Frankfurt — Volkswagen may have stayed clear of its diesel-cheating crisis had it not pulled out of a promising deal with Daimler more than a decade ago.

Led by former CEO Bernd Pischetsrieder, VW examined strategic options for tie-ups and co-operation projects in 2005, when the company was undergoing painful restructuring.

Talks on a possible deal with its German rival could have led to it accessing to Daimler’s diesel technology and included cross-shareholdings of about 10%, say insiders.

But Volkswagen abruptly called off talks that year, and forged on with its own diesel systems which proved incapable of meeting strict US emissions standards.

Faced with an aggressive management push to finally achieve a turnaround in the US, the maker of Golf and Jetta cars resorted to secretly rigging its engines until regulators blew the scheme in late 2015, hammering the German manufacturer with about €20.5bn in clean-up costs and leaving its reputation in tatters.

Volkswagen cancelled talks to advance the top-secret project, Table Mountain, before a key meeting near Braunschweig in 2005, said insiders.

That was months before the first indications that Volkswagen engineers were working on the defeat device that eventually rigged 11-million vehicles worldwide to cheat on emissions tests.

The scheme unravelled in the summer of 2015 when US authorities told VW to explain why on-the-road emissions of smog-inducing nitrogen oxides were as much as 40 times over the legal limit in cars that met standards in test labs.

In addition to fines and costs for fixing or buying back tainted vehicles, at least six company officials face charges, including former board member of the namesake brand Heinz-Jakob Neusser. Volkswagen also pleaded guilty to conspiracy to defraud the US government and obstruction of justice.

"Volkswagen deeply regrets the behaviour that gave rise to the diesel crisis," CEO Matthias Mueller said after reaching the deal with US justice officials. "Since all of this came to light, we have worked tirelessly to make things right."

A deal with Daimler, which owned Chrysler when the talks were under way, could have thwarted the disaster by offering access to the Mercedes-Benz parent’s BlueTec diesel technology, which uses a urea solution to clean up harmful emissions.

But Volkswagen balked at using BlueTec, because it would have added about €1,000 a car to install and the manufacturer struggled to lower production expenses sufficiently to compensate, according to the people.

VW and Daimler officials declined to comment on the discussions.

Pischetsrieder and former VW brand chief Wolfgang Bernhard, who had joined from Daimler and championed the use of the Stuttgart company’s technology, have offered to swear that they were not involved or did not know about the development of illegal engine software.

Instead of adopting Daimler technology, Volkswagen insisted on using its own TDI diesel engines, which directly injected fuel into the cylinders and didn’t use a urea solution to clean the exhaust.

The technology enjoyed strong internal support from then-chairman Ferdinand Piech, and Volkswagen’s former CEO pushed the technology in the 1980s during his time in charge of Audi and devoted an entire chapter to it in his autobiography, published in 2002.

In a bid to expand in the US, Volkswagen ultimately relied on a trick to sell those vehicles as a high-performance, fuel-efficient alternative to petrol models. By detecting test conditions, the rigged diesel cars artificially lowered emissions in regulatory evaluations, while breaching legal limits on the road.

Calling off the talks with Daimler sparked controversy within Volkswagen’s top management. One area of concern was that US emissions limits could prove difficult, if not impossible, to reach without Daimler’s BlueTec, according to insiders. First prototypes of VW’s EA189 engine, the motor at the heart of the diesel scandal, were shown to executives in 2006, they said.

Project US ’07

Evidence reviewed by internal auditors and external lawyers points to early 2006 as the time when developers at Volkswagen started working on the illegal software to cheat on emissions tests. While the timing suggests a link, it’s unclear whether there is indeed a direct connection between senior executives backing out of the talks with Daimler and the development of Volkswagen’s defeat device.

The US Justice Department’s statement of facts dates the first concrete evidence for the cheating back to May 2006 as part of a project internally dubbed US ’07, referring to the EPA’s plan to tighten emissions limits that required manufacturers to fully comply as of model year 2007.

Volkswagen was evidently aware in 2005 that US emissions regulations posed a problem. The company entered a consent decree with US authorities in June of that year to resolve allegations that it violated the Clean Air Act by failing to file an emissions defect report with the EPA in a timely manner. Under the agreement, VW was forced to conduct a $26m recall, implement enhanced defect tracking and reporting systems on possible defects. It was also required to submit a status report to the EPA once a year.

Even though the alliance talks were terminated in 2005, VW later entered an agreement to use Daimler’s BlueTec technology for the Jetta sedan and the Touareg SUV. The two companies planned to jointly promote diesel in the US, but the Wolfsburg-based car maker abruptly ended co-operation after less than a year in August 2007.

Independent Monitor

One significant result in the wake of these talks was a production agreement involving the Mercedes Sprinter and the VW Crafter delivery vans. Daimler let the contract expire at the end of 2016 to use the capacity for its own expansion. Volkswagen and Chrysler, which is now part of Fiat Chrysler Automobiles, co-operated on the VW Routan minivan for the US between 2008 and 2013.

Any prospects to revive a deal have long since ended. In 2006, Pischetsrieder was ousted as CEO by former chairman Piech. He installed confidante Martin Winterkorn, who stepped down in the wake of scandal. Bernhard left in January 2007 and has since rejoined Daimler. Volkswagen officially presented the EA189 diesel engine in 2007 and started using it in cars in the following year. Under the agreement with US authorities, Volkswagen agreed to improve compliance systems, enhance whistle-blower programs and appoint an independent monitor for three years.

"We will continue to press forward with changes to our way of thinking and working," said Mueller. "We know that our success can never be divorced from the way we conduct ourselves."


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