VW Cheats on Emissions Testing

Up until late 2015, Volkswagen AG (VW) was the second largest carmaker in the world, with its 590,000 employees producing nearly 41,000 vehicles per day. At that time, the company's prospects seemed bright, with many of its 12 subsidiaries, such as Audi, Bentley, Bugatti, Ducati, Lamborghini, Volkswagen Passenger Cars, and Volkswagen Commercial Vehicles, performing well.

However, the fortunes of VW changed significantly after a large-scale emissions-test cheating scandal became public in September 2015. VW admitted to installing special software designed to deceive emissions-testing procedures in more than 11 million of its cars, starting as far back as 2005. The software sensed when a car was being tested and then activated equipment that reduced emissions. The software deactivated the equipment during normal driving, resulting in emissions that significantly exceeded legal limits, while also reducing fuel consumption and improving the car's torque and acceleration. The illegal software was installed in VW, Audi, and Porsche models that employed several different diesel engine designs that went through frequent updates over a 10-year period.

VW's admissions led to investigations in Germany, the United States, and other countries, as well as dozens of lawsuits filed by customers, shareholders, and car dealerships. The U.S. Department of Justice sued VW in January 2016 on behalf of the Environmental Protection Agency, and in June, VW agreed to a $14.7 billion settlement. This represents the highest fine to date for violations under the Clean Air Act. Additional civil penalties, a criminal settlement, and further state-level fines have not been determined but could add billions more.

Since news of the emissions scandal broke, the company's stock price has dropped 24 percent, from over $182 per share to under $137 by mid-August 2016. In addition, as a result of diminishing sales and uncertainty over future financial penalties, VW has had to relinquish its goal of surpassing Toyota to become the world's largest automaker by 2018.

Understanding VW's history and culture provides background necessary to understanding how this scandal could have occurred. VW was founded in 1937 by the German Labour Front, a national trade union controlled by the Nazi regime, to produce an affordable "people's car" (eventually known as the VW Beetle) designed by Ferdinand Porsche. However, the breakout of World War II interrupted production of the car, and from 1939 to 1945, VW instead produced vehicles for the German army using laborers from nearby concentration camps.

Following the war, the VW plant was slated to be dismantled because it had been used for military production; however, British officer Major Ivan Hirst convinced his commanders of the great potential of the VW Beetle, and the plant soon began producing cars. In 1949, VW passed back to German control under manager Heinrich Nordoff, and the company became a major component of post-war West German revival.

Over the past two decades, the culture of VW has been primarily shaped by two men: Ferdinand Piëch (grandson of Ferdinand Porsche) who was chief executive from 1993 until 2002 and Martin Winterkorn who was chief executive from 2007 until his resignation in 2015 several days after the emissions testing scandal became public.

According to many employees and industry experts, a success-or-else philosophy has existed at VW at least since the time Piëch became CEO. As an example, early in his tenure, Piëch hosted a group of reporters so they could view a prototype of a new sedan intended to leapfrog all of VW's competitors. When a reporter asked what would happen if the engineering team said that they were unable to deliver the many new features and technical innovations promised by the prototype, Piëch declared, "Then I will tell them they are all fired and I will bring in a new team. And if they tell me they can't do it, I will fire them, too."

Piëch turned VW into a global giant by acquiring luxury car brands such as Lamborghini and Bentley and by reviving brands such as Bugatti. One of the technologies he championed was turbocharged direct injection (TDI), which remains VW's trademark technology for diesel engines. TDI improved fuel efficiency and acceleration and helped make diesel engines more practical for passenger cars. VW company policy required that Piëch retire in 2002 at age 65, but he remained on its supervisory board and was involved in the company's strategic decisions until his forced resignation in April 2015.

Winterkorn rose through the ranks under Piëch's leadership, holding significant management positions, including head of quality control, head of research and development, chief executive of the Audi division, and finally, CEO at VW. Winterkorn's leadership style was similar to Piëch's; both were known for publicly berating subordinates. Winterkorn would go so far as to bang car parts on tables to emphasize a point. He strongly urged European regulators not to impose excessive emission targets on the automotive industry because he felt that there was a lack of time to develop fuel-efficient technology and that such a regulation would further the economic downturn. Under his leadership, VW bought Porsche in 2012 to further its ambition to become the world's biggest carmaker.

Many critics have argued that the autocratic leadership style of both Piëch and Winterkorn produced a corporate culture that has been described by some as confident, cutthroat, and narrow-minded. This, in turn, created an environment in which employees were apprehensive about contradicting their superiors and afraid to admit mistakes. Engineers were encouraged to compete for promotion and the approval of a management team who seemed to know only one way to manage: be aggressive at all times.

A central question of this scandal—whether VW's top management knew of the deception—remains. However, many critics claim that the multibillion dollar emissions cheating scandal shows that at the very least, the VW engineers who created and installed the software did not believe company management expected them to act with integrity. If they had, VW would not have cheated and would not be in this mess.

• Open a new Microsoft® Word document and answer the Critical Thinking Questions below.
• Save the file on your computer with your last name in the file name. (Example: case_1-1 _Jones.doc)
• Click the Choose File button to find and select your saved document.

Critical Thinking Questions

1. VW has blamed a small group of engineers for the misconduct and claims that members of its management board did not know of the decade-long deception. Within many organizations, including VW, a high value is placed on people who can deliver results and get things done. This can create a problem known as "normalization of deviance," where something bad is done by a member of the group in order to achieve a goal but nobody says anything because everyone is expecting that someone else will instead. As a result, more and more bad behavior is tolerated. Perhaps, the VW engineers felt they had no other option when they realized that they could not deliver the combination of great performance, high gas mileage, and low emissions that had been promised. Some observers believe that normalization of deviance was perpetuated because VW kept hiring the same type of people with the same views—engineering graduates who are promotion-obsessed workaholics who have been taught not to say "no" to management's goals. Do you accept this explanation for the emission scandal at VW? Why or why not?

2. VW must bring in a new CEO and a key board member as a result of the forced resignation of Piëch and Winterkorn. Identify three specific actions that their replacements must do to begin to change the corporate culture at VW.

3. At the time of this writing, it has been alleged that Robert Bosch GmbH, Europe's largest supplier of auto parts, may have had a role in the VW emissions scandal. Bosch supplied the engine control unit that VW programmed to recognize when its diesel vehicles were undergoing emissions tests. However, Bosch states that it is not responsible for how its components are integrated into vehicles by customers. Do research to learn more about what role Bosch may have had in aiding VW in this deception. Do you believe that Bosch should also be sanctioned and/or fined? Why or why not?