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A blog by Leon Oudejans

Automotive emission scandal – part 3 – systemic risk

28 September 2015

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When I wrote about the emission scandal at VW/Audi in my blogs of 19 and 22 September, I already had another company in the back of my mind as I was wondering whether VW/Audi had built that software device themselves. When other German brand names popped up (e.g., BMW, Opel), it became more and more likely that this other company had to be involved.

Robert Bosch is the world leading supplier of automotive parts and systems to vehicle manufacturers and the automotive aftermarket. Its market coverage is huge: for several car parts it’s over 90% (Bosch). Consequently, Robert Bosch is by far the main EU Automotive (sub-component) supplier in sales and in workers. Slightly more than half of its business relates to vehicle sales (EU).

Yesterday the Independent wrote the following: “Other reports suggested that VW was informed that the software was illegal as early as 2007. The Bild am Sonntag newspaper said that Bosch, the car component specialist which developed the software, had written to VW in that year warning that it should be used for test purposes only. Bild said that, like the reported technician’s warning, the Bosch letter had turned up in an internal VW company report that the board examined last week. It said Bosch had told VW that its plans for the software were “illegal”.”

Now it gets really interesting: an “illegal” software device produced and sold by Europe’s biggest car part supplier and which was subsequently installed in 11 million cars of VW / Audi. Given the European market dominance of Bosch, it is quite likely that other – non-German – brands will also have bought and installed this “illegal” software device.

From a risk management perspective, the situation is quite serious. The interconnectedness – and thus contagion risk – in Automotive is high given the high concentration at the (car parts) supplier side. To some extent, there is even a systemic risk: the risk of collapse of an entire market. To a lesser extent, systemic risk in Automotive was already revealed after the 2011 tsunami that hit Japan. 
The disaster, and subsequent flooding in Thailand, dramatically affected the vehicle and supply chain in Asia – and not just for Japanese automakers. General Motors, Ford, and Chrysler also rely, although to a lesser extent, on certain supply components from Japan. The tsunami forced all three companies to establish contingency plans for where to get materials such as paint dye or computer chips for navigation systems if disaster strikes again. (source, other relevant source)

The official blame game will soon start: car manufacturers will blame the car parts supplier for selling them “illegal” software devices. The car parts supplier will blame the car manufacturers for willingly installing “illegal” software devices which were just meant for “test purposes”. Nevertheless, the volume of sold “illegal” software devices does not at all suggest that they were meant for “test purposes” unless we take a sarcastic view on this. 

Basically, the car manufacturers have acted as a ‘fence”. A fence is an individual who knowingly buys stolen property for later resale, sometimes in a legitimate market (Wiki). The legal liability for this emission scandal has become rather opaque since the involvement of Robert Bosch.

As my grandfather used to say: “Everything that relates to rubber, stinks”. And he built trucks.

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