case study 5 & 6
448 Case 6 Volkswagen Charts a New Course: The Road to Sustainability
This case was prepared by Jennifer Sawayda for and under the direction of O.C. Ferrell and Linda Ferrell, © 2019. It was prepared for classroom discussion rather than to illustrate either effective or ineffective handling of an administrative, ethical, or legal decision by management. All sources used for this case were obtained through publicly available material.
Introduction Volkswagen (VW) Group is the world’s largest auto- maker in car production with twelve European brands: Volkswagen Passenger Cars, Audi, SEAT, !KODA, Bentley, Bugatti, Lamborghini, Porsche, Ducati, Volkswagen Commercial Vehicles, Scania, and MAN. In 2018, VW set an all-time record of delivering more than 10.8 million vehicles, resulting in "235.8 billion (about $262.7 billion) in sales revenue. This placed VW as the ninth largest com- pany in the world. Nearly 40 percent of deliveries were in China, where VW is steadily increasing their share of the passenger car market. The automaker has continued to grow globally despite the diesel emissions scandal that tarnished their image in the United States.
In early 2017, the automaker pled guilty to three criminal felony charges related to defrauding the U.S. gov- ernment, violating environmental regulations, obstructing justice, engaging in wire fraud, and violating import regulations. The company agreed to pay $2.8 billion in criminal charges—only a small portion of the total costs they will have to pay to resolve this scheme. Other costs include product fixes, legal fees, buy back costs, and more. Worse still, VW’s reputation has been dealt such a blow that it will likely take years to recover. As a global firm, VW has lost the trust of regulators, which will be a major obstacle in building future global relationships.
Volkswagen’s History Volkswagen was founded in 1937 by the German government, which was at the time controlled by Adolf Hitler. As his “pet project,” he desired to develop an affordable and practical car. In fact, Volkswagen trans- lates to “the people’s car.” Headquartered in Wolfsburg, Germany, the automaker’s existence was precarious after Germany was defeated in the war. However, a British major opted to keep Volkswagen open, and the firm continued to grow.
Sales of Volkswagen Beetles were slower in the United States than in other areas because of the company’s origin. However, the vehicle’s small size and odd shape, which was originally a turnoff for U.S. consumers, became the main selling points in a 1959 campaign. Volkswagen Beetle sales skyrocketed. Soon the Beetle had become the best-selling car import in the United States. When sales
began to decline in the 1970s, VW began introducing new generations of cars. They also started making a series of acquisitions, most notably the Bentley and Lamborghini brands in 1998 and the Porsche brand in 2012. VW would continue to sell versions of its iconic Beetle until it was discontinued in 2019.
In the decades since their founding, Volkswagen became a formidable competitor to global carmakers such as Toyota, Ford, and General Motors (GM). Their cars have been widely successful, winning a number of global awards. In 1999, the Volkswagen Beetle was selected as the fourth runner-up for the “Car of the Century,” after the Model T, the Mini, and the Citroen DS. In 2015, VW was elected to 43rd place among Fortune magazine’s “World’s Most Admired Companies.” Earlier that year, the VW Golf had been named the “North American Car of the Year.”
Until recently, VW was highly valued for their sustainability goals. They became the first car manu- facturer to adopt ISO 14001 principles, international environmental principles that act as standards for global firms. The company adopted a number of sustainability goals in 2002—a time before sustainability became a hot topic. VW also began investing in vehicles that would reduce carbon emissions early, including electric and diesel vehicles. In 2014, VW introduced the VW XL1, which they claimed to be the most fuel-efficient car in the world at the time. The company’s reputation for sus- tainability was so great that they won an international sustainability award. However, this reputation would soon be sullied by a scandal of large proportions.
The Emissions Scandal VW’s downfall stemmed from the same thing that enabled them to commit such wide-scale misconduct in the first place: technology. Although the impact of technology has created benefits for businesses and consumers alike, it has also provided a greater opportunity to cheat ethical and legal requirements. Volkswagen, once lauded for their eco-consciousness, saw their reputation crumble after
European testers noticed that VW vehicles did not perform as well on emissions testing on the road as they did in the lab. The testers commissioned a team in West Virginia to conduct research on VW vehicles made for Americans because the United States has some
Volkswagen Charts a New Course: The Road to Sustainability
CASE 6
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Case 6 Volkswagen Charts a New Course: The Road to Sustainability 449
of the toughest emissions standards in the world. The team in West Virginia used a portable emission system measurement to measure emissions on the road. They found that the measurements did not match up with what was shown in lab tests. The results were reported to the Environmental Protection Agency, which confronted Volkswagen with the evidence. Volkswagen eventually admitted that they had designed and installed a defeat device that could detect when the vehicle was being tested and modify its performance levels so that it would meet emissions requirements. During testing, the software made the vehicles run below performance, which released fewer emissions and met requirements. However, on the road, the cars ran at maximum performance and gave off up to 40 times the allowable limit for emissions in the United States.
Volkswagen estimates that 11 million vehicles in the United States and Europe were affected by this defeat device. Until the scandal broke, VW had promoted them- selves as an eco-friendly company. Their commercials featured Volkswagen rally driver and host of Top Gear USA Tanner Foust driving elderly women around town in a TDI Volkswagen to dispel the myth that diesel is slow. As a result of their marketing, Volkswagen made large in-roads in gaining acceptance for their clean diesel vehicles, even though many car buyers had a negative view of diesel previously. This green image, which was highly beneficial for Volkswagen as consumers have started to value greener products, was threatened by the scandal.
The Impact As a result of the scandal, Volkswagen’s CEO resigned and governments demanded answers. Such a fraud not only violates ethical standards but also laws and regula- tions in Europe and the United States. The company agreed to pay more than $25 billion to compensate consumers affected by their defeat devices, which included retrofitting and buying back impacted vehicles. Those who knew about or were responsible for the defeat device’s installation could face jail time. One of the executives arrested was VW’s emissions compli- ance manager. Germany also launched a probe into whether former CEO Martin Winterkorn knew about the misconduct beforehand. Winterkorn claimed he did not become aware of the misconduct until the scandal erupted in September 2015. However, the investigation on Winterkorn proved his knowledge of the scandal was much sooner. In April 2019, Winterkorn, along with four others, were indicted on charges of conspiracy, unfair competition, embezzlement, tax evasion, and giving false witness. If convicted, Winterkorn could face up to 10 years in prison and substantial fines, as well as the obligation to return his salaries and bonuses of nearly $12.5 million. His indictment is the largest of any executive in Germany.
The investigation found that Winterkorn was aware of the conspiracy as early as 2014 and failed to report it to regulators or consumers. Prosecutors believe that he played a substantial role in the scandal. The indictment revealed that, in 2014, engineers at Volkswagen realized their illegal emission levels would be exposed through a study report issued by the International Council on Clean Transport. When senior managers were made aware that the report could uncover their deception, they set up a task force to handle official inquiries. Their objective was to be strategic in their responses by con- cealing their defeat devices while seemingly cooperating with regulators.
The most incriminating evidence leading to the indictment of Winterkorn was proof of documents given to him before the timeline of his initial statement. In late July 2015, Winterkorn received an internal PowerPoint explaining how the deception was occurring in the U.S. and what consequences VW could face as a result. They held meetings where management would discuss the possibilities of being uncovered and the impact it would have on them—one slide was even titled “Indictment?” The investigation revealed that Winterkorn agreed to continue the concealment plan of action outlined in the documents. This occurred over a month before the deception was publicized, proving Winterkorn’s claim of ignorance to be false. The U.S. Securities and Exchange Commission (SEC) also charged him with defrauding investors, but it is unlikely he will be extradited by German authorities because of his German citizenship.
The recent charges aimed at these individuals will likely initiate more allegations against the company as a whole. For example, in 2019, the SEC filed a claim that Volkswagen and Winterkorn defrauded investors spe- cifically through selling corporate bonds and asset-backed securities while knowingly making false and misleading statements to government regulators, underwriters, and consumers about the quality of their automobiles and their environmental compliance. The company made these false and misleading claims about their financial position to sell to investors at inflated prices. Volkswagen’s concealment and deceit allowed them to benefit from hundreds of millions of dollars through issuing securities at attractive rates. A Volkswagen spokesman contested the SEC claim, stating that the investments were sold to sophisticated investors who were not harmed and who had received all interest and principal payments in full and on time. On the other hand, this recent attention by the SEC is expected to fuel the fire in the class action lawsuit in Germany where Volkswagen investors are seeking $9.2 billion in damages from the fall in share prices when the U.S. sector went public in 2015.
Perhaps the worst impact the scandal has caused is to VW’s reputation. Many VW customers claim they pur- chased the cars because they believed them to be better for the environment and felt utterly betrayed by the company. Consumer rights were violated because consumers did not
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450 Case 6 Volkswagen Charts a New Course: The Road to Sustainability
have accurate information, meaning they were not able to make informed purchasing decisions. VW’s reputation for sustainability has been shattered, and two awards they had been given for “Green Car of the Year” were pulled.
VW is not the only company implicated in the conspiracy. U.S. lawyers accuse German parts supplier Robert Bosch GmbH of designing the defeat devices and knowing that they were being installed in VW vehicles to cheat emissions standards. A 2008 email was used as evidence in which Robert Bosch allegedly demanded that VW indemnify the firm for any future legal repercus- sions, suggesting that the company knew full well that they were violating laws. Germany fined Robert Bosch $100 billion for its participation in the scandal.
VW agreed to plead guilty and pay a criminal fine of $2.8 billion in the United States, as well as additional fines for breaking civil, environmental, customs, and financial regulations. The penalty could have been as high as $34 billion under U.S. laws but was reduced because of VW’s cooperation with the investigation. This included a settlement with the Federal Trade Commission (FTC) to allegations that the company had engaged in false advertising by marketing their automobiles as “clean vehicles.”
Even after pleading guilty to U.S. charges, VW’s troubles are far from over. The EU is conducting its own criminal investigation, and class action lawsuits have been filed against VW in the United Kingdom and Germany. The problem could be even more serious than in the United States because VW vehicles are more common in Europe.
Rebuilding their Reputation VW has begun to take steps to restore consumer trust. For instance, they recalled vehicles and offered a $1,000 goodwill package to their American car owners. They agreed to curb executive compensation as a result of the scandal. Yet even with incentives, VW will have to face this loss of goodwill for years to come. VW is also taking a different tactic in Europe. Because of less consumer- friendly laws, VW has not been as willing to compensate European drivers for damages. One major reason is that if the company is forced to pay out to the same extent in Europe as it has in the United States, the company may very well go bankrupt. VW is also claiming that under European definitions, their software does not qualify as an illegal defeat device. How other countries in Europe will approach VW in terms of fines depends largely on the countries’ laws as well as how many consumers file lawsuits against the firm.
VW has also begun to rebuild their reputation for sustainability. The company sees their investments in electric vehicles (EVs) as a core strength crucial to restor- ing their brand image and becoming a market leader in energy-efficient vehicles. VW launched the “Electric for All” campaign and intends to release 70 EVs over the
next ten years at affordable prices. These vehicles will be based on the modular electric drive matrix (MEB), VW’s technology platform for EVs. VW plans to sell its MEB platform to other automakers and is investing $800 million to build an EV plant next to their current plant in Chattanooga, Tennessee. VW’s investment in and promotion of EVs to curb the release of harmful greenhouse gases demonstrates a renewed commitment toward sustainability.
Conclusion VW hopes their settlement with U.S. regulators will be the first step toward putting the scandal behind them. As part of their plea, VW agreed to a three-year probation, a ban on selling diesel vehicles in the United States, and an independent compliance monitor who will oversee VW’s operations over a three-year period. However, truly restoring their reputation will require VW to incorporate ethical practices into the organization from the inside-out—something that was severely lacking in the firm’s corporate culture prior to the scandal.
Because VW operates in an oligopoly, other global car companies may benefit from the scandal and gain market share from Volkswagen. At the same time, while they might benefit from a competitive standpoint, VW’s conduct has caused problems for the industry as a whole. Consumers are now questioning the envi- ronmental claims of other car brands, and automakers will have to work harder to prove that their claims are accurate. Consumer trust is easily lost and is not restored overnight. However, if VW’s continued interest in EVs proves successful, the company could be well on their way to rebuilding the trust they had spent years cultivating among customers. VW’s efforts to become a market leader in energy-efficient vehicles, particularly their investment in affordable EVs, could transform the passenger car market and create the next generation “people’s car.”
Questions for Discussion 1. Explain how the culture of Volkswagen created this
ethical scandal? 2. Since Volkswagen claimed to support ethics and
sustainability, how can they recover from this ethical disaster?
3. Do you believe this scandal will lead to tougher scrutiny of companies’ environmental claims in the future? Why or why not?
Sources “Global 500,” Fortune, 2019 https://fortune.com/global500/2019/
(accessed October 21, 2019). “Volkswagen Is Founded,” History.com, July 28, 2019, http://
www.history.com/this-day-in-history/volkswagen-is-founded (accessed August 20, 2019).
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