Volkswagen’s Diesel Emission Scandal “Dieselgate”Volkswagen’s scandal, which some had...

V o l k s w a g e n ’ s D i e s e l E m i s s i o n S c a n d a l “ D i e s e l g a t e ” | 1

Volkswagen’s Diesel Emission Scandal “Dieselgate”

Ashleigh Cue

The University of North Texas

Dr. Fuse

12/7/15


Table of Contents:

Overview…………………………………………………………………………….. 4

Background…………………………………………………………………………. 5

Company Background……………………………………………………... 5

Corporate Culture.…………………………………………………………. 6

Corporate Social Responsibility…………………………………………… 7

The Emission Problem……………………………………………………………… 8

Impact of Emissions and the Clean Air Act………………………………. 8

International Council on Clean Transportation …………………………..9

Inquiry to Volkswagen’s Emissions……………………………………….. 9

Volkswagen’s Response…………………………………………………… 10

Performance Over Sustainability………………………………………… 11

Timeline……………………………………………………………………………. 12

Public Response…………………………………………………………………… 13

News/Auto Industry Response……………………………………………. 13

Public Relations’ Response……………………………………………….. 13

General Publics’ Response………………………………………………... 14

Impact of Volkswagen’s Lie……………………………………………………… 15

Public Impact……………………………………………………………… 15

Financial Impact…………………………………………………………... 15

Works Cited/References…………………………………………………………. 17


Abstract

Volkswagen, a German car company who prides itself on its sustainable cars, admitted to

using a defeat device in its diesel passenger cars that would allow its cars to pass emission tests.

Research on diesel cars discovered that Volkswagen’s cars were emitting 15 to 35 times the legal

NOx emissions.

Key Words:

Corporate Culture; Corporate Social Responsibility; Volkswagen Scandal; Dieselgate; Public

Relations; NOx Emissions


Overview

On September 18, 2015 the United States Environmental Protection Agency (EPA)

announced that Volkswagen had violated the Clean Air Act. The EPA’s investigation into

Volkswagen revealed that the car company had been using a software algorithm, a defeat device,

to pass emissions test on their diesel cars (“EPA, California Notify Volkswagen of Clean Air Act

Violations”). It was a discrepancy between the laboratory emission tests and road tests. The road

test results showed NOx emissions to be 15 to 30 times the US legal limit (Jaynes, 2015).

Back in May 2014, the California Air Resources Board (CARB) and the EPA ordered

Volkswagen to look into the testing discrepancies. December of the same year, Volkswagen

claimed that it did look into the problem and found a software issue in some of their vehicles.

The auto company then recalled 500,000 cars. However, the CARB did not stop testing the

vehicles and once again brought up the emission discrepancies to the EPA on June 8, 2015

(Jaynes, 2015).

In the wake of the EPA announcement, Volkswagen decided to come clean about the

cheating and launched their own internal investigation. The internal investigation revealed more

than 11 million cars were affected by this software algorithm (“Volkswagen says 11 million of

its cars have emissions test-beating software,” 2015).

Volkswagen’s scandal, which some had nicknamed “Dieselgate,” is the biggest scandal

in the auto company’s 78 years in business (Cremer, 2015b). Since the announcement, the

company’s stocks took a hit and it may be facing criminal charges (Plumer, 2015). The company

has admitted to needing to change the way they manage their employees and build a corporate

culture that encourages open conversations with superiors (Cremer & Bergin, 2015).


Background

Company Background

Volkswagen Aktiengesellschaft was founded on May 28, 1937 in Berlin, Germany, under

the control of the Nazi party. At the time, the company was named Gesellschaft zur Vorbereitung

des Deut-schen Volkswagens mbH (“Volkswagen Chronicle”; “Volkswagen is Founded”). Later

that year, the company change its name to Volkswagenwerk. Volkswagenwerk translates as

People Car Plant, or “The People’s Car Company.” (“Volkswagen is Founded”). The company

started building two manufacturing plants in 1938, one in Fallersleben, Germany and another in

Brunswick, Germany. In 1948 the company moved its headquarters from Berlin to Wolfsburg,

Germany (“Volkswagen Chronicle”).

During World War II, the company was reorganized to manufacture military vehicles,

instead of passenger cars. During this time, the company force more than 15,000 individuals

from concentration camps to work in the factories. After the war the company returned to

automotive manufacturing and started producing sedans under British administration (Bowler,

2015).

Over the next few decades, the British Military Government would appoint the

company’s General Directors. In 1949, the British hand the Volkswagen works over to the State

of Lower Saxony with the understanding that they have control of and are under the supervision

of the federal German government (“Volkswagen Chronicle”).

In the mid-1950s Volkswagen broke into the European, American and African auto

markets. The Volkswagen Beetle was the bestselling automobile in that decade and the company

was considered Germany’s most important automotive maker (“Volkswagen Chronicle”).


In August of 1960, the company changed its name to Volkswagenwerk

Aktiengesellschaft, which is still the official name of the company. It was during this same year,

that Volkswagen opened up the company’s stocks. About 60% of the company would be sold as

stock to the people. The remaining 40% was to be equally divided between the German Federal

Government and the State of Lower Saxony (“Volkswagen Chronicle”).

The company continued to have success with its cars. By 1969, one of Volkswagen’s car

models, Audi, was so successful that the company decided that it should be an independent sales

organization. That same year Porsche added to the second independent sales organization

(“Volkswagen Chronicle”).

Today the Volkswagen Group consists of Volkswagen, Audi, Bentley, Bugatti,

Lamborghini, Porsche, SEAT and Skoda, as well as companies that manufacture motorcycles

and commercial vehicles (“The Group”). It was named the world’s biggest vehicle maker in

2015, surpassing Toyota (Cremer & Funakoshi, 2015).

Corporate Culture

Volkswagen’s core business values are: customer focus; top performance; creating value;

the ability to renew; respect; responsibility; and sustainability (“Group Guiding Principles”).

Their corporate culture focuses on four main areas: performance, leading by example, active

involvement, and social responsibility (“Basic Principles”). The company strives for long-term

growth, not short term success, believing everyone should profit from their success, including

society (“Forging ahead with sustainability”).

Corporate Social Responsibility (CSR) is a large part of the company. Volkswagen has

more than 200 projects that enhance economic and social structures, with emphasis on


sustainability and continuity. Volkswagen has been a part of the largest and most important CSR

initiatives in the world, Global Compact, since 2002 (“Forging ahead with sustainability”). The

Global Compact is the United Nation’s call to corporations to promote sustainability (“What is

the UN Global Compact”). It has 10 principles, but Volkswagen list four as a part of their CSR:

human rights, working standards environmental protection and combating corruption (“Forging

ahead with sustainability”).

In 2008, Volkswagen produced a mission statement on biological diversity. This

statement shows the company’s support for biological diversity and environmental protection,

stating that it is a long established part of the business (“Volkswagen publishes mission

statement on biodiversity”).

Corporate Social Responsibility

● Founded Community Trust, which promotes education and health in South Africa

(“Responsibility knows no boundaries”).

● Has conducted training sessions that instruct drivers on how to conserve fuel in

Europe and Australia (“Responsibility knows no boundaries”).

● Volkswagen started a campaign “The Fun Theory” to promote protecting the

environment by making it fun. Garbage cans, recycling bins, even stairs were

created into a fun entertaining game, which encouraged people to actually use

them (“The Fun Theory”).

● Have started working on making their factories 25% more eco-friendly (Rogers,

2012).


● Volkswagen actively promotes biological diversity (“Volkswagen publishes

mission statement on biodiversity”).

The Emission Problem:

Impact of Emissions and the Clean Air Act

Nitrogen oxide (NOx) is one of the pollutant that can harm not only the environment, but

human health as well. When NOx emissions enter the atmosphere they mix with water and other

compounds to form ground-level ozone. These pollutants can be carried with the wind and can

remain in the air for days or years (“Human Health and Environmental Effects of Emissions

from Power Generation”). These emissions contribute to smog; acidizing of lakes or streams;

damage ecosystems, both forests and coastal; and increases the degradation speed of buildings

and structures. Some of the health issues associated with NOx emissions are respiratory

symptoms, decreased lung function, inflammation of the lungs and other respiratory issues

(“Human Health and Environmental Effects of Emissions from Power Generation”).

The Clean Air Act was established by the Environmental Protection Agency to regulate

air emission, particularly ones that harm human health or welfare (“Summary of the Clean Air

Act”). In 1990, the Clean Air Act was revised and required periodic studies to determine is the

cost of the act outweighed the benefits. According to their studies, between 1970 and 1990, the

Clean Air Act has lowered of sulfur dioxide particles by 40%, nitrogen oxides by 30%, carbon

monoxide by 50% and lowered total suspended particles by 45% (Lockwood, 2012). The health

benefits from these lower emissions for the twenty years is believed to be about $5.6 trillion to

$49.4 trillion. Some of these health benefits are the reduction of about 184,000 premature deaths,

674 cases of chronic bronchitis and over 22 million sick days from work (Lockwood, 2012).


International Council on Clean Transportation

During 2013 and 2014, as a part of research project in collaboration with West Virginia

University, the International Council on Clean Transportation (ICCT) tested Volkswagen diesel

cars’ emission. They tested the cars using a dynamometer and with real-world nitrogen oxide

(NOx) emissions, where cars were driven from San Diego to Seattle. The findings showed a

discrepancy between the dynamometer tests and the real-world emissions. On the test drives, the

Volkswagen Jetta was producing NOx emissions 15 to 35 times the US legal amount (Jaynes,

2015).

Inquiry to Volkswagen’s Emissions

In May of 2014, the California Air Resources Board (CARB) and the Environmental

Protection Agency (EPA) inquired about the Volkswagen Group’s Emission. This inquiry was

not publicized. In December of the same year, Volkswagen claimed they had found the issue, a

software problem and recalled 500,000 cars to fix with a software update. However, the CARB

continued to investigate the vehicles in question and found that they were still violating US law

(Jaynes, 2015).

On June 8, 2015, CARB brought their findings to the EPA and Volkswagen. The EPA

wanted proof that Volkswagen had indeed found and solved the emission problem. The company

had initially tried to blame the problem on the inconsistency of tailpipe NOx levels, which was

not bought by the EPA. That is when the company came clean about the cheating. Volkswagen

had a “defeat device” or a software algorithm that cheated the emission control system on the

vehicles (Jaynes, 2015). A defeat device is a designed to “defeat” the emission control systems


that comply with the emission standards of the Clean Air Act (“Clean Air Act Prohibits “Defeat

Devices” in Vehicles, Engines”).

Volkswagen’s Response

Volkswagen decided to tell the truth to the EPA after the company’s initial excuse failed

to appease the EPA’s inquiry on the discrepancy of the emission tests. Following the

announcement, the company’s CEO, Martin Winterkorn, took responsibility for the emission

cheating (Cremer, 2015b). However, states that he was not aware of any wrong doing on his part

(Kim, 2015). Later Volkswagen blamed engineers for the defeat device, stating that the corporate

heads had no knowledge (Puzzanghera & Hirsch, 2015).

Winterkorn apologized for breaking their customers and public’s trust. In his statement

he told the public that Volkswagen will be cooperating with transparency and urgency in order to

be clear and open so the facts of the issue can be established (Bomey, 2015). Winterkorn also

resigned from his position as CEO of Volkswagen (Cremer, 2015b). Volkswagen also fired two

chiefs of research and development for Audi and Porsche, Ulrich Hackenberg and Wolfgang

Hatz (Cremer, 2015a). The company was going to fire Michael Horn, the CEO of Volkswagens

American branch, but after dealers rallied behind Horn, the company decided not to remove

Horn (Ramey, 2015). After Winterkorn resigned, the position of CEO of Volkswagen went to

Matthias Mueller. Matthias Mueller, 62, was the CEO of Porsche before being offered the

position (Makortoff & Pramuk, 2015). Mueller stated that his focus was first to restore customer

trust. He also state that Volkswagen will be developing and implementing the strictest

compliance and governance standards in the auto industry (Risen, 2015). The company has


vowed and is trying to regain the trust of its publics through open communication and

truthfulness (Bomey, 2015).

Mueller has developed a 5-point plan to deal with the crisis. The first point is to support

the customers affected by the scandal. Investigating and identifying the people responsible for

the defeat device is the second point. The third point is to give each region and brand more

autonomy. Point four may be one of the hardest, to change Volkswagen’s corporate culture, one

of openness and cooperation, while still maintaining their pursuit of perfection and social

responsibility. The last point is to push their 2018 strategy back to 2025 (Krok, 2015).

Now that Winterkorn is no longer the CEO of Volkswagen, many wonder if this scandal

is the result of his effect on the corporation’s culture. Winterkorn was a boss that did not accept

failure. A professor at the University of Duisburg-Essen stated people working at Volkswagen

talk about a special pressure there. However, Volkswagen has not admitted that this scandal was

a result of the company’s corporate culture (Cremer & Bergin, 2015). Peter Henning, an expert

in the auto industry and white collar crime at Wayne State University, also stated that the need to

cheat probably came from a culture set at the higher levels. According to him, when mid-level

managers need to meet a sales target or a certain profitability that is when people start cutting

corners (Kimball, 2015).

Performance Over Sustainability

Part of Volkswagen’s corporate culture and corporate values is performance. Many have

speculated that the reason Volkswagen used a defeat device was because they knew that if they

made their cars according to code it would impact performance. Customers have come to expect

a certain level of performance from Volkswagen. However, Volkswagen also prides itself on its


sustainability and the company’s social responsibility. Recently, Volkswagen received the title

“world's most sustainable automotive group” by RobecoSAM for the second year in a row (Kim,

2015). In this case, however, it seems like Volkswagen chose to pursue performance over

sustainability.

Timeline of Events

● 2002 - Volkswagen stated the largest corporate social responsibility initiatives to promote

sustainability (“Forging ahead with sustainability”).

● 2013-2014 - A research project by the International Council on Clean Transportation

(ICCT), in collaboration with West Virginia University, found that Volkswagen’s diesel

Jetta was producing 15 to 35 times the US legal amount of NOx emissions (Jaynes,

2015).

● May 2014 - The California Board of Air Resources Board (CARB) and the

Environmental Protection Agency put in an inquiry to the Volkswagen Group about the

discrepancy in emissions. CARB continued to investigate the issue (Jaynes, 2015).

● June 2015 - CARB went to the EPA and Volkswagen about the emission problem again.

This time the EPA wanted proof that Volkswagen had identified and fixed the problem.

After inquiring about the issue, Volkswagen admitted to using a defeat device (Jaynes,

2015).

● September 2015 - The US government launches a criminal probe into Volkswagen

(Bomey, 2015). Volkswagen’s CEO, Martin Winterkorn, resigns from his position after

apologizing for the scandal. Matthias Mueller takes his place as CEO of Volkswagen

(Cremer, 2015b).


● October 2015 - Matthias develops a 5-point program to deal with the emission scandal

(Krok, 2015).

Public Response

News/Auto Industry Response

Several news sources and magazines have issues stories about the scandal, some even

calling it “Dieselgate.” (Collins, 2015). In addition to all the media coverage, Volkswagen stocks

dropped 18.6%. The company could also be facing criminal charges from the US government

(Bomey, 2015). In addition, emission test have been conducted on several diesel cars made by

other car manufacturers. Shockingly many of these vehicles showed better emissions during lab

testing than on road emission and many produce more than the legal limit. Mercedes-Benz,

Honda, Mazda and Mitsubishi are a few of the different manufacturers that have diesel cars that

produce more emissions than is legal. For instance, some of Honda’s 4x4 models produce 20x

the NOx limit. Unlike Volkswagen, however, there is no evidence of a defeat device in any of

these vehicles. It is suggested that the cars are being designed to have lower emissions in a lab

setting (Carrington, 2015). The EPA has decided to audit every make and model of passenger

diesel cars in response to this scandal (Risen, 2015)

Public Relations Response

Public relation critics are disappointed with Volkswagen’s crisis management. Many

believe the company is communicating too slowly. The slow release of information keeps the

story on the front pages and keeps eroding at Volkswagen’s reputation. Many state it would have

been better to provide more detail and all at once (Garcia, 2015). Volkswagen’s websites news


most recent story for nearly a week after the scandal was their ranking as the world’s most

sustainable carmaker. It took six days later for the news section to be updated with a brief

apology (Colvin, 2015)

General Public Response

Many Volkswagen drivers feel “ripped off” by the company. One driver had thought

about buying a Toyota Prius Hybrid prior to buying his diesel Volkswagen, but did not like how

the Prius drove. He opted for the diesel Volkswagen because it performed better. Now he worries

that the “fix” will hinder the performance he enjoyed (Mouawad & Jensen, 2015).

Shortly after news about the scandal hit the news, car owners started tweeting their

concerns and disappointment on Twitter. Paula Dixon tweeted about her concern about the

impact the fixes would have on her car’s performance, stating, “I sincerely hope that

#Volkswagen plans to pay me for the lost value in my A3 after they retrofit it to run slower and

get worse mileage” (2015). Doug Cook, another Twitter user, tweeted this message:

“/@Volkswagen: I do not want to drive a polluting car. I loved my new Golf TDI, but now I feel

sick. I'm angry and I want my money back.” (2015). These two users share concerns that are

similar to other upset car owners. However, with the initial upset dying down, many car owners

are just wanting to know what will happen to their diesel cars and are waiting for information

from Volkswagen about the situation (Lazarus, 2015).

http://topics.nytimes.com/top/reference/timestopics/people/m/jad_mouawad/index.html


Impact of Volkswagen’s Lie

Public Impact

Since the news of Volkswagen’s defeat device, studies have been conducted to determine

the human cost of Volkswagen's lie. According to a study conducted by the open-access journal,

Environmental Research Letters, the 500,000 American cars affected by the defeat device has

led to about 60 premature deaths in America. In addition the research shows that if these cars are

not dealt with the number could increase another 140, making a total of 200 premature deaths.

According to the study, “Dieselgate” could cost Americans approximately $910 million dollars.

Since Volkswagen started manufacturing the cars with the defeat deceive, the pollution cost of

these cars is around $450 million dollars (Meyer, 2015).

Financial Impact

By September Volkswagen’s stocks dropped 18.6%. In addition, they were facing fines

and costs of recalling cars (Bomey, 2015). By November, the company’s stocks had dropped

25% compared to the previous year (Davies, 2015). Volkswagen has set aside $7.3 billion dollars

to cover the cost of the recalls, which trashes the profit forecast for the year (Thompson &

Kottasova, 2015). They could be facing an EPA fine of up to $37,500 dollars per vehicle, which

would add up to about $18 billion dollars. However, news analysts do not expect the EPA give

Volkswagen a fine of that magnitude (Bomey, 2015). Volkswagen may also be facing fines from

other countries around the world (Pop, 2015). This scandal has cost Volkswagen 40% of its

value in just two days (Colvin, 2015). Volkswagen has also set forth a “Goodwill” program for

current American car owners affected by the scandal. The car owners will receive $1,000 dollars


in compensation under this program, which could cost Volkswagen a total of $500 million

dollars (Fisher, 2015).

In addition, the German car company may have to sell off some of their luxury brands in

order to pay the $21 billion dollar credit line that was supplied by banks if it cannot find another

way to pay of the one-year loan (Schuetze, 2015). Volkswagen hopes to overcome this issue by

taking a new approach to sustainability. They plan on shifting their focus away from diesel to

electric and hybrid cars. The company plans to make the Volkswagen Phaeton, a purely electric

vehicle currently still in development, the flagship for the brand (Golson, 2015).


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