The Volkswagen Emissions Scandal - Case Study Example

THE VOLKSWAGEN EMISSIONS SCANDAL Student’s Name Course Professor’s Name University City (State) Date The Volkswagen Emissions Scandal One of the most prominent and widely discussed global business incidents in recent times is the Volkswagen emissions scandal. The Volkswagen emissions scandal is commonly also referred to as the diesel emissions scandal, the diesel-gate or the emissions-gate. The Volkswagen emissions scandal begun in September 18th 2015 when the EPA (United States Environmental Protection Agency) provided the German manufacturer, the Volkswagen Group, with a notice for violating the Clean Air Act (Burki 2015). The EPA discovered that the Volkswagen Company had deliberately programmed its TDI (turbo-charged direct injection) diesel engines so that particular emissions controls could only be activated during emissions testing in laboratory settings (Schiermeier 2015). The programming thus allowed for the emissions of Volkswagen vehicles to satisfy global standards when placed under regulatory tests, while during actual driving, the vehicles emitted up to 45 times more emissions. According to Krall and Peng (2015), in the model years, that is, 2009-2015, figures indicate that the Volkswagen had used this programming for over 10 million motor vehicles worldwide, with the United States, for example, one of the most affected nations in the world (about half a million vehicles affected therein). Apart from the massive compensation fees, the investors feared the huge amounts of fines that would potentially be imposed by the regulators on the company as a result of the finding, as well as the ensuing damage to the company’s reputation which would have negative impacts on its market share in the consequent financial years (Schiermeier 2015). Immediately after the news broke, the stock price of the company diminished in value by about 30%. Martin Winterkorn, the then CEO of Volkswagen Group resigned in the wake, while Wolfgang Hatz (head of Porsche research and development), Ulrich Hackenberg (head of Audi research and development) and Heinz Jakob Neusser (brand development head) were all suspended (Burki 2015). The company immediately announced its intentions to utilize up to 20 billion dollars on correcting the emissions issues and refitting the vehicles concerned through its planned recall initiative. The Volkswagen emissions scandal raised global awareness concerning the high levels of pollution/ emissions from motor vehicles built by various companies across the world which are often prone to exceeding the legal limits of emissions during actual driving. The surveys conducted by the ADAC and the ICCT confirmed deviations in real world driving emissions in the Fiat, Citroen, Hyundai, Jeep, Renault, and the Volvo, with other diesel emissions scandals possible (Crête 2016). The scandal provoked assertions that machinery which is controlled through software could be easily manipulated, and therefore such software source codes ought to be made public in order to reduce instances of cheating (Krall and Peng 2015). Recently, on the 21st of April 2017, a United States Federal judge ordered the Volkswagen Group to pay a criminal fine of 2.8 billion dollars for rigging their diesel-driven cars to provide erroneous emissions results. Crisis Management and Communication by the Volkswagen Even though the then CEO of the Volkswagen Group, Martin Winterkorn, resigned following the allegations of cheat devices, the company initially chose to defend their innocence and deny any wrong-doing on their part. In a statement released by the committee members of the Volkswagen Group, following extensive deliberations, the members denied any knowledge of possible software devices aimed at cheating emissions tests (Crête 2016). This was not the only flaw in the initial response system of the Volkswagen Group. Besides initial denials, the Volkswagen Group also initially largely ignored its over half a million employees as well as those who work for the company’s suppliers. At the time, the employees were distracted and scared, with friends and family inquiring from them what had happened. This inevitably hurt employee morale and productivity as the crisis management plan of the Volkswagen Group had little concerns for the employees. Moreover, because of the flurry of inquiries from the employees’ friends, professionals and families, the company could have used the employees to help calm the situation and preserve the then shaky reputation of the Volkswagen Group. However, the company gave no focused attention or responses to the employees concerning the unfolding international scandal. Surprisingly, when the Volkswagen Group did make references to the employees, it did so through public statements that reckoned that employees who had taken part in the scandal would be investigated and prosecuted promptly (Krall and Peng 2015). As a consequence of the employee neglect, former workers of the Volkswagen Group in Brazil, for instance, sued the organization for malpractices. The initial strategy of the Volkswagen Group was quite the opposite of the strategy that was adopted by Mary Barra (the CEO of General Motors during the GM’s ignition-switch scandal). In the wake of the scandal at the GM, Mary Barra convened a Town Hall meeting from Detroit which was live-streamed to GM workers across the globe. In the end, the GM CEO was able to make the employees feel proud of the response of the company and to retain their self-respect. Despite initially dismissing claims of defeat devices, the Volkswagen Group later on adopted a better strategy involving honest and quick responses. For instance, when the EPA later observed that the Volkswagen Group had used falsifying software on over half a million motor vehicles, the Volkswagen Group came out two days later and confessed that the figure was much higher than what the EPA had stated on a global scale. The company placed the actual figure of affected vehicles at a whopping 11 million. In their consequent dealings, the Volkswagen Group and its management pledged and offered satisfactory cooperation with the regulators and authorities (Crête 2016). Furthermore, apart from initially distancing themselves from the cheat devices, the company later opted to accept responsibility for the scandal that had affected millions of people worldwide. One of the major challenges that the Volkswagen Group faced during the crisis was how to manage the crisis across various countries and cultures since the crisis created was global. At first, the company argued that privacy laws in Germany prevented the organization from fully cooperating with US investigators, for example (Warford 2016). On the other hand, South Korean prosecutors wanted to bring criminal charges against the top management in the country. The varying demands from different nations made it quite an overwhelming task to manage the disaster initially, but with time, the company was able to adopt more effective measures of crisis management. Nonetheless, challenges yet linger. For example, while the Volkswagen Group admitted to cheating in the US and decided to make payments to consumers, buybacks and repairs as a show of good will and contrition, the company argued that their actions were not illegal under the European laws. Therefore, in as much as the Volkswagen Group is recalling affected cars in both the US and Europe, it has opted not to pay the European consumers (Krall and Peng 2015). This decision has not gone down well with the European market and such may hurt the market share of the company in this important continent. Different treatment of consumers in the United States and Europe is asking for trouble. A member of parliament from the UK consequently lamented that the Volkswagen Group had shown ‘disdain’ in its treatment of the European consumers. According to a recently concluded Harris poll, an overwhelming majority of the respondents expressed deep distaste for perceived misrepresentation, intentional and public lying from the Volkswagen Group crisis management team (Burki 2015). In the end, following the disastrous start to the crisis management, the Volkswagen Group made haste to seek help by bringing in three additional public relations firms to aid the American Edelman firm in the process. These additional firms included the Hering Schupenner (from Germany), Finsbury (Britain), and Kekst (United States). The Volkswagen Group also did poorly in its initial communications with the company’s shareholders. Instead of convening a meeting with the stakeholders to discuss the matters that were raised concerning the company and assure the shareholders of the way forward, the company at first kept silent and maintained innocence. This lack of attention to the shareholders led to massive exoduses of the shareholders from the company, with the company left reeling in the aftermath of the diesel-gate scandal (Schiermeier 2015). Mistakes by the Volkswagen Group Scandals such as the emissions scandal involving the Volkswagen Group can prove quite costly for companies in the long-term if not handled well. The first step in managing such crises is to act fast (Burki 2015). The initial responses of the Volkswagen Group were slow and empty. However, the company did well to enlist help from firms that helped it navigate through the crisis in the consequent periods. Secondly, it is to the benefit of the company to take full responsibility of the crisis even if investigations are on-going and it is later proven that the company was not to blame in the crisis. Even though top management of the Volkswagen Group resigned following the allegations, the company maintained innocence until evidence was finally provided as proof of guilt (Schiermeier 2015). This approach reeked insincerity in the public light and shows that the company was willing to get away with the malpractices so long as there was no evidence against them. The approach eventually diminished consumer and investor confidence/ trust in the company. Finally, the company should declare the crisis over and embark on rebuilding bran equity and trust as fast as possible as the Volkswagen Group later did. Communications is critical during crises. The Volkswagen Group should have regularly kept in touch with its stakeholders even if to say there is no news to be reported yet. The initial absence of communication from the Volkswagen Group led to, among other things, friction with the investigators, unhealthy speculation, disgruntled employees, and shareholder exodus. Moreover, during such scandals the company should not be seen to be putting their own interests above those of the consumers such as was the case with the European consumers in particular who were treated differently compared to their American counterparts that were awarded compensations. Even though there are consequences to admitting wrong doing, such admissions indicate the willingness of a company to prioritize public interest (Warford 2016). The Volkswagen Group failed in this aspect in the initial stages, but later managed to handle the situation well. Further Reactions to the Scandal As per the EPA, the Volkswagen Group had initially maintained for over a year that there was no deliberate scheme to cheat the emissions tests and asserted that the observed discrepancies were only technical glitches. However, upon confrontation with evidence concerning the defeat software, the Volkswagen admitted that up to 11 million cars had been involved in inaccurate emissions reports (Schiermeier 2015). On September 29th 2015, the company announced its plans to re-fit the 11 million motor vehicles that had been affected by the practice. In Europe, 8 million vehicles were to be recalled including in Germany, the United Kingdom, France, Austria, Czech Republic, and Portugal, among other nations (Burki 2015). The company however confessed that it would take several years to recall and repair all the affected vehicles, particularly the older models which required complex software and hardware changes. The company then announced a timeline for the vehicle recalls for various countries. The Volkswagen then also announced in 2015 that it would conduct a complete overhaul of its diesel strategy with a switch to the use of technology for selective catalytic reduction proposed in order to enhance its compliance regarding diesel emissions (Krall and Peng 2015). In addition, the Volkswagen committed to accelerating the development and sales of electric vehicles, plug-in models, and a shift to petrol engines for smaller vehicles in place of diesel engines (Warford 2016). Besides ramping up its corporate social responsibility endeavors (such as environmental campaigns, free scholarships for students, and so on), the Volkswagen also undertook in several communications actions that were aimed at minimizing reputational damage and restoring consumer confidence. The MediaCom media agency in France, for example, which buys Volkswagen advertising, warned newspapers in France that if they covered the emissions scandal, it would cancel intended campaigns for the Volkswagen and the Audi (Schiermeier 2015). The Volkswagen also launched ad campaigns on German newspapers, such as on the German Utility Day to express its delight in the remembrance of German re-unification, and to give thanks to its consumers, employees, and business partners (Crête 2016). The company also promised to do all in its power to regain consumer confidence. A Belgian importer of the Volkswagen, the D’leteren, offered free engine upgrades for over 800 customers even as the Volkswagen halted sales of affected vehicles. The company further publically acknowledged wrong doing by withdrawing emissions certification applications for 2016 diesel models as refitting was conducted on them (Warford 2016). Furthermore, the Volkswagen announced intended compensations and buybacks for affected consumers. In order to cope with the costs of tackling the emissions scandal, such as in compensation, restructuring, more aggressive marketing, and fines, the company was forced to lay off hundreds of employees in order to reduce its costs of operations. In addition, a new boss, Mathias Mueller, was picked to specifically steer the company out of the mess that had been created by the scandal (Crête 2016). Reference List Burki, T. K. 2015, Diesel Cars and Health: The Volkswagen Emissions Scandal, The Lancet Respiratory Medicine,3(11), 838-839, doi:10.1016/s2213-2600(15)00409-9 Crête, R. 2016, The Volkswagen Scandal from the Viewpoint of Corporate Governance, European Journal of Risk Regulation,7(01), 25-31, doi:10.1017/s1867299x0000533x Krall, J. R., & Peng, R. D. 2015, The Volkswagen Scandal: Deception, Driving and Deaths, Significance,12(6), 12-15, doi:10.1111/j.1740-9713.2015.00861.x Schiermeier, Q. 2015, The Science behind the Volkswagen Emissions Scandal, Nature, doi:10.1038/nature.2015.18426 Warford, E. 2016, Ethics in the Classroom: The Volkswagen Diesel Scandal, 2016 ASEE Annual Conference & Exposition Proceedings, doi:10.18260/p.26741 Read More