Case 1

The Volkswagen Scandal: An Admission to Emission Fraud

INTRODUCTIONRODUCTION
In 2016 Volkswagen (VW) became the world’s largest automaker in car production, surpassing
Toyota to take its title. However, this title can quickly change in a short amount of time. Not only
is the car industry highly competitive, but all is not well at Volkswagen. In early 2017 the
automaker pled guilty to three criminal felony charges that included defrauding the U.S.
government, violating environmental regulations, obstructing justice, engaging in wire fraud, and
violating import regulations. It agreed to pay $2.8 billion in criminal charges, only a small portion
of the total costs it will have to pay to resolve this scheme. 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 future global relationships.
HISTORY
HISTORY
Volkswagen was founded in 1937 in Nazi Germany as a “pet project” of dictator Adolf Hitler,
who desired to develop what he termed the “people’s car” (Volkswagen translates into “the
people’s car” in English). Headquartered in Wolfsburg, Germany, the automaker’s continued
existence was precarious after Germany lost the war. However, a British major opted to keep
Volkswagen open, and the firm continued to grow.

Sales of Volkswagen were slower in the United States than in other areas because of its
questionable founding, but the introduction of the Volkswagen Beetle caused U.S. sales to
skyrocket. 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. It also started
making a series of acquisitions, most notably acquiring the Bentley and Lamborghini brands in
1998 and the Porsche brand in 2012. In the decades since its founding, Volkswagen became a
formidable competitor to global car makers such as Toyota, Ford, and General Motors. Its cars
have been widely successful, winning a number of global awards. In 1999 the Volkswagen Beetle
was selected the fourth runner-up as 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.

The Scandal
Until recently, VW was highly valued for its sustainability goals. It became the first car
manufacturer to adopt ISO 14001 principles, international environmental principles that act as
standards for global firms. It adopted a number of sustainability goals in 2002 at a time before
sustainability became a hot topic. VW began investing in vehicles that would reduce carbon
emissions early, including electric and diesel vehicles. In 2014 VW introduced the VW XL1,
which it claimed to be the most fuel-efficient car in the world at the time. Its reputation for
sustainability was so great that it won an international sustainability award. VW’s reputation for
sustainability worsened the blow to its reputation when it all came crashing down years later.
The Scandal
VW’s downfall stemmed from the same thing that enabled it 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 its green reputation, saw its reputation crumble
after it was discovered the company had purposefully fooled regulators and consumers with its
emissions claims. Volkswagen used a “defeat device” in its software that changed the vehicle’s
performance depending upon the environment. For instance, the software was able to detect when
vehicles were undergoing emissions testing. During this 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 itself as an ecofriendly company.
Its commercials featured Volkswagen rally driver and host on 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 its marketing, Volkswagen made large in-roads in gaining acceptance for its clean diesel
vehicles, even though many car buyers had a negative view of diesel previously. This green image
was highly beneficial for Volkswagen as consumer values are changing to value greener products.

While technology allowed VW to cheat the system, it also played a large part in its downfall.
Discovery began when European testers noticed that VW vehicles did not perform as well on
emissions testing on the road as they did in the lab. They commissioned a team in West Virginia
to conduct research on VW vehicles made for Americans because the United States has some 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
nearly 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 it 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. A whistle-
blower later filed a lawsuit against VW claiming that it began destroying documents that could
implicate the firm and fired him when he refused to get rid of documents. Volkswagen denies that
the employee’s departure had anything to do with the emissions scandal.

IMPACT
As a result of the scandal, Volkswagen’s CEO resigned and governments are demanding answers. Such a fraud
does not only violate ethical standards but also laws and regulation in Europe and the United States. The
company agreed to pay up to $17.5 billion to compensate consumers affected by its 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. Six executives and employees have been indicted for knowing
about the conspiracy. One of the executives arrested was VW’s emissions compliance manager. Germany has
also launched a probe into whether former CEO Martin Winterkorn had knowledge about the misconduct
beforehand. Winterkorn claims he did not become aware of the misconduct until the scandal erupted. Perhaps
the worst impact the scandal has caused is to VW’s reputation. Many VW customers claim they purchased 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 have accurate information, meaning they were not
able to make informed purchasing decisions. Its reputation for sustainability has been shattered, and two
awards it 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 repercussions, suggesting that the company knew full well that it was
violating laws. Robert Bosch did not admit to wrongdoing but agreed to pay $327.5 million to settle the civil
claims.

VW agreed to plead guilty and pay a criminal fine of $2.8 billion in the United States, as well as an additional
$1.5 billion 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. In
total, criminal and civil fines and settlements are estimated to cost VW $22 billion in the United States. This
included a settlement with the Federal Trade Commission to settle allegations that it had engaged in false
advertising by marketing its automobiles as “clean vehicles.” Even after pleading guilty to U.S. charges, VW’s
troubles are far from over. Europe is conducting its own criminal investigation, and a class-action lawsuit has
been filed against VW in the United Kingdom. The problem could be even more serious than in the United States
because VW vehicles are more common in Europe. Volkswagen has begun to take steps to restore consumer
trust. For instance, it recalled vehicles and offered a $1,000 goodwill package to its American car owners. It
agreed to curb executive compensation as a result of the scandal. Yet even with incentives, Volkswagen 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 it is forced to pay out to the same extent in Europe
as it had in the United States, the company may very well go bankrupt. VW is also claiming that under European
definitions, its software does not qualify as illegal defeat devices. This approach seems to be working for VW.
In Germany, where consumer- protection laws are lower than in some other countries, VW has won more than
75 percent of lawsuits filed against it by German consumers. 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.

CONCLUSION
VW hopes its settlement with U.S. regulators will be the first step toward putting the scandal behind it. As part
of its 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 the next three years. However, truly
restoring its reputation will require VW to incorporate ethics and appropriate practices into the organization
from the inside-out, something that was severely lacking in the firm’s corporate culture prior to the scandal.
Because it is one of the world’s largest carmakers operating 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 environmental 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.