Volkswagen Emission Scandal 2015: A Research Investigation

What Went Wrong

The Volkswagen group is a major German car manufacturer which was founded by the German government in order to produce a low priced “people’s car” in the year 1937. In mid-2015 Volkswagen became the biggest car manufacturing company in the world as they moved ahead of Toyota. But as it is said “The sum of our actions decides our fate”, therefore when Volkswagen was all set to rule the automobile industry, one of their action had to impact their fate. The bigger you are the harder you fall is what exactly happened with one of the giant players in the automobile industry. The Volkswagen group received heavy criticism and backlash over the past few years. Which is bound to happen if the trust is broken by the most reliable group of company like Volkswagen. If a business wants to create a brand, it has to choose their values carefully and stick to them. Which is what Volkswagen did which made them one of the biggest and the most trusted automobile manufacturer. But when the German automaker couldn’t stick to their values therefore had to take some heavy hits on their brand image.

The Volkswagen scandal has shaken the automobile industry. Recently, it isn’t very surprising for industrial sectors to face scandal or have a huge increase in regulatory constraints. Some years before the Volkswagen scandal (automobile sector), people would talk about the banking sector and national supermarkets. But news from the Volkswagen group hit everyone unexpectedly as Volkswagen was one of the top players in the industry i.e. the most trusted and one of the most reliable car manufacturing brands in the growing business industry. As it was a huge player in the market the impact that it caused was also enormous.

When Did The Scandal Come in Light

In September 2015 the environmental protection agency of the United State issued a notice to Volkswagen group as they did not meet the clean air act regulation. In November 2015, the Environmental Protection Act (EPA) informed Volkswagen about violations found with their diesel engine. In doing so, the EPA decided that certain models have been polluting more than what is legally accepted, creating health and environmental problems. As the EPA noticed that the emission of the cars during the test is totally different from the emission of the cars when driven on road in real circumstances. The EPA put on trial the Volkswagen of using a software to sense when the car is experiencing its regular state emissions test. Only while going through such tests the cars emit a very less amount of pollutants which falls under the Clean Air Act making the car pass the test. During normal driving conditions that is while driving on the road, the controls are switched off which then allows the cars to emit almost 40 times as much pollution as permitted in the Clean Air Act. The software was created to disguise the cars’ emission of the pollution causing gases like nitrogen oxide, which help to cause the creation of ozone and smoke. The pollutants are associated to a variety of health issues, and many respiratory diseases and early death.

So Did the Scandal Start in 2015

No. The scandal began years ago in 2004 when the EPA set new emission standards for the united states i.e. The amount of pollution that can be emitted by new vehicles in the United States. The new standards would successfully minimize the amount of nitrogen oxide that any new vehicle was permitted to discharge by more than 94 percent. Evidently, the 2004 change presented a costly engineering challenge for automobile makers, mainly for them who were trying to offer better models of diesel vehicles to the United States market. People who use diesel vehicles favour them because they get better torque, more mileage and also retain their value better than almost all of the petrol-powered vehicles. The issue is that diesel engines discharge a lot of nitrogen dioxide compared to most petrol-powered engines. More than 50 percent of European vehicles have diesel engines as European emissions standards are not as strict as United States standards. In Europe not even 5 percent of vehicles are diesel. Volkswagen could see the low diesel cars as a very appropriate time…if it could rule the diesel market of the United States, Volkswagen could position themselves as one of the top selling carmakers in the world. Other automobile companies were also interested to try their expertise at the diesel market of the United States, but big brands of automobile makers like Hyundai, Mazda, Honda and Nissan all backed down from the act due to the EPA standards which were too much to take care of. It was simply very difficult to make cars that keep good engine performance and also meet the emissions standards of the U.S.

Volkswagen utilised this challenge as an opportunity to rule the U.S. diesel market. In 2008, the German car maker was rewarded when it received the first Green Car of the Year award ever which was given to a diesel vehicle at the LA Auto Show in 2008. But now we know, the honour was through wrong practices. The reason Volkswagen discharge was so low in their diesel types was because of the software that was used by the car maker for the scandal. This obviously means a lot more of harmful gases like nitrogen oxides are released in the air than what was expected. The secret damage caused by the German carmaker would equate to all of the United Kingdom’s nitrogen oxide discharge from all the power stations, automobiles, industries and agriculture. In a time when the world is fighting hard to improve the quality of air and make our environment healthier, giant global players like the Volkswagen group are concerned more about their profits and are clearly not much interested in the carbon footprints left by them. Which is of major concern. How they should deal/dealt with the problem? The emission scandal discovered by Environmental Protection agency in September 2015, having use of ‘defeat Software’ in diesel engine cars impacted the financial condition and brand image of Volkswagen group. This scandal not also impacted their group image in the industry, but also impacted their business across complete supply chain of Volkswagen. Thousands of parts from suppliers and various internal customers playing a crucial role in their value chain, felt betrayed along with the customers purchasing the cars. This forced Volkswagen group to deal with both internal and external environment factors in order to recover from the further repercussions of the scandal.

Volkswagen group started dealing with internal factors impacting their business performance as employees were losing their moral. The board of directors forced Martin Winterkorn, CEO of the group to resign along with firing all the top executives that were involved in the scandal. In 2007, Volkswagen started use of their qualified software and systems to meet the U.S emission standard. They operated for almost eight years without even developing a plan in case their strategy backfired. After their scandal was brought to worldwide spotlight, Volkswagen representatives admitted to the U.S regulators that they have installed the cheating software to ‘some’ of their TDI models. At this point, the company tried to gather some time in order to make a concrete plan to mitigate the risk and minimize loses to their business in near future. They tried to admit their guilt partially, so that the investigators reduce their investigation steps and that would somehow weaken their investigation process, giving them some time to analyze the situation and develop crisis management plan. Volkswagen did not try to exploit the opportunity to be transparent with the officials. As the U.S regulators threatened to withdraw the certificates from their 2016 models, the company was forced to confess about their unethical practices publicly. The same day that company admitted that 11 million vehicles were affected, they announced an immediate stop sale of new 4-cylinder TDI vehicles in its dealer inventory. This step of recalling their vehicles could have done before confessing their guilt publicly. This way they could present themselves on a better note to customers instead of getting an image of betrayal to them. The company announced that their cars were safe to drive but did not propose a solution for the problem. This posed a question on the silence they maintained on the radio. The public wanted corporations to recognize the existence of problem and to hear from the company officials about it. Seeing this, the company decided to pay American customers a goodwill payment of $1000 which backfired as the company added that the cheating was not illegal under European rulebook. Even though the company recalled cars for both Americans and Europeans, but the Europeans were not pleased. A British parliament member protested to Volkswagen executives at Britain saying, “you have treated Europeans with disdain”. The difference in company’s action regarding compensation made the situation worse. Either the company should pay compensation for both Europeans and Americans or no compensation to both.

The newly appointed CEO, Matthias Mueller designed a five-point strategy to mitigate the crisis. Firstly, they will try to assist their affected customers in order to show them they care about them which is crucial for brand loyalty. Secondly, to investigate and identify the main culprits behind this cheat software and to expose them in public. This could shift the blame to those employees rather than blaming the whole company. Thirdly, to give every region and brand more autonomy and power. Fourth, to change the corporate culture of the company, to make the company more honest and collaborated. Fifth, he wanted to postpone their 2018 strategy to 2025. The company could have dealt with the situation in three possible ways. First could be to start company under a new name and join a different trusted verification agency. The company should apply as many measures as possible to restore credibility to its company. If these measures backfire, then it may lead to consumer boycott and would eventually lead to collapse of the company as a repercussions of consumer actions. Re-opening a company under a new name would improve their brand image. Re-branding could make facilitate the company to speed up efficiency program and potentially save the company. Even though re-branding is expensive and risky, but it could definitely reduce the negative impact the scandal made on the image of the company. The company should focus on creating and implementing practices promoting superior corporate social responsibility. The second proposal of doing partnership with an independent emissions verification agency. Although Volkswagen has its own internal team that examines vehicle emissions, association with these external agencies would certainly help in building customer trust. They will get the better image out of these actions as now the verification is done by an independent external agency and not their own internal one. The group would also gain acknowledgments and remunerations from non-governmental organizations that test, and rank companies based on CSR practices. This would probably strengthen their credibility in front of customers in future when the associated organizations are more prestigious at international platforms. The third proposal of posting a bond ensuring the public of not repeating any of misdeeds in future. If they repeat or do anything harming the public interest, they will be liable to pay the bond to European Commission automotive industry. The bond value should be set high enough so that customers would get an impression that Volkswagen being having large brand names associated with them with lots of other assets, they will be pressurized to sell their brand to pay the bond.

Conclusion and Further Opportunities

Since 2005 until 2015, Volkswagen’s engineers have managed to rig the emission rates apparently because of more challenging environmental and economic policies enforced across the Atlantic Ocean by major actors and lobbies in the automotive industry such as the United States or the EPA (“Environmental Protection Agency”) until today. As we can observe in the graph attached in our Annexure, European car manufacturers are in an absolute way pretty far from US’s standards, since in 2012 the US limit in terms of average emission of nitrogen oxides in road testing was about 0.4grams/km, whereas the Jetta 2011 or Passat 2012 were in average 10 times more than this limit. In terms of compliance and mutual supervision, even if a subgroup of engineers has decided intentionally to cheat on the records by changing manually the data, how could the whole quality control team has skipped this meaningful decrease followed by a steady position, strangely aligned with the recent policies the market was struggling to face in order to meet the environmental bargaining standards far from Europe? This scheme depicts perfectly an anomaly within the internal operations, unless it was intended. In a small timeframe, the Käfer (Eng. German Beetle) became the Deutsch Enttäschung (deu. Disappointment). On top of that, biased people hailed with contagious group positivism at that time would say that Volkswagen is an undeniable pioneer. Volkswagen has made it. Nevertheless, rationale would tend to lead us to question how this victory was brought on the table, under the how more than the what, the quality control more than the financial results. If we do apply to the coma the principles learnt in quality control lectures, we could assert that it is clearly time to face this despicable truth: we should have raised all of the alarm bells within the company a long time ago. Temporary and shallow correctives measures reported by newspapers and magazines – such as reimbursement, corrective features or car substitution – do not prevent any other similar industrial behavior in the automotive world, since it was easy enough for Volkswagen to remain under radar for almost a decade, why wouldn’t another competitor or even a small-to-medium sized company not have a shot and fire at will in order to dispose of all the unsold and stored products…? It did really affect and still affects this industry as a whole, which has a direct impact on the degree of perceived quality and trust conveyed by the car manufacturer to the final customer – you for instance dear reader.

What is surprisingly interesting in all of this drama is that the engineering, quality and design teams have apparently never thought about (1) redesigning the engine or the combustion scheme to meet the required specifications, (2) negotiate with the American government for a preferred tariff (3), or simply design a new product for the specific American market that became more reluctant towards pollution. All of the examples mentioned above could have represented an alternative to rigging. They may even have considered those before opting for easy and low ethical options but since the group’s governance is really impacted by power distance, low team management and But what could shock us the most is how the 99% of those German and international human resources, men and women, covered up their faces and kept on working on a daily basis carrying on doubts around the core activity of the plant? Since the power is centralized within a decisional core being the conglomerate uniting Porsche and Piëch with the state of Lower Saxony, it was easy enough to pass any procedure hiding underneath contentious working mindsets and prospective controversial scandals.

A year after all the debts and legal proceedings have been settled, The Financial Times headlines stated that “The next Volkswagen scandal can be avoided - Smarter regulation, better governance and jail sentences will all help”. Is this enough? Since re-branding does not seem to be a viable of option since Volkswagen is basing all of it’s marketing around a profound historical background, joining an independent verification agency in order to restore both credibility and notoriety. But if it comes to work with an external structure, how this control entity will change the operations and control system of Volkswagen? Examples of partnerships could be as mentioned in Angie Zhou’s papers: “World Business Council for Sustainable Development (WCSBD), Fair Labor Association (FLA), Federal Trade Commission (FTC), and the Landfill Methane Outreach Program (LMOP)”. Only time could tell us if they are going to learn from their own mistake, and only time in fact could tell us what dimension monitoring would hold among operators, teams and managers. The biggest grey zones in this drama relied in the adoption of new data and procedures that were lacking transparency. If we had to implement a new technology in terms of monitoring that would be a well-designed integrated information system that will solve all the asymmetry issues the employees have been subjected by, because the main issue in this scenario is that the few could have read and interpreted at their will the ratios and figures. Even if some ethics remained in VW, a common operator will be prevented from reading the correct information. This does tell us somehow that the information system itself the company is operating with has shown some limitations that this small group has exploited at the expense of the branding image of VW worldwide.

References:

1. Atiyeh, C. (2016). Everything You Need to Know About the VW Diesel Emissions Scandal, Car and Driver. Accessed May 9, 2017 from http://blog.caranddriver.com/everything-you-need- to-know-about-the-vw-diesel-emissions-scandal/.
2. Davenport, C., & Ewing, J. (2015, September 18). VW Is Said to Cheat on Diesel Emissions; U.S. to Order Big Recall. Retrieved from https://www.nytimes.com/2015/09/19/business/volkswagen-is-ordered-to-recall-nearly-500000-vehicles-over-emissions-software.html.
3. Ewing, J. (2015, September 22). Volkswagen Says 11 Million Cars Worldwide Are Affected in Diesel Deception. The New York Times. Retrieved May 9, 2017, from http://www.marsd.org/cms/lib7/NJ01000603/Centricity/Domain/761/NYTimes%20Volkswagen.pdf.
4. Ewing, J. (2017, February 01). Supplier’s Role Shows Breadth of VW’s Deceit. Retrieved May 10, 2017, from https://www.nytimes.com/2017/02/01/business/bosch-vw-diesel-settlement.html.
5. Merkel, R. (2015, September 30). Where were the whistleblowers in the Volkswagen emissions scandal? Retrieved May 10, 2017, from https://theconversation.com/where-were-the-whistleblowers-in-the-volkswagen-emissions-scandal-48249.
6. Rodriguez, Max., Enriquez, Quillermo., & Herrera, Romelia. (2017). Volkswagen's Emission Scandal Case Study - MGMT10002: Principles of Management. (n.d.). Retrieved from https://www.studocu.com/en/document/university-of-melbourne/principles of management/essays/volkswagens-emission-scandal-case-study/1668685/view.
7. The next Volkswagen scandal can be avoided. (2017, January 11). Retrieved from https://www.ft.com/content/852cff74-d814-11e6-944b-e7eb37a6aa8e.
8. Topham, G., Clarke, S., Levett, C., Scruton, P., & Fidler, M. (n.d.). The Volkswagen emissions scandal explained. Retrieved from https://www.theguardian.com/business/ng interactive/2015/sep/23/volkswagen-emissions-scandal-explained-diesel-cars.
9. Wilson, Andrew. (2015), Volkswagen's Emission Scandal Case Study - MGMT10002: Principles of Management. (n.d.). Retrieved from https://www.studocu.com/en/document/university-of-melbourne/principles-of-management/essays/volkswagens-emission-scandal-case-study/1668685/view.
10. Zhou, A. (2016), Analysis of the Volkswagen Scandal Possible Solutions for Recovery. School of Global Policy and Strategy, UC at San Diego. Retrieved May 10, 2017, from https://gps.uscd.edu/_files/faculty/gourevitch/gourevitch_cs_zhou.pdf.