managers."
These individuals did in fact apply pressure. After several meetings, Daimler, Audi, VW and BMW agreed, in September 2008, to an 8-liter tank for all vehicles. The arguments were: It was lightweight, didn't cost much and left enough space for golf bags in the trunk. The managers were determined not to scare away customers.
The only problem is that eight liters of AdBlue are not even enough for a range of 6,000 kilometers, provided the manufacturers wanted to clean exhaust gases as required by regulations.
In its brief, Volkswagen informed the European Commission that top management became involved at this point. "An internal Audi presentation resulted in a commitment by German automobile manufacturers at the executive level."
The decision to introduce the small tanks led to initial doubts, especially in the departments in charge of vehicle licensing. This was the phase in which U.S. regulators were causing problems for the car companies. They demanded that the tanks contain enough urea to ensure that they would only have to be refilled during an inspection after about 16,000 kilometers. They were unwilling to accept the possibility that the tanks could be refilled between inspection dates, and they even threatened to stop approving the vehicles.
The automakers responded with irritation. A dispute erupted among the various departments at each company, and there were also heated debates in the secret group-of-five meetings. To satisfy the U.S. requirements, "a minimum tank volume of 19 liters" was needed at average AdBlue consumption levels," read a document prepared by Audi. Daimler, VW and BMW concurred.
In contrast, the companies' marketing departments felt that tanks of that size were too heavy and too large. "These conflicting goals," the Audi managers wrote in a document, had to be resolved "across the board." They also stated that a "coordinated scenario for the future" was urgently needed.
This finally happened in June 2010, when the companies agreed to introduce smaller tanks. The marketing and sales departments had prevailed. The 8-liter target size was to remain the standard in Europe, while 16-liter tanks were planned for the U.S. market. Audi was permitted to install somewhat larger tanks in some of its models.
With the introduction of stricter environmental regulations in the United States and Europe, the amount of AdBlue required to comply with legal limits also increased. The planned introduction of Euronorm 6, according to a March 2011 report by the relevant strategy group, would lead to an "increase in AdBlue consumption of up to 50 percent." This meant that the tanks were much too small. No one could expect customers to be reminded to refill the urea mixture every 2,000 to 3,000 kilometers.
None of the players hit upon the obvious idea of installing larger tanks, thereby attaining the competitive advantage of being able to market cleaner cars. On the contrary. In a May 2014 email, Audi urgently warned against any company going it alone. The need to inject larger and larger amounts of AdBlue into the exhaust gas system, Audi wrote, could "expand into an arms race with regard to tank sizes, which we should continue to avoid at all costs."
If one manufacturer had installed larger AdBlue tanks, licensing and regulatory authorities would probably have become suspicious. The obvious question would have been why that one company's vehicles needed so much more urea to clean the exhaust gases, while the other manufacturers' cars supposedly managed with significantly less AdBlue.
It was something the companies were unwilling to risk. Some had already begun to deceive licensing authorities and customers about the true exhaust emissions coming from their cars. VW installed software that detected when a car was in a testing facility and injected a sufficient amount of AdBlue during that short period of time. Audi used similar software.
US authorities discovered the deception in September 2015. The Volkswagen Group had to create reserves of more than €20 billion for fines, vehicle improvements and compensation for customers in the United States. In Europe, shareholders and car owners also demanded billions in compensation.
The Stuttgart public prosecutor's office is investigating Daimler, which is suspected of having used similar software. Last week, the Stuttgart-based company announced it was recalling 3 million cars for a software update to improve emissions control in diesel models. This is unlikely to satisfy the public prosecutor's office and the U.S. authorities, which are also investigating Daimler.
The collusion over diesel engines is the most spectacular case, but only one of many in which the five German carmakers may have violated cartel law. The system of collusion encompassed almost all areas of automobile development.
As Volkswagen noted in its brief to the cartel authorities, there as an "exchange of internal, competitively sensitive technical data." The five manufacturers had jointly established "technical standards" and had agreed to use "only certain technical solutions" in new vehicles.
None of the manufacturers was to step so far ahead of the others with a new model that they would encounter problems in selling their vehicles. If a manufacturer introduced groundbreaking technology, the others had to be capable of also offering their customers the technology relatively quickly.
It is standard practice in the industry to analyze competitors' vehicles. The automakers buy cars, drive them and sometimes dismantle them. This is a complex and expensive undertaking.
The members of the group of five helped each other to facilitate these comparisons by exchanging data on such variables as the "driving resistance coefficient." The Third-Party-Motor Analysis working group oversaw this effort. According to one employee, "the 'give and take' motto is correct and, in this manner, is also experienced in a friendly manner within the working group."
This may not have posed a problem under cartel law if all automakers had been given access to the data, including competitors from France, Italy, Japan and the United States. But the members of the German group of five wanted it to remain an exclusive group. Inquiries from Jaguar, Volvo, Renault and Fiat were rejected.
Not all members of the Third-Party-Motor Analysis working group were completely comfortable with the situation. A rejected manufacturer could file a complaint with the cartel office, a member of the group warned. As a precaution, Daimler had "had its legal advisers examine the issue," a VW manager wrote in an email. "The law firm that was hired expressed considerable concerns that problems could arise if a competitor did in fact file a complaint."
The participating managers repeatedly recognized that their agreements could be illegal. The Diesel Engines working group removed the last two pages of a September 2011 presentation, which related to the development of a special sensor. The change had to do with feedback from Daimler. An email reads: "A review of the document with the legal department led to serious concerns in terms of cartel law."
The subject was discussed at a meeting of the working group in Bayreuth on Sept. 14. According to a memo about the meeting, the BMW representative had asked: "Who would be interested in proving that we are in violation of cartel law?" The Daimler representative responded: "Mainly the exchange supervisory authority." He added that Daimler had also engaged "outside auditors who have access to everything." Another participant said: "Our agreement that a sensor needs to be developed is not the critical issue, but the joint definition of the supplier is."
It was critical, but things went smoothly for a long time, enabling the German auto industry to continue to wheel and deal in "friendly collaboration."
But there were also occasional conflicts. As one memo reads: "The Daimler representatives in the working group on the after-treatment of exhaust gases continue to leave much to be desired."
The collusion was also problematic in terms of cartel law when the group of five exchanged information about major suppliers. Beginning on Sept. 24, 2013, representatives of the automakers met within the Pneumatic Suspension working group to "discuss supplier performance." The discussions revolved around ZF, one of the largest suppliers to the industry. Daimler was critical of the company, citing its poor performance in the processing of electronically transmitted orders and stating that it only addressed problems when put under pressure. The Porsche representative added that the quality of ZF's products was also poor.
Such agreements could deprive individual suppliers of the opportunity to receive orders from Daimler, BMW, Audi, Porsche and Volkswagen. This too could be in violation of cartel law.
Given the large number of working groups, the employees sometimes lost their ability to consider the bigger picture. Members of the Clutch working group discussed when the parking lock should be activated in a vehicle. According to the minutes of a meeting in Munich, an attendee suggested clarifying "whether a Standstill Management working group exists yet."
The individual cases described in the Volkswagen brief reveal that the German automakers live in two worlds. The one world, the hidden one, is characterized by a lively "give and take." In the other world, the one on display at auto shows, the automakers act as if they were in bitter competition with each other.
At the major shows in Paris, Frankfurt, Geneva, Detroit and Tokyo, the executives often deride their competitors' models, though they are usually quoted anonymously. Referring to a Daimler model, a VW executive says: "It has the clearance of a truck." Commenting on a new Audi, a BMW developer says: "It already looks as old as its predecessor." And a Mercedes manager says the following about a Volkswagen: "You're better off buying a Skoda. It's €3,000 cheaper and a better car."
The fact that Daimler and Volkswagen are now offering a detailed look at this practice with their reports to the cartel authorities is not voluntary. The companies were under pressure, fearing that their syndicate would be exposed.
In connection with investigations against a steel cartel, the Federal Cartel Office conducted searches at six companies on June 23, 2016. The officials seized computers, hard drives and files, which contained something the investors call "bycatch": Evidence of violations in a completely different case. It was a case they had been completely unaware of until then: the auto cartel.
After that, Volkswagen searched all of its own records that could be related to the case and made them available to the cartel authorities in Brussels and Bonn. Insight or remorse were certainly not motivating factors. The company wanted to take advantage of its last opportunity to emerge from the affair unpunished -- by revealing everything and blowing the whistle on its old partners.
In antitrust proceedings, companies that are involved may have the opportunity to offer themselves as key witnesses. The European Commission and the Federal Cartel Office often provide immunity from prosecution to companies that disclose their activities.
This case is likely to involve a lot of money -- several billion euros in potential fines.
A year ago, truck manufacturers Daimler, Volvo/Renault, Iveco and DAF were ordered to pay €2.9 billion in fines, because the companies had coordinated pricing for their trucks for years. Only one company in the industry got off scot-free: MAN. Although the Munich-based company was also part of the truck cartel, it had offered its services as a key witness early on.
Volkswagen is now hoping for similar treatment. The company is also asking for a "waiver, or alternatively a reduction of the fine that would otherwise be imposed" for its subsidiaries Porsche and Audi.
The only problem is that Daimler has also come clean to the authorities. Only the authorities know which of the two companies was quicker in the art of self-incrimination. It may be a matter of days or even hours that will decide whether one of these companies will eventually be slapped with a fine of €1 billion, a half-billion or perhaps nothing at all.
The issue is clearly regulated in German cartel law, which states that the greatest penalty reduction is granted to the company that outed itself first and most extensively documents the violations.
In this case, Daimler and Volkswagen are truly in competition with one another.