Volkswagen Recall - Emissions Cheating Scandal - Case Study Example

University

Volkswagen Recall: Emissions Cheating Scandal

Introduction

Under a product recall, the manufacturer withdraws sold products from the market. Such recalls are normally initiated when a manufacturing defect is uncovered in the product. Other factors like wrong labeling and faulty packaging can also prompt manufacturers to withdraw products from the market. Normally, manufacturers issue recalls voluntarily. However in some cases the government agencies may also pass directives to manufacturers to initiate a product recall.

Product recalls have increased over time. The concept has existed in the developed for a long time. At present, product recalls are no longer alien in the developing world also. The trend of product recalls is likely to continue as complexity of products increase, consumers become more aware of their rights and government regulations on product safety become more stringent. The globalization of production has also led to an increase in the incidence of product recalls.

The role of media cannot be undermined in ensuring that organizations operate as responsible citizens and take utmost care of the customers. If organizations shirk their responsibility and do not recall defective products, media is at the forefront to highlight such irresponsible behavior. This leads to loss of reputation and sales for the organization in question.

It is pertinent to mention that the intent of a product recall is to correct the anomaly in the product and protect the customer from any harm. The cost associated with product recalls including, communication cost, logistics cost, cost of replacement of defective products and labor cost, is borne by the manufacturers.

Volkswagen Recall

The instances of product recalls are pretty high in the consumer goods industry, consumer durables industry, pharmaceutical industry and automobile industry. Global behemoths like Honda Motor Company, Toyota Motor Corporation, General Motors Company and Volkswagen AG have not stopped short of recalling and repairing defective automobiles in different countries of the world.

The present paper details the Volkswagen diesel engine recall of 2015. The magnitude and reason behind the Volkswagen diesel engine recall are enough to call it a scandal (Hotten, 2015). Volkswagen is one of the leading players in the global automobile industry. It manufactures and markets some immensely popular brands including Audi, Beetle, Jetta, Passat, Polo, Porshe and Golf. The behemoth’s products are sold in 153 different countries.

In September 2015, the Environmental Protection Agency (EPA) found that the German manufacturer had been hoodwinking consumers and government alike with regard to emission norms. The government agency found that automobiles manufactured by Volkswagen were fitted with a defective device or software that had the potency to improve emission results when the vehicle was tested.

The device could camouflage the real emission norms to a great extent. According to EPA estimates, the Volkswagen engines fitted with the device emitted pollutants as high as 40 times above the permissible limits in the United States and still passed the emission tests.

The problem was not restricted to the United States alone. As things transpired, it was found that the defective device was fitted in close to 11 million vehicles worldwide. Of these, 8 million vehicles were affected in Europe (Hotten, 2015). What followed was a change in leadership at Volkswagen, an internal inquiry and a massive product recall.

The ensuing paragraphs explain the Contractual Theory, Due Care Theory and Social Costs View and discuss how the Volkswagen diesel engine recall episode relates to these theories.

Contractual Theory

The contractual theory views an organization as a network of contracts. Such contracts are explicit and state the duties and obligations of all participants. It is noteworthy to mention that stakeholders may have different, sometimes conflicting, interests. While many stakeholders tend to be risk-averse and settle for low returns, the shareholders play on the plank of high-risk, high-returns. They pocket the surplus after all payments have been made or incur losses if revenue does not exceed costs.

The contractual theory examines how businesses enter into legal agreements and how they take decisions with asymmetric information and under conditions of uncertainty. A logical extension of the contract theory suggests that incentives can be rolled out to attain desired outcomes. Likewise the risk of moral hazard cannot be ruled out if one of the parties has not entered the contract in good faith.

Due Care Theory

The Due Care theory rests on the premise that manufacturers have the necessary expertise and skill to assess the quality of the product. This wherewithal and specialized information is not available with the consumers. The theory suggests that manufacturers should incorporate safety devices in the product design. In the real world, manufacturers or sellers do not meet consumers as equals in commercial transactions. The onus of producing defect free products thus rests on the manufacturer. In simple words, the producer has to protect the interest of the consumers.

The Social Costs View

The Social Costs view further elaborates the duties of a manufacturer. This theory states that in case a defective product causes harm and injury to the consumers, the manufacturer must bear all the expenses. This payment must be made by the manufacturer even if due care had been taken during the production of the goods. Such payout will ensure that the manufacturer is extra cautious.

Relation with Volkswagen Scandal

The Volkswagen crisis emanated due to failure at multiple points including internal control and risk management. Thus the contractual theory has certainly been contravened. It is yet to be established whether the software (cheating device) was fitted with the connivance of the top management or was it the handiwork of few software engineers. It may not have been direct orders from the top management, but the mere pressure to perform well that may have led to installation of this device in the vehicles (Argenti, 2015).

Whosoever may be the culprit, one thing is clear; one of the parties worked with phony intentions. It can also be said that the company did not follow the Due Care approach. The internal quality control system should have been robust enough to detect the cheating device before the vehicles left the manufacturing facilities.

The company is now striving hard to make amends and salvage as much as possible from the crisis. The buyback of defective diesel vehicles is up and running in the United States. The company states that such buyback program is not required in Europe as vehicles can be repaired with ease in that region.

People at the helm are also bearing the brunt of the scandal. The executive bonuses have been linked to the share price of the company which has lost about one-fifth of its value since the scandal was exposed. The top shots will do whatever it takes to shore up the stock price to cater to the interests of all stakeholders, including themselves (Boston, 2016).

The episode has huge financial implications which include fines and penalties that are likely to be slapped on Volkswagen. The company’s image is badly tarnished. Many countries like Italy, France and Canada have opened investigations against Volkswagen. Consumers are feeling betrayed. The company has set aside more than $ 18 billion to cover the costs associated with the recall. This is in line with the Social Costs view. As expected, the customers have been harsh. Volkswagen registered its biggest annual loss in 2015 (Boston, 2016).

The aforesaid establishes that Volkswagen flouted the Contractual and Due Care Theory but is assiduously working according to the Social Costs view. In part, there is enormous pressure from the regulatory authorities, social activists and consumers to bear all direct and incidental costs related to the scandal.

Ethical Ramifications

There is no denying the fact that Volkswagen made a mistake, rather blunder, by cheating on emission tests. The German automobile giant has been ousted from FTSE Russell, the index of socially responsible investments for a period of two years (Davidson, 2015).

Volkswagen’s diesel engine scandal clearly indicates that the company did not carry out its business operations ethically. The customers were wrongly informed that the vehicles adhered to the emission norms and coaxed into buying them. Looking at the issue from a broader perspective the company cheated the society as a whole by plundering the environment. In a day and age where governments of numerous countries are taking all possible steps to reduce pollution, Volkswagen hoodwinked everyone for a selfish motive.

Lies do not have legs to stand on. And that’s what has happened with Volkswagen. The company may have earned some extra profits by operating unethically. Now, it faces the stark reality of winning back the trust and faith of all stakeholders including the customers.

Martin Winterkorn, the former CEO of Volkswagen, had averred that the group’s responsible and innovative approach will enable it become one of the leading players; economically and ecologically, by 2018 (Adams, 2015). It can now be said that these claims are not dubious, they are downright false. Each statement that comes from Volkswagen will be looked at with suspicion. The company’s own misdeeds have led it to such a situation.

The message is loud and clear; Volkswagen should monitor reputational risk as closely as it monitors financial risk. If Volkswagen is successful in doing so it will be able to sustain its sales and shore up its stock price again.