VOLKSWAGEN’S DIESELGATE:A CASE STUDY OF THE

AUTOMAKER’S ONGOING EMISSIONS CRISIS

The 2016 Arthur W. Page Society Case Study Competition in Corporate Communication

ABSTRACT

Volkswagen (VW), an iconic and beloved automaker, has found itself in the middle of a disastrous communications and business crisis with the news that they deliberately cheated on and falsified emissions tests on a large number of their vehicles over the past several years. Since the mid-September revelations by the U.S. Environmental Protection Agency (EPA), the company has undergone a shakeup among its executives, a drop in stock and resale values, government investigations, and a serious blow to their reputation as a trustworthy and environmentally responsible carmaker.

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TABLE OF CONTENTS

I. CASE STUDY

1. Case Overview 4

2. Company History 4-6

3. Crisis Timeline 6-7

4. Impact on the Organization’s Financial Business Performance 7-8

5. Public ResponsesGovernment Response 9Media Response 9-10Consumer Response 10-11

6. Volkswagen’s Response to the Scandal 11-12

7. Conclusion 13

II. REFERENCES 14-21

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CASE OVERVIEW

In recent months, Volkswagen has found itself embroiled in a serious crisis that has had enormous ramifications for their reputation and business interests. On September 18, 2015, news broke that the U.S. Environmental Protection Agency (EPA) had determined that Volkswagen had installed a “defeat device,” used to cheat on emissions tests, in 11 million vehicles.The use of the defeat device directly violates the Clean Air Act (CAA).

Of primary concern are emissions of Nitrogen Oxides (NOx), gases that produce smog in the environment and contribute to respiratory problems such as asthma (“Nitrogen Oxides (NOx) Control Regulations”; Davies, 2015). Diesel, despite producing less carbon dioxide than gasoline, is known to emit more nitrous oxides and other pollutants (Bender, 2015; Bigelow, 2015). The diesel engines of recent history have been promoted as being cleaner than their predecessors, and they are appealing for their greater fuel economy (Bigelow, 2015). Volkswagen in particular touted its “clean diesel” offerings (Glinton, 2015). Lawrence, Elgin, and Silver (2015) refer to the company’s promotional efforts as “publicity worthy of Barnum” (para. 22). According to the recent revelations, the approximately 482,000 U.S. vehicles equipped with the cheating software emit between 10 and 40 times the allowed amount of NOx(Duffer, 2015). Further compounding the situation, some gasoline models were later found to have their own problematic emissions inconsistencies (Kammel&Rauwald, 2015).

Volkswagen, which has long enjoyed a strong relationship with consumers and what auto industry blogger Peter De Lorenzo calls “a core group of enthusiasts for their diesels who believed in the Volkswagen message,” is now experiencing a serious trust deficit (Bomey, 2015, para. 19). They face this in addition to fallen stocks, the probable loss of billions of dollars in potential penalties and other expenses, and restructuring efforts after the resignation of Chief Executive Officer Martin Winterkorn (AFP, 2015, “Timeline of Events”; Duffer, 2015).

COMPANY HISTORY

1930s–1940s: Origin of Volkswagen & Volkswagen in World War IIVolkswagen’s history dates back to May 28, 1937, when the German state-owned GesellschaftzurVorbereitung des Deutschen Volkswagens mbH (“Society for the preparation of the German People’s Car”) came into being (“Volkswagen Success Story,” 2015).Its name was soon after shortened to Volkswagenwerk, “The People’s Car Company.” Nazi-run and headquartered in Wolfsburg, Germany, the company was intended to fulfill Hitler’s desire to introduce an affordable, mass-produced car. Early designs were provided by Ferdinand Porsche of Austria. Very early in the company’s life, though, World War II redirected the company’s attention toward military production (“Volkswagen Success Story,”2015). When the conflict ended, Volkswagen—then called Volkswagen-Finanzierung-Gesellschaft and owned by the British Military Government (“Volkswagen Success Story,” 2015)—became a cornerstone in “[the Allies’] attempts to resuscitate the German auto industry” (“Volkswagen is Founded,”

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2015). Ownership eventually changed hands again, with the company returning to the control of the German government (“Volkswagen Success Story,” 2015).

1950s : VW entering the international market & Beetle becoming popularThe 1950s saw Volkswagen spreading to other nations, including Canada, Brazil, and the United States. Early Volkswagen sales were slow in the US, hindered by the brand’s historical ties to the Nazi party and also by the vehicles’ size and shape (“Volkswagen is Founded,” 2015). Nonetheless, the company eventually grew to become the most popular imported car brand in the United States (“Volkswagen is Founded,” 2015). With the name “Beetle,” the company played up the cars’ small size, which they also highlighted in the classic “Think Small” advertisement by Doyle Dane Bernbach (“Volkswagen is Founded,” 2015; ”Volkswagen Brand History,” 2015).

1960s: Stable development In the 1960s, the company went public, with 60 percent ownership being allotted as “people’s shares” and the remainder being split between central and local government. This decade also saw the introduction of “Herbie,” an iconic Hollywood Beetle. With the company continuing to grow and the Berlin Wall impacting the makeup of employees, there was an influx of a number of Italian “guest workers” (“Volkswagen Brand History,” 2015). By the end of 1966, the organization had acquired Audi (ACNA, 2015).

1970s: Mass production of Beetle & Creation of GolfDuring the 1970s, the Beetle surpassed a production record previously held by the Ford Model T, and the Passat and Jetta models were introduced. In the face of challenges presented by an ongoing oil crisis and recession, the VW introduced a new Golf in 1974 with a 1.5-litre diesel engine. Not long after, the company began its first efforts in hybrid technology, and the resulting prototype was exhibited at New York’s Museum of Modern Art (“Volkswagen Brand History,” 2015).

1980s–1990s: Volkswagen in modern times & beginning of enterprises mergerDuring the following decade, the company, now Europe’s top automaker, opened a research center to explore new technologies. In the 1990s, the Volkswagen Group took over SEAT, Skoda, Bentley, Bugatti, and Lamborghini. The diesel-powered Lupo, promoted for its impressive fuel economy, appeared on the market. Another new model, the Phaeton, appeared, serving as the Volkswagen brand’s first toe dipped into the luxury car market. In 1997, the organization hosted “Top Priority—Partners for the Environment,” in which a number of companies joined together to focus attention toward environmental protection. The Volkswagen Environmental Award was also launched (“Volkswagen Brand History,” 2015).

2000s: Leading up to the current emission crisisIn 2007, Martin Winterkorn became CEO of Volkswagen AG. Around that same time, the EPA initiated tougher testing on 2008 models (Duffer, 2015). In 2008, production began on the Golf VI, which was called “safer and greener than ever before (“Volkswagen Brand History,” 2015). From this point forward, the company’s history

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became increasingly tied into the events and decisions that led directly to the current crisis.

CRISIS TIMELINE

2008—The defeat device is first installed on the EA189 diesel engine (Mihalascu, 2015).

2009—The first models of cars implicated in the scandal are released (Davenport &Ewing, 2015).

May 2014—Researchers from West Virginia University find that on-road emissions do not match lab findings (Lawrence, Elgin, & Silver, 2015).

September 18, 2015—The EPA accuses Volkswagen of cheating on its emissions test with a “defeat device” and thereby violating standards (Cobb, 2015a).

September 20, 2015—Volkswagen announces halted sales of all 2015/2016 models equipped with a 2.0-liter TDI engine (Harder and Spector, 2015).

September 22, 2015—Volkswagen allocates $7.3 billion to deal with the crisis (Chicago Tribune). Winterkorn apologizes (Economic Times). The term “Dieselgate” has its origin on Hybridcars.com (Siciliano, 2015).

September 23, 2015—CEO Martin Winterkorn resigns (Makortoff, Boyle, &Tutt, 2015).

September 25, 2015—Matthias Müller, formerly of Porsche, is named Winterkorn’ssuccessor (Ewing & Vlasic, 2015).

October 8, 2015—Michael Horn and officials from the EPA give testimony to the House Energy and Commerce subcommittee. Horn apologizes (“Live Blog and Video,” 2015).

October 17, 2015—Winterkorn steps down from Porsche Automobil Holding SE, which owns more than 50% of Volkswagen; he will be replaced by Hans Dieter Poetsch, Volkswagen’s new supervisory board chairman (Associated Press, 2015b).

November 2, 2015—The EPA accuses Volkswagen of installing test-defeating software in other Volkswagen, Audi, and Porsche diesel models. The company disputes these claims, calling it “permissible software” (Spector & Boston, 2015).

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November 3, 2015—Bloomberg.com reports that Volkswagen AG has found through an internal probe that some of their gasoline-powered vehicles may also have been assigned false emissions readings. Specifically, 800,000 cars were found to have “‘unexplained inconsistencies’ concerning their carbon-dioxide output.” Porsche announces halted North American sales of Cayenne diesel models (Kammel&Rauwald, 2015; Thompson, 2015).

November 4, 2015—The Associated Press tweets that Moody’s has downgraded Volkswagen’s credit rating (Associated Press, 2015c).

End of 2016—Volkswagen expects to have fixed all 11 million vehicles initially involved in the scandal (Ivory & Ewing, 2015).

IMPACT ON THE ORGANIZATION’S FINANCIAL BUSINESS PERFORMANCE

1. FinesAccording to initial estimates, Volkswagen faced up to $18 billion in EPA fines (Gardner & Woodall, 2015). In total, there are around 482,000 Volkswagen cars with four-cylinder engines installed with the cheating software in America. Each non-compliant vehicle might face penalties of $37,500.Later, EPA disclosed that an additional 1,000 VW models with six-cylinder engines have the defeat devices. Thus, VW could face up to $375 million in new fines in addition to the original $18 billion fine. (Associated Press, 2015, November 2).

2. Loss of RevenueCurrently, customers cannot buy a new Volkswagen with the 2.0-liter TDI diesel engine since the company has announced a stop-sale for its all 2015 and 2016 models equipped with the four-cylinder 2.0 liter TDI engine (Lorio, 2015). Therefore, the scandal certainly will reduce the company’s sales in the next few months.

3. Repairing ExpensesVolkswagen lost around $1.83 billion in the third quarter since it allocated 6.7 billion euros to repair costs (McHugh, 2015). As the scandal widened and more VW diesel models were found equipped with the defeat devices, VW admitted that the company needed to raise new funds—around 2 billion euros—in addition to the 6.7 billion euros already issued for repairs(Kammel&Rauwald, 2015).

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4. Stock Value

Source: Yahoo! Finance

On September 21, 2015, the first full business day of trading after the EPA accused VW of cheating on its emission teat with a defeat device, the share prices of VW AG fell 20 percent on the Frankfurt Stock Exchange. On September 22, 2015, the stock prices fell another 12 percent.

5. Resale Value and Plummet in Used-Car MarketBased on the used-car auction price, some vehicle valuation and automotive research companies, like Kelly Blue Book, show the resale value of Volkswagen influenced model cars in the U.S. market was decreased from 5 to nearly 16 percent. In addition, according to the National Automobile Dealers Association’s October report on the used-cars market, the actual volume of used VW diesel cars sold at auction has plummeted (Beene, 2015, October 26).

According to the analysis from Forbes, combined the government fines and settlements, recall expenses, private settlements and loss of future sales, the net present value of the total cost of Volkswagen’s emission scandal will be around $34.5 billion (Dee, 2015)

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PUBLIC RESPONSES

Government VW has found itself under investigation by multiple governments. Government

responses will directly impact the company in terms of financial repercussions and future regulation and will also likely impact the company’s reputation moving forward.

The company has traditionally enjoyed strong ties with its home country’s government (Smale, 2015). It is Germany’s largest employer, and there are concerns about consequences for German industry overall (Bender, 2015). The German government has positioned itself as an ally in the United States’ response to the scandal, perhaps hoping to limit negative effects on the German economy (Bender, 2015).

Michael Horn (CEO of VW Group of America) faced a U.S. House subcommittee on October 8, where representatives echoed expressions of anger and disbelief over the deception (Rodriguez, 2015).

EPA officials in attendance made it clear that VW is vulnerable to financial penalties and criminal charges. They also asserted that future testing procedures will be changed, which may have implications not only for future VW engineering but for other automakers as well (“Lawmakers Press,” 2015).

Media After Volkswagen’s emission scandal broke out, the company received widespread

negative news reporting about the scandal. Major news organizations, such as Reuters, Bloomberg and AP, all reported the scandal. Reuters reported with the headline “Volkswagen could pose bigger threat to German economy than Greek crisis” (Nienaber, 2015).

The scandal also appeared in the headlines of multiple news websites, such as Hybridcars.com, which used the headline “VW admits 11 million diesels globally are potentially cheating” (Cobb, 2015b).

In addition, some authoritative technology magazines, such as Popular Mechanics, also reported the emission issue. Popular Mechanics said the VW emission scandal is not only an issue of recalling, but also an issue of “cynical deceit” (Dyer, 2015).

The term “Dieselgate” started being used to describe the emission scandal after the company’s top managers officially admitted the violation and company CEO Winterkorn stepped down (Siciliano, 2015).

The media referred to the emission crisis as “Dieselgate,” which suggested that the issue had reached a level so severe as to be comparable to former president Nixon’s

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Watergate scandal. The “gate” status means lying to the public and facing serious charges (Cobb, 2015a).

Consumers As shown below, YouGov’s BrandIndex tracked a steep drop in brand perception

following the September revelations (from a Buzz score of between 10 and 11 for most of the month to -2 as of September 22) (Marzilli, 2015).

Source: http://www.brandindex.com/article/volkswagens-diesel-scandal-brings-lowest-perception-6-years

This graph reflects respondent’s positive and negative exposures to the brand over a specified period. The full scale ranges between 100 and -100, with a score of zero reflecting equal positivity and negativity.

On September 18, Twitter users reacted by posting links to articles about the news and expressing surprise and disapproval. Some used humor to mock the company. For instance, Twitter user @RR_Anderson wrote, “Volkswagen, a car company invented by Hitler, caught secretly poisoning the Earth” before linking to an NPR article.

A wave of lawsuits has begun, with customers accusing VW of defrauding them (Meier, 2015).

A survey conducted after the scandal became public revealed that 50% of consumers still view VW positively or very positively. These respondents indicated that the company still brings to mind positive things like reliability and affordability. Few respondents seemed to overtly associate VW with negativity or scandal (Hennessy, 2015).

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Some analysts have suggested that the company’s brand is strong enough to carry it through the crisis relatively unscathed, particularly in European countries aside from Germany (Verhage, 2015).

There is some evidence that the public’s overall view of diesel may not have been significantly impacted. The National Association for Convenience & Fuel Retailing found in an October survey that opinions of diesel among gas users were relatively unchanged (Saefong, 2015).

Volkswagen’s Response to the ScandalAfter the emission scandal happened, Volkswagen conducted several strategies to cope with the crisis and prevent the crisis from expanding.

1. Volkswagen publicly acknowledged the cheating devices were installed in some diesel-powered VW models, after EPA announced Volkswagen violated the Clean Air Act on September 18, 2015. Volkswagen American CEO Michael Horn said, “We’ve totally screwed up.” Martin Winterkorn, the former CEO of Volkswagen also publicly apologized for the wrong behavior of Volkswagen.

2. In official announcements, the top managers of Volkswagen were persistent showing that the company was trying to do everything it can to compensate customers and gain back their trusts. Winterkorn said his resignation could give Volkswagen a fresh start.

a. In addition, Matthias Müller, the company’s new CEO, voiced that his most important duty is to gain back customers’ trust. “Under my leadership, Volkswagen will do everything it can to develop and implement the most stringent compliance and governance standards in our industry,” Müller vowed in an official statement (Volkswagen AG, 2015).

b. Müller also showed his faith about Volkswagen; he believed this crisis was an opportunity for the company to conduct reform and become stronger than before.

3. In order to contact with customers and listen to public opinion, Volkswagen launched a new, dedicated portal in the U.S. https://www.vwdieselinfo.com/(Molleda, 2015).Customers can find out the latest news about Volkswagen’s emission scandal and seek for help from this website by checking their vehicle identification number.

4. Volkswagen started to issue financial compensation for customers to save back their loyalty. Volkswagen will provide a $2,000 reward for existing Volkswagen owners who will buy or rent any new Volkswagen hybrid or gasoline cars (Beene, 2015, October 5).

a. Apart from this, Volkswagen of America created a ‘2.0L GOODWILL PACKAGE’ for affected customers. The ‘2.0L GOODWILL PACKAGE’ including: “a $500 Volkswagen Prepaid Visa Loyalty Card, a $500 Volkswagen Dealership Card, and no-charge 24-hour Roadside Assistance

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for three years.” (Volkswagen diesel information, 2015). Volkswagen hopes this goodwill package can help the company to compensate the loss of customers and correct its mistakes.

Source: https://www.vwdieselinfo.com/wp-content/uploads/2015/11/Customer_Goodwill_Package_Overview_1.pdf

5. By buying back some unsellable, used diesel vehicles, Volkswagen was trying to contain the used diesel cars’ value in the market and protect the dealer shops’ benefits. According to a Volkswagen dealer meeting, Volkswagen will buy back the affected used diesel vehicles at the price from before the scandal happened if the pre-owned cars remain in the inventories of dealers for 60 days or longer. (Beene, 2015, October 30).

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CONCLUSIONS

Emissions scandals and defeat devices are not unique to this particular crisis. In past instances, the EPA has responded by revising testing procedures, and it is expected that the current Volkswagen crisis will also lead to changes in regulations and testing procedures (Beene, 2015).

Aside from the financial consequences (in the billions of dollars) for the company, this scandal also amounts to a trust crisis. As former CEO Winterkorn said, Volkswagen “broke the trust of [its] customers and the public.” Winterkorn asserted that it is crucial to regain the trust of the people (Hotten, 2015). As part of their response to the situation, Volkswagen and new CEO Müller have stepped up efforts to gain back some of the goodwill lost.As has been noted, however, the Volkswagen reputation itselfmay be strong enough to survive the current scandal.

In general, this latest emissions crisis is casting widespread doubt over the validity of claims that diesel is a clean fuel option, claims that Volkswagen has relied upon in their business and marketing (Harder & Spector, 2015). Going forward, some have suggested that VW should refocus its energies into hybrid and electric models, which it has largely shirked in favor of its diesel offerings (Wharton, 2015). Such technology is expected to benefit as environmental concerns grow and emissions regulations continue to buckle down (Trudell& Hagiwara, 2015). Currently, Volkswagen’s electric Phaeton model is set to compete on this front (Perkins, 2015). With diesel failing to live up to expectations, redirecting focus toward these technologies might help give Volkswagen a light at the end of the tunnel (Randall, 2015).

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