Volkswagen Cheating Emissions Tests - Case Study Example

Volkswagen Cheating Emissions Tests Name: Course: Instructor: Institution: Location: Date: Introduction Volkswagen is a German automaker that was founded in the late 1930s. Over the years, the company has expanded towards many other western countries, becoming one of the most successful automobile companies in the industry. With more than 40 models that have been designed by the company, the company has been able to make global sales of more than 10 million cars in the year 2015. A major business aspect of the organization has been to manufacture vehicles that are more environmentally friendly than their predecessors. However, the company, like many in the automotive industry, has experienced challenges in designing such cars. In September 2015, the Environmental Protection Agency (EPA), an environmental regulation agency of the United States, revealed that the company had installed cheating emissions tests, which were used to provide false evidence of the cars’ emission levels (McGee, 2017). The incidence sparked international backlash, which led to significant financial losses for the company along with a long-term taint in the long-term global reputation. The company responded to these claims by denying the cheating tests, and rather blaming the incidents on technical errors. However, on further investigations, the company was eventually able to respond to these claims. The company was determined to have violated the Clean Air Act through circumventing the regulations controlling nitrogen oxide gases in their 2008-2009 and Audi models. Description of the Incident The claims of diesel emission violations surfaced in mid September 2015. The EPA had made the discovery of the software a month prior to making it public. According to the EPA, Volkswagen had installed software known as the Engine Control Unit, which would be able to detect the time when the cars are being inspected. The software, which came to be popularly coined as the ‘defeat device’ was installed in millions of the Volkswagen cars, in order to cheat the EPA emission testers into thinking the cars were more environmentally friendly, and complied with the environmental provisions. On a global scale, the cars that had this software installed were estimated at 11 million. The defeat device, which was a subtle part of the vehicles’ software system, worked through sensing test scenarios through monitoring the speed, operation of the engine, steering wheel position, and engine operation, among other features. Volkswagen manufacturers had intentionally set up the program turbocharged direct injection that activated these emission controls. Upon sensing, the software would prompt the vehicle to go into safe mode, which allowed for the testing to occur. However, the safe mode of the vehicles was designed in such a way that the full performance that is carbon emissions would be minimized (McGee, 2017). In essence, the engine ran below the normal level of performance and power, which ultimately reduced the levels of emissions. However, the safe mode would be automatically turned off once the car was on the road. The EPA estimated that without the safe mode on, the vehicles emitted 40 times more carbon gases above the threshold stipulated in the environmental regulations. Researchers who found out about the device termed it as one of the most sophisticated in the automotive industry. Some of the models that were affected included the Audi A3, Volkswagen Beetle, Beetle Convertible, Golf, Passat, Jetta, Jetta Sportswagen, Golf Sportswagen, Skoda, and Seat, among several others. A majority of these models were sold all over the world, including North America, South America, Asia, and Africa. With the move towards environmentally friendly machines, the larger manufacturing industry has experienced pressure by regulators to make more environmentally friendly machines. Volkswagen was at the frontline of marketing their vehicles, which they said would run on cheap fuel whilst emitting less carbon and nitrogen oxides into the air. According to CNBC (2015), the company had “appeared to have found a sweet spot between high-performance and fuel-efficiency with a zippy, fun-to-drive car that topped 40 miles per gallon in highway driving” (par 4). The EPA investigators were cautious about unraveling the cheating device scandal. This was because of the limitations they faced at every turn, coupled with the insufficient response provided by the company. However, after months of rigorous testing, the senior officials within the agency were able to determine that the device indeed worked in this way. One of the initial occurrences that triggered investigations into the emissions included the fact that many cars running on diesel in other parts of the world showed higher levels of pollution than the Volkswagen models in the United States. Effects of the Incident The incidence was met with widespread criticism of the Volkswagen Group. Senior personnel from the firm found themselves having to deal with the repercussions from various stakeholders, including the government. In the following month after the cheating incident was made public, the Environmental Protection Agency proceeded to issue a notice of violation (of the Clean Air Act) to Volkswagen Group. The fines that were issued by the EPA were estimated to cost up to $18 billion. The EPA was entitled to sue the company up to $35,000 for every car whose engines were installed with the device. Following closely was the lawsuit issued by the Federal Trade Commission of the United States (McGee, 2017). The lawsuit was on the grounds that Volkswagen carried out false advertising about their “clean fuel” cars following the revelations that they were actually dangerous for the environment. Aside from the federal lawsuits, consumers also wished to receive reparations for being sold cars that violated environmental regulations. This incident also worried investors, who were worried about the negative press that it would receive, and thus pulled off from the company. Stock prices also dropped significantly in just days of the release of the news. The stock prices were estimated to have dropped by about 20% on the first two days, and a further 17% on the next day (Lovelace & Wang, 2016). The Volkswagen Group CEO Martin Winkerton resigned on Wednesday 23 September 2015 (Hotten, 2015). Soon after, the company hired Kirkland & Ellis law firm for their defense. Soon afterwards, other senior executives, such as the head of operations working on the American branch were fired. Because there existed an executive chain of command which needed to approve the installation of this cheat device, the EPA along with other agencies that held the company responsible were unable to pinpoint the exact number of people who were involved in the incident (McGee, 2017). Another effect of the scandal that followed was the order by the EPA to recall seven of the models that were being sold in America at the time. The total number of the vehicles to be recalled was estimated at more than 600,000, which included models dating as far back as 2009. Furthermore, the company would also need to compensate consumers for purchasing vehicles that did not operate within the regulations of the EPA. According to Gates et al (2017), consumers would be expected to receive up to $12,500 for older models such as Jetta, and as much as $44,000 for a 2014 Audi model. In total, the company would buy back more than 80,000 vehicles which had 3-liter engines. Another significant aftermath was the series of investigations that were opened by other countries where the company sold its vehicles. The various regulatory agencies from the United Kingdom, Italy, Canada, France, South Korea, and Germany began to question the legality of the Volkswagen vehicles following the revelations about the cheating devices. Following the investigations, the company was forced to recall an estimated 8.5 million cars in Europe (Hotten, 2015). The company also received significant backlash from other groups, particularly those affiliated with environmental conservation processes throughout the countries in which it operated. The level of negligence that the company carried out in manufacturing these products was enough to launch criminal charges on some of the top officials (Lovelace & Wang, 2016). With the taint in reputation along with significant financial setback, the multibillion-dollar company would need to work much harder in order to win back the trust of its stakeholders. How the Company addressed it At first, senior officials from the EPA along with those from the company struggled to come to agreements as to what the truth was about the discovered cheating device. Volkswagen strongly disputed the evidence provided by the EPA, stating that the results provided could be attributed to technical hitches. By this time, the EPA had not yet publicly disclosed the incident, even though the first discoveries were made in August 2015. However, the company needed to carry out a series of additional tests to prove that the device indeed influenced the results of performance and emissions. It was clear that the company was facing much pressure from the EPA to release more information about the device. However, senior personnel seemed to give into the pressure they received, and decided to acknowledge the incident. By September 18, the company admitted to the high levels of carbon emissions produced by their cars, and that the device in question was affecting performance results from the tests (CNBC, 2015). In the months to come, Volkswagen would face significant losses through settlements. The company parted with $21 billion as a result of criminal settlements, civil settlements for car owners, and car dealers. Other provisions would lead to a further loss of $19 billion. A significant mistake that the senior executives made while dealing with this incidence is the failure to comply with the requirements of the regulatory agencies. Lack of cooperation stemmed from a shortcoming in the management sector, where people did not seem to be knowledgeable about the occurrences of this incident (CNBC, 2015). The management sector also lacked transparency about their operations to not only their consumers, but also important investors as well as significant other members of the organization. As such, it was even more difficult to pinpoint to what point the level of deception had reached. From the automotive industry perspective, Volkswagen scandal increased the level of scrutiny that other manufacturers would receive, especially concerning the level of carbon emissions that were on their products (McGee, 2017). There was significant level of awareness raised as a result of the cheating device, which were examined within other major manufacturers such as Volvo, Renault, Mercedes, Hyundai, and Peugeot, among several others. A positive step that was taken by the company was the eventual acknowledgement of the incident, followed by the compensations and fines they paid as reparations. The company admitted to having made huge mistakes in installing this device, and would work towards rebuilding their reputation as well as improve on their production quality. With the increased scrutiny, Volkswagen would have to be more open to transparency with regulatory agencies, and ensure that they comply with the various laws. The company also announced its plans to consider producing alternative energy cars such as electric cars, similar to some of their competitors such as Tesla Motors. Conclusion Volkswagen, a German automobile company was accused of violating the Clean Air Act in September 2015. The company had installed a cheating device to bypass some of the tests carried out by the EPA, thus giving the impression that their cars emitted less carbon and nitrogen gases than it did. The scandal was met with widespread criticism from the company’s stakeholders, regulatory agencies, and the automotive industry. Following the scandal, Volkswagen suffered a loss of more than $40 billion in reparations, recalls, and fines. Stock prices fell to about two-thirds a few days after the incident. The company was less compliant months before the revelation. However, the company was able to acknowledge this mistake and take measures to make a turnaround with their policies in an effort to rebuild their tarnished reputation. References CNBC, 2015, After a year of stonewalling, Volkswagen finally came clean, Retrieved from http://www.cnbc.com/2015/09/24/how-volkswagen-fought-epa-on-emissions-cheating-claims.html Gates, G., Ewing, J., Russel, K., & Watkins, D, 2017, How Volkswagen’s “defeat devices” worked, International New York Times. Retrieved from https://www.nytimes.com/interactive/2015/business/international/vw-diesel-emissions-scandal-explained.html Hotten, R., 2015, Volkswagen: the scandal explained. BBC News, Retrieved from http://www.bbc.com/news/business-34324772 Lovelace, B, & Wang, C., 2016, Volkswagen to recall 83,000 vehicles to settle allegations of cheating emissions tests, CNBC, Retrieved from http://www.cnbc.com/2016/12/20/volkswagen-strikes-deal-to-address-80000-polluting-diesel-vehicles-judge-says.html McGee, P, 2017, How VW’s cheating on emissions was exposed. Financial Times, Retrieved from https://www.ft.com/content/103dbe6a-d7a6-11e6-944b-e7eb37a6aa8e?mhq5j=e1 Read More