Volkswagen case study – emission case

Introduction

In the recent decades conservation and sustainable environment are of great concern to the nations.
The natural phenomenon such as globalization and also environment pollutions such as emission
have been considered by a great number of environmental protection agencies and united nation
agencies.

A noticeable attention to conservation and saving green have led Environmental Protection Agency
(EPA) tighten emission control because of harmful and mortal effects of nitrogen oxide which is a
pollutant found in car’s exhaust. Therefore, since 1970s EPA has announced continuously more
restrictions on standard of emission for light-duty vehicles entailing small pickup trucks, automobiles,
and sport-utility cars. The most stringent requirements for emission standards were for vehicle
models of year 2004. Not only EPA but also federal agency created significant diminution (94%) in
the amount of emitted nitrogen oxide by vehicles tailpipe from 1.25 to 0.07 grams per mile. Emitted
nitrogen oxide endangers human lives and triggers disease such as asthma, respiratory,
cardiovascular, bronchitis, and pre-mature death.

The new emission standard posed immense hardship to automakers manufacturing fuel-efficient
diesel cars to the United States automobile market. One of the market players in automobile industry
is Volkswagen attempting to crack the United States diesel market; as a result, Volkswagen became a
substantial seller in automaker market. Volkswagen competitors namely Honda, Hyundai, Mazda,
and Nissan found new emission standards significantly challenging; therefore, they made decision
to scrap their tactics. Surprisingly, in the years 2015, Volkswagen was announced as “diesel dupe” in
virtue of rigging emission test to make diesel vehicles seem emitting less pollution than what they
really emit. In September 2015 it was reported by EPA that in an ample number of Volkswagen
vehicles, sold in worldwide, a defeat device or software was embedded in diesel engine with the
purpose of changing vehicle performance to improve required result.

Volkswagen aimed at pretending that its vehicles follow emission standards; therefore, conducted
emission test in the lab instead of on the roads. Volkswagen cars were programmed to detect the
situation where cars with TDI diesel engines experience emission test and then take information from
brakes, accelerator, and steering. Subsequently, the program made slight changes to engine
setting with the purpose of diminishing nitrogen oxide level emitted by Volkswagen diesel cars.
The actual result of Volkswagen emission test on road was thirty-five (35) times more than
cheated result in the lab. Volkswagen emission test scandal has created a dramatic consequences
having impact on ample number of authorities.
Volkswagen

Volkswagen Group, also called Volkswagen AG, major German automobile manufacturer, founded by
the German government in 1937 to mass-produce a low-priced “people’s car.” Headquarters are in
Wolfsburg, Germany. The company was originally operated by the German Labour Front (Deutsche
Arbeits front), a Nazi organization. The Austrian automotive engineer Ferdinand Porsche, who was
responsible for the original design of the car, was hired by the German Labour Front in 1934, and ground
was broken for a new factory in the state of Lower Saxony in 1938. The outbreak of World War II in 1939
occurred before mass production could begin, and the factory was repurposed to produce military
equipment and vehicles. Volkwagen’s military involvement made its factory a target for Allied bombers,
and by the end of the war the factory was in ruins. It was rebuilt under British supervision, and mass
production of the Volkswagen began in 1946. Control of the company was transferred in 1949 to the
West German government and the state of Lower Saxony. By that time, more than half of the passenger
cars produced in the country were Volkswagens.

Volkswagen production expanded rapidly in the 1950s. The company introduced the Transporter van in
1950 and the Karmann Ghia coupe in 1955. Sales abroad were generally strong in most countries of
export, but, because of the car’s small size, unusual rounded appearance, and historical connection to
Nazi Germany, sales in the United States were initially sluggish. The car began to gain acceptance there
as the 1950s progressed, however, and Volkswagen of America was established in 1955. The American
advertising agency Doyle Dane Bernbach was hired to represent the brand in 1959, and the result was a
landmark advertising campaign that helped to popularize the car as the “Beetle” and promoted its size
and unconventional design as an advantage to the consumer. The campaign was very successful, and the
Beetle was for many years the most-popular imported automobile in the United States. Although
Volkswagen made many detail changes to the Beetle, the basic rear-engine design and rounded shape
remained the same. The company developed other rear-engine models with more-modern styling and
improved engineering, but none were as successful as the Beetle.

Competition from small cars with more-modern designs and the company’s increasingly troubled
finances eventually dictated a change in corporate philosophy toward developing more-contemporary
and sportier car models. As a result, Volkswagen began phasing out its rear-engine cars in the 1970s,
replacing them with front-engine front-wheel-drive designs. The first of those new cars was the short-
lived K70 in 1970, followed by the Passat in 1973. Most significant, however, was the Golf, initially called
the Rabbit in the United States, which was introduced in 1974. The Golf was an instant sales success,
effectively replacing the Beetle in the company’s lineup and ultimately becoming Volkswagen’s best-
selling model worldwide.

Joint ownership of Volkswagen by the West German government and the state of Lower Saxony
continued until 1960, when the company was mostly denationalized with the sale of 60 percent of its
stock to the public. Since the 1950s Volkswagen has operated plants throughout much of the world,
including in Mexico, Brazil, China, and the United States. In addition to passenger cars, the company also
produces vans and commercial vehicles. Volkswagen owns several other automotive companies,
including Audi and Porsche in Germany, SEAT (Sociedad Española de Automóviles de Turismo) in Spain,
Škoda in the Czech Republic, Bentley in the United Kingdom, Lamborghini in Italy, and Bugatti in France.
In mid-2015 Volkswagen briefly held the distinction of being the world’s largest car manufacturer by
volume after surpassing Toyota Motor Corporation. However, shortly thereafter Volkswagen faced a
public relations and corporate social responsibility crisis when the U.S. Environmental Protection Agency
(EPA) determined that the manufacturer’s diesel-powered cars contained software that altered the
vehicle’s performance in order to pass emissions tests. Volkswagen admitted to installing the “defeat
device,” and it recalled more than 10 million automobiles worldwide. In the United States alone, the
carmaker faced fines of more than $4 billion, and several Volkswagen officials later were found guilty of
various crimes. Despite the scandal, Volkswagen sales worldwide continued to increase.

CSR

Corporate social responsibility (CSR) is a self-regulating business model that helps a company be socially
accountable—to itself, its stakeholders, and the public. By practicing corporate social responsibility, also
called corporate citizenship, companies can be conscious of the kind of impact they are having on all
aspects of society, including economic, social, and environmental.

To engage in CSR means that, in the ordinary course of business, a company is operating in ways that
enhance society and the environment, instead of contributingg negatively to them.

The scandal

In 2015, the U.S. Environmental Protection Agency (EPA) issued a notice of violation to German

automobile company Volkswagen. The company’s vehicles met emissions standards when

tested in indoor lab environments but failed when tested outside of the lab. On roads, the

vehicles’ emissions equipment reported 40 times above the permissible levels of dangerous

gases as set by EPA standards. After the EPA presented evidence to Volkswagen, the company

eventually admitted to using a “defeat device” in the software of the vehicles’ engines. This

software detected when the automobiles were in lab environments and adjusted the level of

power and performance to pass emissions requirements.

This was not the first violation Volkswagen faced for skirting emissions tests. In 1973, the

company used temperature-sensing devices to deactivate vehicles’ emissions control systems.

Volkswagen settled those charges with the EPA for $120,000 and admitted no wrongdoing.

Volkswagen began using the software-based defeat device in 2008 after finding that its engine

could not pass the pollution standards set by many countries. This was a diesel-based engine
newly developed at a high cost to the company. In the U.S., the company marketed new

vehicles with this engine as environmentally responsible “clean diesel.”

In response to the EPA’s disclosure, Volkswagen CEO Martin Winterkorn stated, “I personally

am deeply sorry that we have broken the trust of our customers and the public.” He blamed the

deceptive practices on “the terrible mistakes of a few people.” Winterkorn soon resigned and

was replaced by Matthias Mueller. Mueller stated, “My most urgent task is to win back trust for

the Volkswagen Group—by leaving no stone unturned.” Volkswagen launched an internal

investigation and recalled as many as 11 million cars worldwide, pledging €6.7 billion

(approximately $7.3 billion at the time) for repairs. Volkswagen board member Olaf Lies stated,

“Those people who allowed this to happen, or who made the decision to install this software—

they acted criminally. They must take personal responsibility.”

Timeline of scandal:

 On September 18, 2015, EPA issued a Notice of Violation of the Clean Air Act to Volkswagen AG,
Audi AG, and Volkswagen Group of America, Inc (collectively, “Volkswagen”). The notice alleges
that Volkswagen installed software in its model year 2009-2015 2.0 liter diesel cars that
circumvents EPA emissions standards. These vehicles emit up to 40 times more pollution than
emissions standards allow.
 On September 25, 2015, EPA announced that defeat device screening protocols would be
included in compliance oversight programs going forward. Review manufacturer guidance letter.
 On November 2, 2015, EPA issued a different Notice of Violation of the Clean Air Act to
Volkswagen, Audi, and Porsche for producing and selling certain model year 2014-2016 3.0 liter
diesel cars and SUVs that include a software device that circumvents EPA emissions standards
for certain air pollutants. These vehicles emit up to nine times more pollution than emissions
standards allow. Subsequently, on November 19, 2015, Volkswagen officials informed EPA that
the defeat device has existed in all of its U.S. 3.0 liter diesel models since 2009.
 On January 4, 2016, the Department of Justice filed a complaint on behalf of EPA against
Volkswagen AG, Audi AG, Volkswagen Group of America, Inc., Volkswagen Group of America
Chattanooga Operations, LLC, Porsche AG, and Porsche Cars North America, Inc. for alleged
violations of the Clean Air Act.
 On June 28, 2016, Volkswagen entered into a multi-billion dollar settlement to partially resolve
alleged Clean Air Act violations based on the sale of 2.0 liter diesel engines that were equipped
with software designed to cheat on federal emissions tests, known as “defeat devices.” The
settlement was formally entered and took effect on October 25, 2016.
  On December 20, 2016, Volkswagen entered into a second settlement to partially resolve
alleged Clean Air Action violations based on the sale of 3.0 liter diesel engines that were
equipped with software “defeat devices” designed to cheat on federal emissions tests.
 On January 6, 2017, EPA and California Air Resources Board approved emissions modifications
for model year 2015 VW Beetle, Beetle Convertible, Golf, Golf SportWagon, Jetta, Passat, and
Audi A3 Diesel Vehicles. Review approval letter.
 On January 11, 2017, Volkswagen agreed to plead guilty to three criminal felony counts, and
agrees to pay $2.8 billion criminal penalty. In separate civil resolutions of environmental,
customs, and financial claims, VW agreed to pay $1.5 billion which covers EPA’s claim for civil
penalties against Volkswagen as well as U.S. Customs and Border Protection claims for customs
fraud. In addition, the EPA agreement requires injunctive relief to prevent future violations.
The agreements also resolve alleged violations of the Financial Institutions Reform, Recovery
and Enforcement Act.

Impact of the scandal:

In the year 2014, Volkswagen was the world’s second largest automaker in automobile industry after
Toyota Motor Corporation. In the year 2015, Volkswagen admitted rigging in diesel emission test
which caused the company to suffer from huge amount of cost burden. Volkswagen has brought in
three public relations firms based in United States, Britain, and Germany to assist the company to cope
with the crisis. Moreover, Volkswagen has employed the former communications of BMW as a
consultant to work 60 hours a week with salary of $22,000 per month. Moreover, since this case
includes various countries over the world, Volkswagen is required to deal with different
international regulations. The primary consequences of this unethical deceptive scandal are listed
as follow:

1. Threatening People’s Health

By end of 2016, Volkswagen cars with defeat device will have produced additional toxic
pollution to directly trigger premature death of roughly sixty individuals merely in the United
States. From the year 2008 to 2015, 428,000 Volkswagen and Audi diesel cars pumped out
nitrogen oxide forty times more than it was allowed by the Clean Air Act. It is estimated by the
researchers that with six years Volkswagen and Audi diesel produced an excess of 36.7
million kg nitrogen oxide to the environment. Nitrogen oxide is a primary element of
particulate and smog matter which paves the ground for various disease namely heart
disease, premature death, bronchitis, and respiratory and cardiovascular disease. Researchers
have estimated that significant impacts of nitrogen oxide produced by Volkswagen cars
endanger 60 human lives from 10 to 20 years prematur y. It is noted that excess of pollution
from Volkswagen vehicles participated directly in thirty-one and thirty-four chronic bronchitis
and admission of respiratory and hearth cases respectively in the United States. Additional
pollution to the environment will results in 120,000 minor restricted activity day and
 approximately 210,000 days of less respiratory signs. The sickness of people over six years
from 2008 to 2015 will cost United States $450 million. If Volkswagen declines to recall
vehicles with defeat device, from 2015 onwards 140 premature deaths will take place. In
addition, health cost of $840 million will be caused by the Volkswagen diesel cars. In
addition, excess of nitrogen oxide to the natural environment by Volkswagen diesel cars
results in acid rains. The acid rains not only have crucial impact on human health bot also
have vital destruction on nature and natural resource.

2. Slump in Workforce’s Bonus

When rigging in diesel emission test was revealed to the public, sales of Volkswagen was
affected. Therefore, Volkswagen in order to cope with crisis, has announced that bonus of
chief management will be reduced substantially. Volkswagen said in a statement that various
models which establish fair and rational solution for all participated parties are being
deliberated. As a result, this leads to a considerable diminution of variable remuneration.
The reduction in bonus will include management board and also a group of executive positions
assisting CEO to operate the company’s daily routine. It is said that the bonus of German
equivalent of board of directors, which is the supervisory of Volkswagen, would not be
reduced except for Volkswagen chairman Hans Dieter Poetsch.

3. Drop in Volkswagen Sale

Although Volkswagen diesel scandal has resulted in crucial impact on Volkswagen group
brands namely Audi and Skoda, slump in sales of Volkswagen vehicles are far substantial than
group brands. The bad reputation of Volkswagen has affected its customer loyalty; therefore,
costumers switch from Volkswagen to its competitors which lead to a noticeable drop in sales.
Since 2002, for the first time, in 2015 sales of Volkswagen plunged world-wide substantially in
virtue of deceptive scandal.

4. Plunge in Volkswagen Shares

Unethical practice of Volkswagen led to a dramatic slump in share value. Immediately once
Volkswagen scandal was revealed, market showed reaction thus share value of the company
dropped by one third. In other words, the emission scandal wiped billion dollars from
Volkswagen value.

5. Creating Hassel for Volkswagen Dealers

When deceptive emission took place, a package of specific programs with the purpose of
assisting retailers to cope with Volkswagen rigging in diesel emission test was provided to
Volkswagen dealers. The program includes specific amount of money in form of sales bonus,
incentives, or subsidy injected to dealership network struggling with lower sales and profit.
The sale of Volkswagen diesel cars, which includes just above 20 percentages of total sales, was
stopped. Therefore, dealers are still suffering from thin profit and sluggish sales. On first of
October Volkswagen of America with the purpose of relaxing crisis gave extra discretionary
funds to Volkswagen dealers to use it in a way they wish. According to Automotive News, the
amount of loan varied base on dealer’s volume and reached to the highest amount of ten
thousand dollar. Volkswagen crisis grew significantly and affected the brand name, whilst
dealers were not permitted to sell diesel vehicles. Thus dealers were concern whether the
given fund is sufficient for survival or not. The CEO of Volkswagen America stated that
further programs will be considered for dealers with cash flow, but still specific date is not
declared for programs. A dealer of Volkswagen Steve Kalafer in New Jersey said that the given
fund will be utilized to cover the store’s operating costs and to boost marketing budget.
Kalafer added that millions of dollars have been expended to strengthen this brand, but
the scandal is an international deception; therefore, Volkswagen customers, employees, and
investment of dealers have been affected. A great number of employees are concern about their
job security and they are dissatisfied to encounter with customers suspecting them whether
they were aware of company’s scandal or not. Another Volkswagen dealer in east coast said
that dealers of Volkswagen in the United States are not making money or merely breaking
even. Moreover, the dealer adds that the given fund assists to break even or present thin
profit. The other dealer of Volkswagen Bill Wallace in Stuart said that overall customer traffic
has reduced significantly and also it is critical to convert shoppers to sales. Therefore, the
discretionary fund assists to him to close the deals. General Manager of Volkswagen Tom
Backer in New York said that some amount of the given fund will be utilized primarily to
close deals with the owner of diesels cars who are unwilling to get into Volkswagen gasoline
cars, whilst the rest of discretionary fund will be given to sales workforces with the purpose
of improving their satisfaction and motivation.

Conclusion

In accordance with findings and analysis under previous sections, Volkswagen deceptive
scandal is an overwhelming complicated case having created dramatic hassles for its direct and
indirect stakeholders. Albeit Volkswagen cheating in diesel emission test was an unethical
action resulting in series of disastrous consequences. The monetary punishment levied on the
company and the prison punishment put up on some key figures in this scandal are very well put
up by the judiciary of respective countries keeping the notion and ideals of corporate social
responsibility alive.