Analysis of a major business incident
The Volkswagen Scandal 10
THE VOLKSWAGEN SCANDAL: A MAJOR BUSINESS INCIDENT
The “Dieselgate” scandal is a case of intentionally misrepresented information communicated to the world by the Volkswagen (VW) Group. The scandal has negatively affected the reputation of the German automaker by reducing the trust that the firm enjoyed from its customers. The installation of a “defeat device” into the Turbocharged Direct Injection (TDI) engines to yield “clean diesel” vehicles was an outright violation of the Clean Air Act. The issue affected approximately 11 million vehicles thereby necessitating an immediate recall operation to rectify the situation (Blackwelder et al. 2016). The essay describes the scandal as a negative business incident that necessitated communication response from the management of the corporation. The paper further provides an analysis of the manner in which the company handled the situation.
The Scandal Explained
The investigation conducted by the US Environmental Protection Agency (EPA) concluded that VW had been cheating on emissions tests. From the investigation, it was evident that the automobile manufacturer had developed cars with actual pollution rates that exceeded the rates stated by the company. In fact, the pollution rate of the automobiles in question was 40 times more than the standard levels (The Guardian 2015). The implication of the deceitful information was the emission of more toxic NOx pollutants into the environment. One of the toxic NOx pollutants is Nitrogen dioxide. The fact that the NOx emissions ranged between 250,000 and 1 tonne on an annual basis implies that the total emissions from the vehicles were equivalent to the cumulative emissions from all the industries, agriculture, vehicles and power stations in the UK.
The “defeat device” does not represent an actual physically device installed in the automobiles. On the other hand, it represents a programme installed on the engine software that allows the car to perceive when driven under test conditions. By so doing, the software enables the vehicle to pass the emissions test only under the test drive but emit more harmful pollutants under normal driving conditions. This is different from the standard techniques employed in the manufacture of “clean diesel” engines. There are several methods employed by automobile manufacturers to achieve the standard emission requirements. Some of the procedures encompass injecting a solution of urea to render the harmful pollutants harmless. Other manufacturers adjust exhaust flows and air-fuel ratios to result in “clean diesel” engines (The Guardian 2015).
The fact that the testing conditions entail putting the vehicles on rollers and running them at particular speeds for a certain period and changing the speed to another speed for another particular period enables the “deceptive device” to detect whether the car is under test drive or normal drive. To attain the capability, the manufacturer pre-installs the conditions in the main computer to enable the automobile to detect the drive conditions of the car. The realisation of the scandal was an independent endeavour of the International Council on Clean Transportation (ICCT) that conducted on-road emission tests for a number of VW vehicle brands. The tests utilised five routes in accordance with EPA roller-based simulations. The vehicles selected for the independent test included the VW Jetta, BMW X5 and VW Passat. The performance of the Volkswagen brands was worse than the emissions performance of the BMWs thereby necessitating a further test using a dynamometer (The Guardian 2015). After realizing that the performance of the cars on the emissions test using the dynamometer was excellent, the ICCT contacted EPA thereby signalling the onset of the scandal for the giant automaker.
The more than 40 times emission of harmful NOx substances has significant implications to the health of the public. For instance, the fumes worsen the breathing of an individual by causing inflammations of the airways. The reaction of NOx emissions with other compounds may also yield harmful impacts on the respiratory system of an individual thereby aggravating cardiac problems. Following the long-term exposure of an individual to the toxic emissions, there is an increased likelihood of the person to succumb to premature death. According to a research conducted in London about the contribution of NOx emissions to premature death, it was evident that the emissions were responsible for approximately 9,500 premature deaths in London (The Guardian 2015).
The scandal also impacted negatively on the company itself and its customers. On the part of the company, VW had to recall the already sold and affected cars to rectify the problem. All the diesel models of Passat, Beetle, Golf, Jetta and Audi A3 models had to undergo the recall exercise. In the US alone, the company would incur expenses to the tune of $18 billion in fines and €6.5 billion on compensation and fixes in the US alone. Moreover, the company is also likely to face civil action and criminal charges. The reduction in the trust of customers also implies that the company will witness declining sales for the affected brands. As a result, regaining the trust of customers is an imperative course of action for the company in the quest to regain competitive advantage in the automobile industry (Milne 2015).
The Company’s Response
It is proper to echo the statement of the CEO of VW America, Michael Horn, that indeed the company had screwed up and needed the implementation of immediate corrective measures to regain its position in the market (Hotten 2015). As a matter of fact, the scandal had affected the reputation of the company negatively. The first move of the company in accordance with the EPA and other environmental agencies in the other markets was to recall all the affected brands to rectify the situation. When Mr. Mueller took over as the new boss of VW America, regaining the trust of the company sufficed to be the primary objective. Towards achieving the objective, it was proper not to leave any stones unturned positively.
The company had agreed to either buy back or recall the affected brands. The recall exercise applies to Audi A3 and Volkswagen models fitted with 2-litre engines. As a strategy of aligning itself with the clean-air standards, the company has also resorted to fitting a tubular part into some engines to achieve the clean-air European standards. However, the installed part does not render the company fit on the emissions test in the American market since the attained emission levels are still higher than the EPA standards. The announcement made by the company regarding its decision to switch to battery-powered vehicles to deal with the scandal is an effort geared towards recovering the incurred loss in the first quarter of 2016. Prior to the incident, VW had never recorded losses for over a decade (Gates et al. 2016). From the statistic, it is evident that the scandal has hit the company hard.
Prior to announcing the recall action, the VW Group through its CEO accepted the responsibility for the discrepancy associated with the emissions software (Cremer 2015b). The management of the corporation stated that they did not understand or have any contribution towards the installation of the deceptive device. Rather than bearing the blame, they shifted the blame to the engineers. The CEO made a public apology for having broken the trust of the firm’s loyal customers. Winterkorn notified the public that the company would cooperate with utmost urgency and transparency towards addressing all the issues related to the case. As an endeavour of assuring the public that the firm had taken a new course and did not relent with the chief officials that led the company to the scandal, the firm fired the CEO, Winterkorn and two research and development chiefs for Porsche and Audi, Wolfgang Hatz and Ulrich Hackenberg (Cremer 2015a). Mueller, the Porsche CEO took over the position of the Volkswagen CEO.
Recalling the affected cars was one of the five-point plans that the company devised to deal with the situation. Under the strategy, the firm aimed at supporting customers of the affected cars. The second plan entailed conducting investigations to determine individuals that plunged the company into the scandal. The firm also decided to increase the autonomy of each brand and region. The fourth response was the need to change VW’s corporate culture to ascertain the embracing of the cooperation and openness culture amidst the quest for social responsibility and perfection. Finally, the firm decided to postpone its 2018 strategy to 2025. According to some experts of white collar crime and the auto industry, Winterkorn’s culture of never accepting defeat or failure may have instilled fear among the engineers thereby compelling them to ‘cut corners’ in the effort to achieve the desired results (Fielkow 2015).
The firm has also endeavoured to balance performance with sustainability. Volkswagen’s customers anticipate certain performance levels from the automobiles manufactured by the company (Cue 2015). On the part of VW, the management and engineers may have realised that limiting engine performance to reduce NOx emissions may reduce the performance of the vehicles. As a strategy of attaining balance, the company through its engineers and instruction from the management may have opted for the “deceptive device” to meet the required emissions standards as well as retaining the performance standards of the vehicles.
An Analysis of the Manner in Which the Company Handled the Situation
Communication is vital in the bid to maintain positive relations essentially with its customers. It can be stated that when a company is involved in a scandal that affects its reputation and relationship with the customers, communication becomes a vital tool in dealing with the situation. The most appropriate approach to effect the communication process in such a situation is by adopting crisis communication which involves managing the impact, outcome and public perception of the crisis with an objective diminishing the problem. Various studies such as studies those conducted by Wolf1 and Mejri, (2013) on the BP scandal disclosed that failure to implement effective crisis communicating can heighten the scandal and further damaged the reputation of the business.
It can be argued that in the context of Dieselgate” scandal, Volkswagen effectively implemented a crisis communication approach. As noted earlier, before announcing the recall action, the CEO accepted the responsibility for the discrepancy associated with the emissions software (Cremer 2015b). He further blamed the engineers for the entire problem. What is evident is that the management of the company had a crisis communication plan, as a result, the company was able to undertake crisis management with an objective of reducing the extent of damage caused by the scandal.
The management of the corporation stated that they did not understand or have any contribution towards the installation of the deceptive device. West and Turner (2010) highlight that communication has the ability to change perception. In this case, the assertion by the management that they did not understand or have any influence on the fixing of the fake devices may be perceived by some as truthful while others may contend such views. It can therefore, be stated that despite the views adopted by the public, the company used communication to change the perception of the people towards the company.
Also, it can be stated that the transactional model of communication was adopted by the company and The Environmental Protection Agency (EPA) after the crisis was discovered. The Environmental Protection Agency (EPA) held talks with the company and demanded the Volkswagen should recall all the affected cars. The company agreed and the recall exercise was conducted which applied to the Audi A3 and Volkswagen models fitted with 2-litre engines. The communication process between EPA and Volkswagen was imperative in order to reduce the impacts caused by the scandal.
The Volkswagen diesel emission scandal is a case of corporate misbehaviour witnessed in the automobile industry. In its attempt to communicate to the world that VW is a firm that aligns its automobiles with emission standards as well as performance, the company blundered with its communications. The scandal impacted negatively on the financial and social performance of the company thereby resulting in massive losses and fines as well as a tainted reputation emanating from reduced trust from customers. In dealing with the scandal, the company endeavoured to regain the trust of its customers by firing the chief individuals that were in charge before the scandal and recalling the affected cars as a way of supporting its customers. Communication was also a significant aspect in dealing with the scandal.
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