September 21, 2015

Many in the industry who are familiar with the reporting requirements of safety recalls are less familiar with EPA recalls and EPA regulation. As with safety components, suppliers and OEMs are well served to analyze EPA recall activity for greater insights on risks, costs and trends with these components.

VW News

Last Friday, the New York Times reported “The Obama administration on Friday directed Volkswagen to recall nearly a half-million cars, saying the automaker illegally installed software in its diesel-power cars to evade standards for reducing smog. The Environmental Protection Agency accused the German automaker of using software to detect when the car is undergoing its periodic state emissions testing. Only during such tests are the cars’ full emissions control systems turned on. During normal driving situations, the controls are turned off, allowing the cars to spew as much as 40 times as much pollution as allowed under the Clean Air Act, the E.P.A. said… The recall covers roughly 482,000 diesel passenger cars sold in the United States since 2009. Affected diesel models include the 2009-15 Volkswagen Jetta, 2009-15 Beetle, 2009-15 Golf, 2014-15 Passat and 2009-15 Audi A3.”[1]

Complete details can be found on the EPA website here - http://www3.epa.gov/otaq/cert/violations.htm.

What Do We Know About EPA Recalls?

Unlike NHTSA, the EPA does not generally make detailed automotive emissions recall data available to the public. The EPA notes “Vehicle, engine, and equipment manufacturers are required to design and build their vehicles, engines, and equipment to meet emission standards for the useful life of the vehicle, engine or equipment specified by law. Under Section 207 of the Clean Air Act, if EPA determines that a substantial number of vehicles, engines, or equipment in a class or category do not meet emission standards in actual use even though they are properly maintained and used, EPA can require the manufacturer to recall and fix the affected products. Manufacturers may, and often do, initiate recalls without a recall order from EPA as part of a customer satisfaction effort or to preempt an ordered recall from the Agency.”[2]

“The EPA issues periodic compliance reports that include general information on recall numbers.”[3] The latest of these reports was published in December 2013 and included information on emissions recalls from 2009 to 2011. It can be found Here

Also unlike NHTSA, the EPA does not have a website that enables consumers to search for their vehicle make and model to determine whether there is an outstanding emissions recall on the vehicle. Further, additional detailed documentation and information regarding emissions recalls is not available to the public. As such, completion rates or measure of recall effectiveness are not reported (even though manufacturers are required to submit six quarterly progress reports following a new Voluntary Emissions Recall Report, similar to safety recalls with NHTSA), nor is other information commonly available on the Section 573 letters provided by OEMs to NHTSA during a safety recall campaign.

So, Do We Know Anything About Emissions Recalls?

Yes. Stout has obtained and analyzed detailed information on emissions recalls from 2009 to 2015 and has worked to identify meaningful trends and analytics regarding emissions recalls.

The EPA reports that from 2009 to 2011 Light Duty Vehicles and Trucks were involved in 134 emissions recalls affecting 14,230,767 vehicles (averaging over 100,000 vehicles per recall) – again, it’s unclear what percentage of these vehicles actually had the repair completed. Data from 2012 to 2015 is less conclusive due to the format in which it has been maintained by the EPA. However, several recent examples are insightful as to trends involving emissions recalls (particularly larger recalls):

  • 2015 – Ford
    • Model Years 2011 – 2014
    • Models: F250, F350, F450, F550
    • Approximately 450,000 units affected
    • Component: Powertrain Control Module
    • Defect Description: The software for the 2011-2014 F-250, F-350, F-450 and F-550 Super Duty trucks with 6.7L diesel engines exhibits a defect in workmanship (calibration error) enabling drivers to go faster than intended if they enter into the low Diesel Exhaust Fluid (DEF) final inducement step. Per Agency guidance, the vehicle should be speed-limited to 5 mph in final inducement mode. While this was executed properly in the case of the final inducements for poor DEF quality and tampering, the calibration error allows the vehicle to go up to 50 mph in the final inducement for low DEF. The message center indicates that the vehicle is speed-limited to the intended value of 5 mph.
  • 2015 – GM
    • Model Years 2011 – 2013
    • Models: Cruze
    • Approximately 420,000 units affected
    • Component: Engine Control Module
    • Defect Description: The design of the fuel control system for these 2011-2013 Cruze vehicles did not sufficiently comprehend the adverse emissions effects of component protection, which resulted in higher than expected emission performance under conditions represented on the US06 test.
  • 2015 – Toyota
    • Model Years 2012 – 2014
    • Models: Tundra, Sequoia
    • Approximately 280,000 units affected
    • Component: Engine Control Module
    • Repair Description: Toyota initiated a limited service campaign to perform a software update to the Engine Control Module (ECM) on certain Toyota 2012-2014MY Tundra/Sequoia with 3UR-FE or 3UR-FBE engine. In the subject vehicles, the ECM may set a Diagnostic Trouble Code (DTC) if debris/ice becomes lodged in the air switching valve. If this occurs, the Malfunction Indicator (Check Engine) Light (MIL) could illuminate and the vehicle could enter a “Fail-Safe” Mode (also known as “Limp-Home” Mode). If this occurs the vehicle’s power and speed will be reduced. In January of 2015, Toyota issued “Emissions Defect Information Report Toyota-DIR-20150105” on this concern.
  • 2014 – Ford
    • Model Years 2009 – 2012
    • Models: Fusion, Escape, Mariner, Milan
    • Approximately 950,000 units affected
    • Component: Powertrain Control Module
    • Repair Description: Vehicles may experience a loss of power due to the FMEM (failure mode effects management) strategy because of silicon oxide deposits on the throttle body motor commutator.
  • 2013 – Ford
    • Model Year 2013
    • Models: Explorer, MKT, Flex, MKS, MKZ, Taurus, Fusion
    • Approximately 390,000 units affected
    • Component: Fuel Delivery Module
    • Repair Description: Some 2013 Ford Explorer, Taurus, Flex, Fusion and Lincoln MKS, MKZ and MKT vehicles may have Fuel Delivery Modules (FDM) that can develop cracks near the FDM outlet port. This condition may be caused by an incompatibility of the outlet port design, material and gasoline.   The propensity of this material to crack when in contact with gasoline was not detected by the full service FDM supplier when the part was developed.

As reflected in the examples above, many of the emissions recalls in recent years have involved electronic modules that control or monitor vehicle emissions and engine performance. While there are certainly emissions recalls involving traditional component failure, the data indicates that these recalls are typically relatively small. However, control module recalls have often been much larger, especially recently. In order to meet EPA emissions regulations, OEMs and suppliers are required to develop new and innovative technology in an effort to maintain vehicle performance while meeting or exceeding these regulations. As the components have become more sophisticated, much like elsewhere in the vehicle, the use of technology has increased. Consequently, recalls have increasingly involved modules and control units. This trend is also observed with respect to safety recalls. The EPA’s 2009-2011 Compliance Report further demonstrates this trend. In 2011, nearly 4 million vehicles were affected by emissions recalls involving “Computer Related” or “Monitoring / Measuring Sensor / System” components – representing 57% of total units affected by emissions recalls that year. In 2009, less than 700,000 units were affected by emissions recalls involving those component classifications – 22% of the total units affected that year.[4]

Conclusion

Like safety recalls, emissions recalls can be costly for OEMs and suppliers. Though emissions recall data is not as accessible as safety recall data, it is clear that millions of vehicles are being recalled annually for emissions violations or defects. There is a cost for these recalls. As with safety components, suppliers and OEMs are well served to analyze EPA recall activity for greater insights on risks, costs and trends with these components.

Neil Steinkamp is a Managing Director at Stout. He has extensive experience providing a broad range of business and financial advice to corporate executives, risk managers, in-house counsel and trial lawyers. Steinkamp has provided consulting services and has been engaged for several years as an expert in numerous matters involving automotive warranty and recall costs. His practice also includes consulting services for automotive OEMs, suppliers and their advisors regarding valuation, transactions and disputes.

[1] http://www.nytimes.com/2015/09/19/business/volkswagen-is-ordered-to-recall-nearly-500000-vehicles-over-emissions-software.html?_r=1

[2] http://www3.epa.gov/otaq/archive/recall.htm

[3] http://www3.epa.gov/otaq/archive/recall.htm

[4] http://www3.epa.gov/otaq/documents/cert/420r13006.pdf

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