Case Study 1: Volkswagen’s Emissions Scandal (chapter 4)
In 2015, Volkswagen was engulfed in a scandal associated with its use of the “defeat” device
to cheat in emissions tests for its diesel engines
Breena E. Coates, California State University, San Bernardino
Volkswagen’s Notorious “Defeat” Device
On September 18, 2015, the Volkswagen Group (VW) was served with a notice of violation of
the US Clean Air Act by the US Environmental Protection Agency (EPA). The EPA had
discovered that VW had deliberately programmed turbocharged direct injection of its diesel
engines to activate certain emissions controls only during laboratory emissions testing. This
“defeat device,” as it came to be known, allowed the cars’ nitrogen oxide (NOx) output to meet
US standards during regulatory testing but emit up to 40 times more NOx in actual on road
circumstances—violating the standards of the Clean Air Act. When the cars were operating
under controlled laboratory conditions, which typically involve putting them on a stationary test
rig, the device appeared to have put the vehicle into a sort of safety mode in which the engine
ran below normal power and performance. Once on the road, however, the engines switched
out of this test mode and emitted the nitrogen oxide pollutants. VW was also accused by the
EPA of modifying software on the three-liter diesel engines fitted to some Porsche and Audi
cars as well as VW models.
VW had put this deceptive programming in about 11 million cars worldwide (including 500,000
in the United States) during model years 2009 through 2015. In November 2015, VW admitted
that it had found “irregularities” in tests to measure carbon dioxide emissions levels that could
affect about 800,000 cars in Europe, including petrol vehicles. However, in December 2015 it
said that following investigations, it had established that this had only affected about 36,000
of the cars it produced each year.
How the Deception was Unearthed
In 2014, US regulators were already raising red flags about VW emissions levels. However,
VW dismissed these as “technical issues” and “unexpected” real-world conditions. An analysis
of emissions inconsistencies between European and US automobiles had been commissioned
in 2014 by the International Council on Clean Transportation (ICCT). Among the groups doing
the analysis was one of five scientists from West Virginia University, who detected additional
emissions during live road tests on two out of three diesel cars. The scientists provided their
data to ICCT, which also purchased data from two other sources. ICCT then provided all the
findings to the California Air Resources Board in May 2014. Following this, VW became subject
to regulatory investigations in various countries. The news of these investigations caused a
major VW stock price drop by one-third immediately following the disclosure. The widening
scandal also prompted Moody’s Investors Service to cut the rating on VW’s debt, which could
make borrowing money more expensive for the company. The company cited “mounting risks
to Volkswagen’s reputation and future earnings.”
Corporate Fallout
It is clear that top management must have known about and approved fitting cheating devices
onto the vehicle’s engines. Implications for the chain-of-command deception resulted in the
resignation of senior executives in VW. VW Group CEO Martin Winterkorn resigned, saying
that his company had “broken the trust of our customers and the public.” The VW Group brand
development head Heinz-Jakob Neusser, Audi research and development head Ulrich
Hackenberg, and Porsche research and development head Wolfgang Hatz were fired. VW
announced plans to spend $7.3 billion on rectifying the emissions issues and planned to refit
the affected vehicles as part of a recall campaign. The Volkswagen emissions scandal raised
awareness over the higher levels of pollution being emitted by all vehicles built by a wide range
of automakers, which under real-world driving conditions were prone to exceed legal emission
limits. A study conducted by ICCT and Allgemeiner Deutscher Automobil-Club showed that
the biggest deviations were from Citroën, Fiat, Hyundai, Jeep, Renault, and Volvo. A
discussion was sparked that software-controlled machinery would generally be prone to
cheating, and one way out would be to make the software source code accessible to the
public. Matthias Mueller, the former boss of Porsche and the new CEO of VW, statedon taking
up his new position, “My most urgent task is to win back trust for the Volkswagen Group—by
leaving no stone unturned.” VW also launched an internal inquiry. With VW recalling millions
of cars worldwide from early 2016, it set aside $7.3 billion to cover costs. That resulted in the
company posting its first quarterly loss in 15 years of $2.7 billion in late October 2015. The
financial impact would continue to plague VW. The EPA has the power to fine a company up
to $37,500 for each vehicle that breaches standards—up to a maximum fine of about $18
billion.
Impact on the Diesel Auto Industry
Under the assumption that diesel is better for the environment, governments over the last ten
years had promoted the production of diesel cars, and the automobile industry had poured its
money into their manufacture. Scientific evidence indicated that this was untrue. As a result,
there was greater push to reduce diesel cars in some localities. Throughout the world, decision
makers in political, regulatory, and environmental sectors were examining the validity of VW’s
emissions testing, and the investigations by the US EPA created concerns in countries such
as Britain, France, Germany, Italy, and South Korea. In the European Union alone, VW would
recall 8.5 million cars. The VW scandal has had far-reaching impacts. Environmental activists
in Europe maintained that emissions standards were being defied there. “Diesel cars in Europe
operate with worse technology on average than that in the US. Our latest report demonstrated
that almost 90% of diesel vehicles didn’t meet emission limits when they drive on the road.
We are talking about millions of vehicles,” said Jos Dings of the nongovernmental organization
Transport and Environment. Car analysts at the financial research firm Bernstein LP agreed
that European standards are not as rigorous as those in the United States. However, they
noted that as a consequence of the lax standards there has been “less need to cheat.”
Bernstein also argued that if other European carmakers’ results were called into question,
“consequences are likely to be a change in the test cycle rather than legal action and fines.”
Sales of diesel cars were already slowing when the VW emissions scandal erupted. “The
revelations are likely to lead to a sharp fall in demand for diesel engine cars,” said Richard
Gane, automotive expert at consultant firm Vendigital. The UK trade body for the car industry,
the Society of Motor Manufacturers & Traders (SMMT), said: “The EU operates a
fundamentally different system to the US—with all European tests performed in
strict conditions as required by EU law and witnessed by a government-appointed independent
approval agency.” The SMMT went on to say, “The industry acknowledges that the current test
method is outdated and is seeking agreement from the European Commission for a new
emissions test that embraces new testing technologies and is more representative of on-road
conditions.”
“Dieselgate” Continues to Assail Volkswagen
VW’s troubles with its “Dieselgate” scandal never seem to cease. On March 15, 2019, the US
Securities and Exchange Commission charged former CEO Martin Winterkorn and two of
VW’s subsidiaries “for defrauding US investors, raising billions of dollars through the corporate
bond and fixed income markets while making a series of deceptive claims about the
environmental impact of the company’s ‘clean diesel’ fleet.”One after another, the elements in
the aftermath of the Dieselgate scandal continue to bubble up. On January 2, 2020, the
Guardian newspaper reported that VW was in negotiations about an out-of-court settlement
with 40,000 German car owners who were affected by the emissions cheating scandal. The
Associated Press reported on January 14, 2020, that VW continued to be hounded by German
prosecutors. Six additional executives, who were part of the original scandal, were cited by
prosecutors, bringing the total number to eleven corporate leaders. Of these executives, three
were accused of direct illegalities and three of being accessories. Prosecutors, however, made
it clear that this was not the end of their investigations and revealed that 32 additional
individuals were under scrutiny.
The VW scandal just keeps popping up in diverse locations and never seems to die, primarily
because a whopping 11 million cars are involved. As reported in the Guardian in April 2020,
the World Health Organization (WHO) put out a forceful statement to the effect that VW had
subverted key air pollution tests “to deliberately hide this toxicity.” It also stated that the
environmental hazard of diesel emissions worldwide “cannot go on.” The WHO then took
another threatening swipe at the diesel car industry, stating forcefully that the sale of all
diesel and petrol cars and vans should be banned by 2030.
According to a Reuters report, in December 2019 British VW car owners had launched a classaction lawsuit against the corporation for cheating on emissions tests. Then on April 6, 2020,
the Guardian reported that the British High Court affirmed that VW had indeed subverted key
air pollution tests. This verdict was seen as a shot in the arm for UK petitioners and
campaigners to force the carmaker to address the lung-damaging effects of its cars, which
emitted air toxicities at greater levels than legally allowed. The Guardian also reported that
91,000 plaintiffs were taking the car manufacturer to court in what was said to be one of the
biggest class-action cases—or group litigations—in England and Wales.
Although VW has been found guilty in the United States and in Europe, the company continues
to deny that it cheated on emissions tests. However, the carmaker’s arguments continue to be
seen as preposterous by the general public, and it will predictably face a steep climb to repair
its corporate reputation in the coming years.
Sources: Reports from the Associated Press, BBC News, Guardian, Reuters, SEC News,
SMMT, Transport and Environment, Venedigital, and Wall Street Journal.
Questions on this case study
1. ON ETHICS: What were the ethical issues underlying the VW scandal?
Answer:
The VW scandal involved several ethical issues:
• Deceptive Practices: VW deliberately programmed its diesel engines to activate
certain emissions controls only during laboratory testing, creating a "defeat device" to
cheat emissions tests. This deliberate deception violated ethical principles of honesty,
transparency, and fair representation of the product's environmental impact.
• Environmental Impact: The use of the defeat device allowed VW to meet emissions
standards during testing but resulted in significantly higher nitrogen oxide (NOx)
emissions during real-world driving. This posed a serious environmental hazard and
contradicted the ethical responsibility of corporations to minimize their negative impact
on the environment.
• Public Health: The increased NOx emissions had potential health implications, as
NOx is a major contributor to air pollution and can cause respiratory problems. This
raised ethical concerns about the impact of VW's actions on public health and wellbeing.
• Violation of Regulations: VW's actions violated the US Clean Air Act and other
environmental regulations, demonstrating a disregard for legal and regulatory
frameworks. This raised ethical questions about corporate responsibility and
compliance with the law.
Any relevant answer.
2. ON ETHICS: VW recalled cars with the diesel device. In your opinion, does this reduce
VW’s responsibility?
Answer:
While the recall of cars with the defeat device shows a commitment to addressing the
issue, it does not absolve VW of responsibility. The recall is a corrective measure taken
after the unethical practices were exposed, but the responsibility lies in the initial decision
to deceive regulators and consumers.
VW's responsibility extends beyond the recall to addressing the environmental impact,
compensating affected consumers, and implementing measures to prevent such ethical
lapses in the future. The recall is a step toward rectification, but the company should be
held accountable for the ethical breach and its consequences.
Any relevant answer.
3. ON ETHICS: What fallout concerns have resulted for the diesel auto industry as a whole?
Answer:
The fallout from the VW scandal had several implications for the diesel auto industry:
• Reputation Damage: The scandal damaged the reputation of diesel vehicles, as
governments and consumers questioned the environmental claims associated with
diesel engines. Other automakers faced increased scrutiny, and trust in the industry as
a whole was eroded.
• Regulatory Scrutiny: Governments and regulatory bodies worldwide intensified
scrutiny of emissions testing and standards for all vehicles. This increased oversight
aimed to prevent similar deceptive practices in the industry and ensure compliance
with environmental regulations.
•
Shift in Consumer Preferences: The scandal contributed to a decline in consumer
demand for diesel cars. Concerns about emissions and environmental impact led to a
shift in preferences toward cleaner and more environmentally friendly alternatives,
such as electric and hybrid vehicles.
• Legal Ramifications: The scandal resulted in legal actions against VW and
heightened legal risks for the entire auto industry. Other companies faced increased
pressure to demonstrate compliance with emissions standards and ethical business
practices.
• Global Impact: The scandal's repercussions were not confined to VW or specific
regions. It prompted a global reevaluation of emissions standards, testing procedures,
and corporate ethics in the automotive sector.
In summary, the fallout from the VW scandal had a profound and far-reaching impact on
the diesel auto industry, influencing consumer behavior, regulatory practices, and the
industry's overall reputation.
Any relevant answer.
4. ON ETHICS: Besides economic costs, what other costs did VW generate for itself?
Answer:
1. Reputation Damage: The scandal severely damaged VW's reputation globally. The
deliberate deception and violation of environmental regulations eroded consumer trust
and confidence in the brand. Rebuilding a tarnished reputation is a long and
challenging process, impacting customer loyalty and brand value.
2. Legal Consequences: VW faced and continues to face extensive legal
consequences. The company had to pay fines, settlements, and legal fees associated
with lawsuits and regulatory actions. The legal battles further strained the company's
financial resources and hindered its ability to focus on innovation and growth.
3. Leadership Fallout: The scandal led to the resignation and firing of top executives,
including the CEO and other senior management figures. This leadership fallout not
only disrupted the company's management structure but also contributed to the loss
of experienced leaders, affecting strategic decision-making and corporate governance.
4. Operational Costs: VW committed to spending billions of dollars on rectifying the
emissions issues, including refitting affected vehicles as part of a recall campaign. The
operational costs associated with implementing these corrective measures added a
significant financial burden to the company.
5. Market Share Decline: The scandal negatively impacted VW's market share. As
consumers lost trust in the brand, sales declined, leading to a loss of market share in
the automotive industry. Competitors seized the opportunity to attract disillusioned VW
customers, further affecting the company's standing in the market.
6. Consumer Class Actions: VW faced and continues to face numerous class-action
lawsuits from affected consumers. These legal actions not only result in financial
settlements but also contribute to the negative publicity surrounding the company,
prolonging the damage to its image.
7. Regulatory Scrutiny and Oversight: The scandal brought increased regulatory
scrutiny not only on VW but also on the entire automotive industry. Governments and
regulatory bodies worldwide intensified their oversight of emissions testing and
environmental compliance, affecting the industry's operations and requiring additional
resources for compliance.
8. Public Trust and Stakeholder Relations: Beyond consumers, the scandal affected
relationships with other stakeholders, including investors, suppliers, and employees.
Rebuilding trust with these stakeholders requires time and effort, impacting the
company's overall standing in the business community.
In summary, the costs incurred by VW extended beyond direct financial penalties,
encompassing damage to its reputation, legal repercussions, leadership instability,
operational expenses, market share decline, consumer actions, regulatory scrutiny, and
strained relationships with stakeholders.
Any relevant answer.