The Volkswagen emissions scandal A case PDF

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The Volkswagen emissions scandal: A case study in corporate misbehaviour

A brief journey through a long history When in 1937 the company known as "Gesellschaft zur Vorbereitung des Deutschen Volkswagens mbH" was founded, no one could have guessed that it would one day be Europe's largest carmaker. The history of the company - with all its trials and tribulations - is first and foremost a story of impressive success.

1937-1945 On May 28th, 1937 the "Gesellschaft zur Vorbereitung des Deutschen Volkswagens mbH" company is founded, and on September 16th, 1938 it is renamed "Volkswagenwerk GmbH". In early 1938, in what is today Wolfsburg, work begins on construction of the Volkswagenwerk plant which is to house production of the new vehicle designed by Ferdinand Porsche. During the Second World War Volkswagenwerk's production is switched to armaments. Some 20,000 forced labourers, prisoners of war, and later also concentration camp prisoners, work at the plant. In September 1998, in recognition of the events of that time, VOLKSWAGEN AG established a humanitarian fund on behalf of the forced labourers compelled to work at Volkswagen during the Second World War. By the end of 2001 more than 2,050 people in 26 countries had received humanitarian aid from the fund. Furthermore, a Memorial in remembrance of the forced labour employed at the Volkswagenwerk plant is currently being established at Wolfsburg, involving contributions from present-day Volkswagen apprentices. 1945-1949 After the end of the Second World War, in mid June 1945, responsibility for Volkswagenwerk is placed in the hands of the British Military Government. Under the management of Major Ivan Hirst, mass production of the Volkswagen Beetle is started. 1949-1960 On March 8th, 1950 the Type 2 goes into production, expanding the company's product range. The Volkswagen Bus, still today known to many as the "VW Bully", soon creates rising demand thanks to its multifunctional capabilities. In 1956 a separate manufacturing base for the Transporter is established in Hanover, at the same time setting down the roots of today's Volkswagen Commercial Vehicles brand. 1960-1980 On February 17th, 1972 Volkswagen breaks the world car production record: with 15,007,034 units assembled, the Beetle surpasses the legendary mark achieved by the Ford Motor Company's Model T, popularly known as the "Tin Lizzy", between 1908 and 1927. In 1973 the Passat is the first model of the new generation of Volkswagen vehicles to go into production - with front-wheel drive, a water-cooled four-cylinder engine and a range of engines up to 110 bhp. The Passat is built in line with the modular strategy, by which standardised components usable in a range of different models provide significant

rationalisation. In January 1974 the first Golf is built at the Wolfsburg plant. The compact saloon quickly becomes a hit, and advances to become the legitimate heir to the legendary Beetle. The same year also sees the launch of the sporty Scirocco, which was to continue in production until 1981. In 1976 the first Golf GTI rolls off the production line. The car, with its110 bhp engine, creates a real furore on the roads - and lays the foundations for the birth of a legend. 1980-1990 In June 1983 production of the second-generation Golf begins. The car is designed for a largely automated assembly process, and in the specially erected final assembly hall, designated Hall 54, robots are deployed for the first time in vehicle manufacture. 1990-2000 With the production launch of the Lupo 3L TDI, the first production car to offer fuel consumption of just three litres per 100 kilometres, in July 1999, Volkswagen once again makes automotive history. 2000-2003 In August 2002, at Volkswagen Slovakia, a.s. in Bratislava, mass production of the Touareg, a luxury-class off-road vehicle, is started, marking the Volkswagen brand's move into an entirely new market segment. In December 2002 the "Auto 5000 GmbH" company, operating a plant at the Group's site in Wolfsburg, starts production of the Touran compact van. A special collective pay model has been developed, aimed at implementing lean production and involving flat hierarchies, team working, flexible working hours and the deployment of more process expertise by the workforce. In 2003 production of the fifth-generation Golf is started, embodying a new dynamism in its design and engineering.

Vision of VWP We are a highly motivated and innovative team providing our customers with the highest quality cars and components, competitive and viable in the long run and manufactured in the environmentally friendly plant.

The Group's strategy The main goal of the group's strategy is for Volkswagen to become the economic and ecological leader of the global automotive industry. We defined four objectives through which Volkswagen shall become the most successful and fascinating enterprise of the global automotive industry by 2018.

Volkswagen wants to gain a position of the world's leading manufacturer by using intelligent innovations and technologies to shape customers' satisfaction and quality Sale is expected to exceed 10 million vehicles per year; whereas Volkswagen wants to rely upon development of large growth markets. The profitability of sales before taxation is expected to reach at least 8% thus guaranteeing financial safety and ability of the group to function in the periods of economic downturn. Volkswagen wishes to be an excellent employer on all markets, among different communities and in all regions; this is the prerequisite for creation of great teams of employees. The group pays particular attention to the question of the environmental protection and profitability of its vehicle-related projects so that the right products contribute to success

in challenging market conditions. At the same time, it allows controlling the size of new investments. Our attractive range of environmentally-friendly vehicles, which is continuously extended, as well as an excellent position of individual brands on the markets worldwide allow for adequate use of the group's assets and consistent improvement of its market position in relation to competitors. Our efforts are focused on determining new ecological criteria in such fields as: production of vehicles, aggregates and light constructions. Due to the modular design system, which undergoes constant development, we increase efficiency and flexibility of production while improving the group's profitability. Moreover, we seek to broaden a group of regular customers of Volkswagen by acquiring new recipients of our services worldwide. We would also like to increase satisfaction of our current customers. Daily activities, aimed at improving productivity and quality are carried out without time limit, regardless of the overall economic situation. Other significant elements include: standardisation of processes in direct and indirect areas and shorter production cycles. These factors, together with consistent cost and investment discipline, will aid in reaching our long-term objectives concerning profitability and ensuring financial solvency.

Case: Volkswagen’s diesel emissions fiasco offers a valuable lesson to corporations on how not to react when they’ve put themselves in a ditch — and, ultimately, how to get back on the road. In a federal court in San Francisco, the once-admired German automaker recently agreed to a civil settlement of up to $15.3 billion, by far the largest in the history of the auto industry. It stemmed from VW’s decision to dodge clean-air laws by installing “defeat devices” on 11 million diesel cars around the world, including 475,000 sold in the United States. They were equipped with software that turned on their pollution control systems when they were being tested but largely disabled them when they were actually on the road. As a result, the cars — Jettas, Golfs, Passats, Beetles and Audi A3s manufactured in various years — got great fuel efficiency on the road (north of 40 miles a gallon) but spewed nitrogen oxide at levels 40 times the federal limit. When the testing oddity came to light two years ago, VW officials dismissed it as a “technical error” but later acknowledged their actions were deliberate. Now they’re about to pay $10 billion to U.S. consumers in a mix of compensation, buybacks and repairs, $2.7 billion to an EPA remediation fund and $2 billion for genuine cleaner-vehicle projects. Another $600 million will settle claims by 44 states, including Missouri and Kansas, as well as the District of Columbia and Puerto Rico. An estimated 8,750 vehicles in Missouri are involved, with settlements reaching $40 million. There were 2,000 affected vehicles in Kansas, with settlements totaling $11.1 million. Volkswagen’s deception was an egregious breach of trust, akin to an organic farm-to-table restaurant stocking its kitchen with pesticide-laden produce from a chain grocery store. Business owners who have an ounce of respect for their customers simply don’t behave that way. When they were caught, VW officials made matters worse by denying what they did. Then they made a half-hearted effort to

compensate the people they’d lied to, offering them a paltry $1,000 and free emergency roadside assistance. Volkswagen isn’t the first corporation to dupe consumers or government regulators and it certainly won’t be the last to try. But if there’s a silver lining in this smoky cloud of a story, it’s that the truth eventually won out and the betrayer will be forced to compensate the betrayed. How Did the System Work? The software sensed when the car was being tested and then activated equipment that reduced emissions, United States officials said. But the software turned the equipment down during regular driving, increasing emissions far above legal limits, most likely to save fuel or to improve the car’s torque and acceleration. The software was modified to adjust components such as catalytic converters or valves used to recycle some of the exhaust gasses. The components are meant to reduce emissions of nitrogen oxide, a pollutant that can cause emphysema, bronchitis and other respiratory diseases.

The Emissions Tests That Led to the Discovery of VW’s Cheating The on-road testing in May 2014 that led the California Air Resources Board to investigate Volkswagen was conducted by researchers at West Virginia University. They tested emissions from two VW models equipped with the 2-liter turbocharged 4-cylinder diesel engine. The researchers found that when tested on the road, some cars emitted almost 40 times the permitted levels of nitrogen oxides. Which Cars Are Affected? The Environmental Protection Agency said in September 2015 that it would order Volkswagen to recall seven of its American car models with affected engines, which

amount to nearly 600,000 vehicles. The vast majority of the cars — about 8.5 million — are in Europe and include Skoda and Seat cars not sold in the United States. The rest of the vehicles are scattered around Asia, Africa and South America, where diesels account for a relatively small percentage of cars sold. The E.P.A. said on November 2015 that it had found the same test-cheating software on additional Volkswagen and Audi diesel models and on a Porsche model. The agency said it covered about 10,000 cars sold in the United States since the 2014 model year. But in meetings with the E.P.A., the company admitted that all model years since 2009 with its 3liter diesel engines contained the software as well. The latest disclosure covers an additional 80,000 vehicles. What Is at Stake for the Company? Volkswagen has pleaded guilty to multiple criminal charges in the United States and has set aside more than $20 billion for costs related to the scandal, with the settlements with American regulators and car owners consuming a big chunk of that money. Six company employees are also facing criminal charges in the United States, including the head of engine development. One executive who helped oversee emissions compliance in the United States has already been arrested. Since the scandal broke, the company has recorded losses, announced layoffs and shaken up its leadership. Its chief executive, Martin Winterkorn, as well as the head of American operations stepped down, and the company suspended several high-ranking executives. Who Knew About the Deception and When? The company’s unusual culture — confident, cutthroat and insular — has come under scrutiny as potentially enabling Volkswagen’s lawbreaking behavior. Signs of irregularities in Volkswagen cars were first discovered in 2014 by a nonprofit group, the International Council on Clean Transportation. By that year, according to an indictment from the Department of Justice, company officials had already “perfected” the cheating software. But the decision to cheat on emissions tests was made more than a decade ago, after employees realized they could not meet United States clean-air standards legally. In the subsequent years, several high-ranking company officials are believed to have been briefed about the so-called defeat devices, though the extent of who knew remains unclear. Mr. Winterkorn, the former chief executive, was given a memo about emissions irregularities in 2014, though the company continued to install defeat devices in its cars until last year. In June, German prosecutors said Mr. Winterkorn was under investigation for market manipulation because he had waited too long to disclose that the company faced an inquiry over the emissions scandal. On July 19, a civil complaint from the New York attorney general connected the current chief executive, Matthias Müller, to the scandal. In other words, the scandal has reached the top echelon of Volkswagen’s management.

Personal Views: The news that Volkswagen rigged its diesel engines to falsify emissions tests is shocking. Business leaders may not always get it right, but how VW got it so wrong is truly baffling. This corporate misbehaviour is unacceptable from any of the perspectives we teach in our classrooms – from that of finance and the markets, or business sustainability and corporate social responsibility, or business leadership. There is a myth in finance that a company’s goal is to maximize shareholder value. The myth is believing that investors care only about the stock price, and not the impact on society. Perhaps this myth was behind VW’s decision to install “defeat software” to cheat on emissions tests. Shareholders’ judgment of this move was evident from the immediate market reaction, which saw the share price drop by a third, wiping billions from VW’s value. Clearly, unethical behaviour destroys share value. Corporations must balance shareholders’ desire for rising earnings with the dual objectives of looking after other stakeholders (such as employees) and respecting the environment. It may be costly to resist sending production to countries with worse working conditions, or to implement environmentally friendly solutions. But these are the right choices for both companies and shareholders. Research shows that cutting R&D to meet short-term earnings targets or to maintain a desired credit rating is associated with lower shareholder value later. Short-term rewards skew behaviour. The financial sector has seen a string of scandals: misselling of mortgages, fixing market benchmarks, aiding tax evasion and money laundering, illegal insider trading, to name a few. A minority of unscrupulous people is to blame. Most people are decent, hard-working, and well-intentioned – society needs them to speak up when they witness unethical behaviour. When one voice speaks up, others will follow. Finance and sustainability are not incompatible, they are aligned. Business leaders need to focus not only on shareholders but also on society and the planet. This alignment will ensure that our economy is balanced, healthy, and sustainable for the long term. VW’s efforts were clearly focused on short-term profits; they were not focused on the long-term health of the company’s brand, its customers, or the environment. Financial sustainability is about resilience. Sustainable businesses can survive shocks, whether from financial crises or natural disasters. This resilience comes from strong relationships with their employees, their communities, and the environment. Sustainable businesses avoid working against the very systems that ensure their long-term success. Volkswagen’s actions represent the antithesis of sustainability. It is difficult to imagine how VW’s managers could think these actions would help their organization to thrive in the long run. Consciously deceiving regulators and consumers may have served their immediate needs, but it compromised the needs of future generations. Sustainability and corporate social responsibility are not easy. Every manager faces trade offs between the short term and the long term, between quarterly profits and the longer-term environmental impact, between their annual compensation and the survival of the business. Business leaders need to confront these trade offs, not ignore them. While it is still too early to know where to lay the blame in the VW scandal, leadership failures of this type are often due to a failure in character, not a lack of competencies or commitment. The three pillars that support good leadership are character, competencies, and commitment. If any of these is lacking, the shortfall will undermine the other pillars and, ultimately, lead to performance problems for leaders, organizations, and their stakeholders.

In cases like Volkswagen, the leaders were highly educated individuals surrounded by bright colleagues. There was no shortage of subject-matter expertise. These leaders typically had high drive and a strong desire to succeed. They tackled problems with a sense of urgency. They approached challenges with energy and passion. It is easy to believe that such leaders will expand their organizations and outpace industry rivals. But drive is only one of many dimensions of a good leader. Various Research study has revealed 11-character dimensions of leadership: drive, collaboration, humanity, humility, integrity, courage, accountability, justice, temperance, transcendence, and judgment. These traits must work together; too much of one quality can become a liability. Too much drive in the absence of temperance or justice may spur recklessness. Temperance allows leaders to be calm when others around them panic, to think things through and to act in an organization’s best long-term interests. Justice recognizes the importance of contributing to the societies within which businesses operate. Sadly, VW is destined to become another case study of a leadership failure. Ethical Policies: Volkswagen (VOWG_p.DE) said on Tuesday it will repair up to 11 million vehicles and overhaul its namesake brand following the scandal over its rigging of emissions tests. New Chief Executive Matthias Mueller said the German carmaker would tell customers in the coming days they would need to have diesel vehicles with illegal software refitted, a move which some analysts have said could cost more than $6.5 billion. In Washington, U.S. lawmakers asked the automaker to turn over documents related to the scandal, including records concerning the development of a software program intended to defeat regulatory emissions tests. In separate letters, leading Republicans and Democrats on the House Energy and Commerce Committee requested information from both Volkswagen and the U.S. Environmental Protection Agency as part of an investigation into the controversy. Europe's biggest carmaker has admitted cheating in diesel emissions tests in the United States and Germany's transport minister says it also manipulated them in Europe, where Volkswagen sells about 40 percent of its vehicles. The company is under huge pressure to address a crisis that has wiped more than a third off its market value, sent shock waves through the global car market and could harm Germany's economy. "We are facing a long trudge and a lot of hard work," Mueller told a closed-door gathering of about 1,000 top managers at Volkswagen's Wolfsburg headquarters late on Monday. "We will only be able to make progress in...