Volkswagen’s Diesel Deceptionhttp://www.volkswagenag.com/content/vwcorp/content/

Volkswagen’s Diesel Deceptionhttp://www.volkswagenag.com/content/vwcorp/content/en/brands_and_products.html. Accessed June 8, 2016.
“Be aggressive at all times” was how one Volkswagen executive described the company’s confident approach to global competition. Volkswagen chief executives including Ferdinand Piëch, a grandson of Ferdinand Porsche, and Piëch’s successor, Martin Winterkorn, heavily promoted clean diesel technology as part of the company’s environmental commitment. He had promised that Volkswagen would surpass Toyota to become the world’s largest automobile manufacturer, and that clean diesel vehicles, not hybrids, were the key to global domination. and ozone. These are chemical compounds that, according to the EPA, can cause “adverse respiratory effects including airway inflammation in healthy people and increased respiratory symptoms in people with asthma,” especially inside vehicles and near roads. Emissions control systems are installed in vehicles to reduce the production and/or emissions of compounds. Volkswagen started selling diesel cars in the United States in 1977, taking advantage of increased consumer interest in diesel fuel economy. emissions to nitrogen, oxygen, water, and carbon dioxide . A computerized controller sprayed an optimal amount of liquid as the emissions passed through the exhaust system. The liquid is sold in the United States as AdBlue. emissions by a factor of 40. VW’s diesel emissions control systems also increased the price of each vehicle between U.S.$5,000 and U.S.$8,000.
Catching the Cheat
Government reliance upon manufacturer testing can be problematic. According to Zeynep Tufekci, an assistant professor at the University of North Carolina, smart cars and other smart devices should be tested in realistic conditions, not in a controlled environment. Companies should not be able to use copyright and intellectual property laws to restrict inspection of proprietary software, especially when the code is used in important processes such as voting and public safety. Developers should also include logs and audit trails in their software, to help document its operation. emissions during the WVU road tests than were seen in dynamometer tests performed by the California Air Resources Board. ICCT posted the findings to its Web site in May 2014 and notified the EPA. Investigations by CARB and the EPA led to the EPA’s September 2015 announcement. The regulators refused to certify VW’s 2016 diesel vehicles for sale, leaving VW and its North American dealers with billions of dollars in new car inventory that could not legally be sold. On September 21, VW’s stock price dropped 23 percent.
Over 11 million diesel vehicles worldwide had engines that were affected by VW’s unorthodox technology; 660,000 were sold in the United States. The EPA ordered a recall of over a dozen diesel-powered models. (See Figure 2)
Figure 2
Diesel Automobiles Recalled by the EPA
Audi A3 (2010–2015)
Audi A6 Quattro (2014–2016)
Audi A7 Quattro (2014–2016)
Audi A8 (2014–2016)
Audi A8L (2014–2016)
Audi Q5 (2014–2016)
Audi Q7 (2009–2016)
Porsche Cayenne (2013–2016)
Volkswagen Beetle (2012–2015)
Volkswagen Beetle Convertible (2012–2015)
Volkswagen Golf (2010–2015)
Volkswagen Golf SportWagen (2015)
Volkswagen Jetta (2009–2015)
Volkswagen Passat (2012–2015)
Volkswagen Touareg (2009–2016)
U.S. consumers were assured that they could continue to drive their affected vehicles while the recall was being organized. For 2015 and 2016 model year vehicles that used the nitrogen oxide trap, the repair was most likely a software patch, installed by a dealer. More extensive modifications were needed for SCR models.
Marketing the Clean Diesel
Between 2009 and 2015, VWoA bought significant amounts of advertising for diesel vehicles in the United States, which was one of the Volkswagen’s most profitable markets. Diesel vehicle sales accounted for about 5 percent of the North American market, but about 25 percent of VW’s sales were in the diesel category. While VW is a market leader in China, diesel engines are unpopular there. There are stringent emissions control rules in European countries, especially in cities such as Paris, but diesel vehicles held a 50 percent market share in Western Europe. Between January and September 2015, VW spent $77 million on U.S. television advertising for diesel vehicles, which was about 45 percent of the company’s total in that market.
VW diesel ads used humor to emphasize the high performance and clean emissions of its diesel cars. In a 2015 campaign, three older women discussed the drawbacks of diesel cars while being driven in a VW diesel vehicle. The series, titled “Old Wives Tales,” focused on consumer complaints regarding diesel cars, including sluggish performance, loud noise, and the scarcity of diesel fuel. The passengers in the commercials were always surprised when their VW vehicle overcame the problems they discussed. Another 2015 VW advertisement showed precocious boys who cause chaos in a convenience store, to the sounds of Waylon Jennings’ country music song “Mommas, don’t let your babies grow up to be cowboys.” Their mother notices the boys are missing while she refuels their vehicle outside. A VW diesel Jetta drives by, and the viewers see the mother who is driving that vehicle while her three boys sit quietly.
Another benefit that VW and Audi emphasized in their marketing was decreased diesel fuel consumption. During the 2010 Super Bowl, Audi ran a television advertisement for its A3 TDI hatchback that showed the car as the only vehicle that could pass through a fictional “green police” checkpoint. For the 2015 diesel Jetta, VW aired a television advertisement that claimed “When you’re driving, things aren’t always what they appear to be.” The advertisement only aired a few times before it was pulled in September 2015. After the EPA’s September 18 announcement, VWoA paused its national advertising through October 11, including the company’s non-diesel vehicles. Advertising for gasoline and electric vehicles resumed slowly, as VWoA managers and ad agencies scrambled to create new campaigns and content.
Government Investigations
Over 450 VW and third-party investigators conducted a probe during late 2015 and early 2016, coordinated by the accounting firm Deloitte and a U.S.-based law firm, Jones Day. There were many obstacles in VW’s internal reports and documentation on the affected diesel systems. VW engineers used dozens of code words such as “acoustical software” when referring to the emission control countermeasures. The investigators turned their focus on about 20 VW employees. Many persons interviewed during the investigation were “reluctant to provide insight because they were afraid of the legal consequences.” The German employees under investigation were not executives. However, the idea that VW executives were unaware of the diesel defeat designs “just doesn’t’ pass the launch test,” to quote John German, a former EPA official who became a senior fellow at ICCT and helped begin that group’s investigation of VW in 2013. French authorities launched their own investigation into intentional fraud by VW.
German law exempts companies from being prosecuted for crimes; the German Penal Code or Strafgesetzbuch (StGB) stipulates that only individuals can be held liable for criminal acts. Six Volkswagen employees were under investigation for charges of corporate tax evasion. In the United States, Senators Ron Wyden (D-OR) and Orrin Hatch (R-UT) accused Volkswagen and VWAG of accepting as much as U.S.$51 million in tax incentive credits for diesel vehicles. Margo Oge, who was director of the EPA Office of Transportation and Air Quality in 2011, revealed that German Volkswagen executives had pressured the EPA for “special fuel economy credits for environmental friendliness” that were equivalent to those awarded to zero-emissions vehicles such as electric cars. Oge perceived that the German Volkswagen executives believed their diesel technology was superior to electric motors: “I never had a problem dealing with the Americans. The U.S. Volkswagen people would always come and apologize to us after meeting with the Germans. My sense was that things were being dictated by Germany.”
Whistleblowers also came forward. David Donovan, who worked at VWoA in electronic discovery and information management, claims he was fired in December 2015 after he reported his concerns to the company’s legal department. Volkswagen acknowledged that there were at least 50 other whistleblowers.
The legal responsibilities of Volkswagen and VWoA executives is also of concern. CIOs are responsible for finding and archiving data, messages, and other corporate information. In September 2015, U.S. Deputy Attorney General Sally Quillian Yates announced that the U.S. Department of Justice planned to increase its efforts to prosecute corporate executives for their involvement in corporate misconduct. Investors criticized Volkswagen’s executive compensation practices. Billionaire investor Christopher Hohn of TCI Fund Management wrote in a letter to Volkswagen’s executive supervisory boards that top management compensation appeared to be “excessive,” and was “unlinked to transparent metrics and paid in cash with no vesting or deferral, and has encouraged aggressive management behavior, contributing to the diesel scandal.”
Michael Schrage, a research fellow at MIT’s Center for Digital Business, noted that Volkswagen had brought the crisis on itself by failing to acknowledge societal and technological change. The emergence of the Internet of Things (IoT), in which products are embedded with sensors and smart systems, coupled with societal acceptance of social media, made the revelation of corporate deception far more likely than ever before.
Volkswagen Diesel Timeline
2005: Volkswagen executives make diesel the focus of the company’s U.S. marketing efforts. A small group of Volkswagen engineers and employees in Germany decide to find ways to cheat emissions testing.
2006: A Volkswagen executive prepares a PowerPoint presentation that describes how to cheat U.S. emissions testing.
2007: Martin Winterkorn becomes CEO of Volkswagen.
2008: Volkswagen opens a U.S.$1 billion production facility in Chattanooga, Tennessee, in return for U.S.$577 million in state tax incentives.
2009: Volkswagen and Porsche merge. Diesel vehicles with the altered software go on sale. VWAG launches diesel vehicle marketing campaign in the United States.
2011: Volkswagen opens a new manufacturing facility in Chattanooga, Tennessee.
2014: Volkswagen decides to expand the Chattanooga plant instead of moving production to Puebla, Mexico, based on an additional $U.S.230 million in state tax incentives.
September 18, 2015: The EPA orders Volkswagen to recall 486,000 because they used software designed to cheat emissions tests.
September 22, 2015: Volkswagen reveals that 11 million diesel cars worldwide used the affected software.
September 25, 2015: Winterkorn resigns as CEO. Matthias Müller, the head of the company’s Porsche unit, is named as his replacement.
November 2, 2015: The EPA discovers cheating software on more cars than previously disclosed and, for the first time, also finds the illegal software in a Porsche model.
November 3, 2015: Volkswagen announces that it understated emissions of gasoline powered cars in Europe.
November 9, 2015: VWoA offers $1,000 gift cards to owners of affected diesel vehicles in the United States. Volkswagen later states that this offer does not apply to owners in the EU.
November 11, 2015: Volkswagen halts production of the 2016 diesel Passat at its Chattanooga manufacturing facility.
November 25, 2015: Volkswagen announces that a set of simple repairs could bring the affected diesel cars in to compliance with European standards.
December 10, 2015: The chairman and CEO of VW presented the results of an internal inquiry, revealing that the decision by employees to cheat on emissions tests was made in 2005.
January 10, 2016: CEO Müller claims in a radio interview that the emissions scandal was a technical issue, not an ethical concern. He changes his statement the next day.
March 2, 2016: Volkswagen reveals that former CEO Winterkorn received a memo on problems with diesel emissions in Volkswagen vehicles in May 2014, but did not indicate if Winterkorn had ever read the document.
April 22, 2016: Volkswagen agrees to fix or buyback almost all affected diesel cars in the United States.
April 24, 2016: CEO Müller personally apologizes to President Barack Obama for the emissions scandal, during a state dinner hosted by German Chancellor Angela Merkel.
May 24, 2016: Volkswagen claims that the U.S. Government has no jurisdiction over the emissions scandal. The company will continue its own internal investigation.
Questions for Discussion
Consider the corporate culture of Volkswagen in Germany. How did it affect this situation?
Why did Volkswagen engineers decide to cheat the emissions tests? Should the engineers have consulted with executives?
What is your assessment of VW’s sense of business ethics and fair play as manifested in the emissions cheating scandal?
VW has always been perceived to be a socially responsible corporation. In light of this, how could an emissions cheating scandal like this occur?
What roles should government regulators play in terms of emissions and fuel economy testing?
Assume that you are a consumer who purchased one of the affected diesel vehicles in 2014, before the EPA made its announcement. What might your reaction have been? What forms of restitution would you have sought from VWoA and Volkswagen?
Do research into what has taken place in the VW case since the end of this case. Are circumstances looking better or worse for the company?

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