The Volkswagen Recall Scandal - Case Study Example

The Volkswagen Recall Scandal Name Institution Course Date The Volkswagen Recall Scandal Introduction Volkswagen is a public traded company established in 1937 with the fast brand of cars that were affordable to all German families (Mays, 2015). Over the years, the Volkswagen has grown and expanded in operation. In 2014, the company was among the largest automobile companies in the world with about 13% market share. In the same years, the company produced almost 41,000 vehicles a week and sold about 10 million vehicles (Mays, 2015). For the 65 years it has been in operation, Volkswagen has been adding new vehicles to its portfolio and incorporates innovation in its operations. For several years, the company has focussed its attention on social and environmental sustainability which has enabled it to achieve competitive advantage (Mays, 2015). In order to emphasize on its environmental sustainability concept, Volkswagen has produced environmentally friendly range of vehicles and has also aired commercials that establishes its cars to be less greenhouse-gas emitter. This has enhanced its brand image and has increased its market share over the years (Plungis and Hull, 2015). However, in 2015, the Environmental Protection Agency gave a notice that the Volkswagen “environmentally-friendly” vehicles violated the Clean Air Act ((Biesecker, 2015)). This was one of the largest scandal that faced the company and resulted to huge amount of losses and affected its brand reputation. This paper will describe the Volkswagen Company recall scandal that had some negative impacts on the company. In addition, the paper will provide with an analysis of the methods the company used to handle the situation in context to some relevant communication theories and frameworks. Recall Incident at Volkswagen In 2015, Environmental Protection Agency in the United States issues a notice to Volkswagen for claims that the company has violated the Clean Air Act (CNN Money Staff, 2015). It was discovered that the company had intentionally pre-set its turbocharged direct injection diesel engines that were able to activate some emissions controls only in an instance at the laboratory emission testing (Biesecker, 2015). As a result of the intentional pre-set program, the vehicles’ nitrogen oxide output showed to have met with the United States standards during control and regulatory testing. In real sense, the vehicles emitted 15-40 times more nitrogen oxide when driven. For instance, Jetta exceeded the emission standards by about 20-35 times, Passat were at 5 to 20 times higher than the standard limit while the BMW X5 was found to have met the set standard limit (Plungis and Hull, 2015). The program was placed in approximately 11 million vehicles across the world and about 500,000 vehicles in the United States. These vehicles were manufactured between 2009 and 2015 model year. The findings about the Volkswagen vehicles defects originated from the study commissioned by International Council on Clean Transportation on the emission discrepancies on vehicle models (Biesecker, 2015). The research group discovered additional emissions of Volkswagen vehicle models during road testing. The company there after was the target of several regulatory investigations that were conducted in different countries (Biesecker, 2015). Volkswagen’s stock prices fell few days after the announcement of the regulatory investigations. This led to the CEO of the company to resign voluntarily and other heads such as research and development and brand development managers were suspended (CNN Money Staff, 2015). This scandal raised awareness across nations over the increasing pollution levels due to vehicle emissions by brands build by different car makers. Initially, Volkswagen disclaimed any wrongdoing with regard to the emission issues of its vehicles. In the end of 2014, Volkswagen carried out a massive recall that involved more than 500,000 cars in the United States alone (Reiger, 2010). The company first claimed that the reason for the emission problem was a software glitch and resulted to implementing a software patch. However, even after the repaired were made, the California Air Resources Board continued with the investigations through testing on the road. They found out that there was no improvement made on the vehicles (Biesecker, 2015). In the early 2015, the California Air Resource Board and the EPA gave a notice to Volkswagen that they would not approve their 2016 models unless they conform to the established standards. In September 2015, the company admitted to having programmed its diesel engines so that it offers inaccurate results during laboratory test. The CEO of the company, Martin Winterkorn releases a media report accepting the responsibility as he resigned his position (Biesecker, 2015). As a result of the emissions scandal and the recalls made by the company, there were significant financial concerns for Volkswagen (Reiger, 2010). The company suffered a loss amounting to 1.7 billion pounds by the end of the third quarter in 2015. This amount is exclusive of the fines, penalties and compensation. Analysts are estimating the total losses for the recalls and the whole crisis to tens of billions of Euros. In addition, the company’s market capitalization went down 40% only two months after the crisis (Reiger, 2010). The Volkswagen recall crisis has received a lot of attention and has been criticized for their intentional causes of the TDI emissions. The media stated that the Volkswagen scandal could affect the economy of Germany that Greek Eurozone crisis. Also, the lawsuits and other consequences of the crisis has been a blow to the “made in German” brand (Reiger, 2010). However, even after the scandal, a poll conducted in German showed that majority of people still had faith in Volkswagen since they believe that the company is already guilty of the manipulation. The engine concern scandal exposed manipulative and unscrupulous practices done at Volkswagen that affected its image and reputation across different nations (Bruce, 2015). The new CEO of the company indicated that, “most urgent task is to win back trust for the Volkswagen Group – by leaving no stone unturned and with maximum transparency” (Volkswagen, 2015). In addition, the recall crisis has impacted the ability of Volkswagen to pay its senior executives a higher compensation compared to the competitors. The senior executives in the compared were receiving total salaries of approximately 63.2 million euros compared to about 26 million euros paid to the executives at the German counterparts (Volkswagen, 2014. Also, there is a number of wrangling needed to be resolved with the United States authorities in relation to the claims regarding the recalls of 500,000 vehicles in the country. Responses to the Scandal The initial response to this matter by Volkswagen was that they had admitted their responsibility in manipulating the tests carried out to determine their vehicle emission (Reiger, 2010). This came to happen after they were confronted with the evidence concerning the defeat “device”. During the green transportation conference in Pacific Grove, California, the director of the Environmental Protection Agency was approached by anonymous representative of Volkswagen informing the director that the company was misleading the regulators (Bruce, 2015). A formal recognition of their faults was made during a September conference call by Volkswagen executives in Germany together with the US to EPA where they discussed penned materials offered to the participants showing how their diesel engine software evaded the US emission tests (Reiger, 2010). Volkswagen’s executives finally admitted after they received threats from the EPA regarding the approval of their 2016 diesel models. According to social penetration theory, people move from superficial talk to intimate talk (Coombs, 2007). We tend to learn about other people in order to gain a better understanding and gain more information about them. This understanding is gained without even knowing through self-disclosure and observation (Coombs, 2007). The theory argues that we peel off a person in order to understand the breadth and depth of that particular person. We come to understand their perception of situations and gain knowledge of their previous experiences (Coombs, 2007). In the case of the Volkswagen scandal, the company had to gain knowledge about the customers and the stakeholders before responding to the crisis. This gave them an advantage as they eventually gained the trust of their stakeholders and the customers. The social judgement theory was created in order to determine what mode of message and under what situation and circumstances the communicated message can change a person’s behaviour. A person’s perceptions of behaviours, attitudes as well as beliefs exist on a field including latitude of acceptance and latitude of rejection and non-commitment (Coombs, 2007). The theory illustrates that persuasive messages often succeed when it falls on a person’s latitude of acceptance. In order to be able to persuade others, we need to think about the range of possible attitudes and behaviours that exist (Coombs, 2007). One response to the emission crisis was a public apology that Volkswagen offered to the public and the shareholders. The company in the long run have the potential to gain the trust of the shareholders and regain its brand image (Coombs, 2007). This is attributed to the well-articulated public apology as well as the fact that the company took responsibility of the problem. This enabled them to persuade the public into forgiving their manipulating act. According to the uncertainty theory, people often want to know more about another person in order to reduce any anxiety of the unknown. The more we gain an understanding of another person, the more we can predict the future interaction contexts (McLean, 2005). If we don’t have any idea about a person, it is very easy for use to offend them. Knowing a person often reduces uncertainty and builds on trust between two parties (McLean, 2005). Volkswagen did well in reducing uncertainty and enhancing trust. For instance, the company put in some efforts aimed at mending relationships with their chief stakeholders impacted by the scandal (Volkswagen, 2014). They went ahead and retracted their diesel fuelled car from the market and are also formulating plans which will undertake the recalling of the affected vehicles which are still being operated. In addition, the company has also tackled various initiatives with the intention of mending significant associations with both their customers and their dealers. These efforts entails compensation to their dealers for accommodating inventory as well as their new dealership motivations related to the trade of gasoline-powered vehicles (Volkswagen, 2014). Moreover, for their customers who were impacted by the situation, the company offered them a “Goodwill Package” which was inclusive of gift cards, credits for products as well as services, and extension of their roadside assistance for a period of three years. The board member to Volkswagen, Olaf Lies, approached the media house, BBC, and mentioned that those who allowed the installation of the software acted criminally and therefore, must be held liable for the occurrence of the problem (Volkswagen, 2014). He also mentioned that the problem was recognized by the board briefly after the media got a hold of it. This raised a lot of concerns regarding the knowledge of the board about the problem when they were already known in the United States (Reiger, 2010). In addition, Volkswagen later declared that 11 million of their automobiles took part in the distorted emission report and also mentioned that $7 billion would be set aside to handle the costs of correcting the software at the core of the pollution announcement (Volkswagen, 2014). The company also hired Jones Day, a law firm, to carry on internal investigations into the matter. Conclusion To sum up, Volkswagen’s scandal regarding the emission test tarnished the reputation of the company together with the relationship with their stakeholders. This scandal occurred due to the falsification of the software that was supposedly installed in their diesel-powered vehicles to control vehicular emissions. The company’s CEO as well as their top executives eventually took responsibility of the unfortunate incidence claiming that they really messed up in this situation. On the other the company went ahead and responded appropriately to the scandal by changing the structural management of the firm, suspending executives who were directly involved in the scandal and offering compensation to the customers who were impacted by the scandal. With an attempt to mend their relationship with their stakeholders, they offered gift vouchers to those affected. Other than repairing their relationships, they ensured that all the vehicles that were involved were recalled and also they went further to set aside almost $7 billion to correct the falsified software. References Biesecker, M 2015, VW commercials getting a new view in light of emissions scam, Associated Press. Bruce, C 2015, "VW explains fixes for 1.6, 2.0 diesels in Europe". Media release, Autoblog. Retrieved 12th May 2016 from http://www.autoblog.com/2015/11/25/vw-diesel-fixes-germany/ CNN Money staff 2015, Volkswagen scandal…in two minutes. CNN Money. Retrieved 12th May 2016 from http://money.cnn.com/2015/09/28/news/companies/volkswagen-scandal-two-minutes/ Coombs, W2007, “Protecting Organization Reputations During a Crisis: The Development and Application of Situational Crisis Communication Theory“, Corporate Reputation Review, Vol.10, No.3, pp.163-176. Mays, K 2015, VW Diesel Crisis: Timeline of Events. Cars.com. Retrieved 12th May 2016 from https://www.cars.com/articles/vwdiesel-crisis-timeline-of-events-1420681251993/ McLean, S 2005, The basics of interpersonal communication, Boston, MA., Allyn & Bacon. Plungis, J. and Hull, D. 2015, VW’s Emissions Cheating Found by Curious Clean-Air Group. BloombergBusiness. Retrieved 12th May 2016 from http://www.bloomberg.com/news/articles/2015-09-19/volkswagen-emissions-cheatingfound-by-curious-clean-air-group Reiger, B 2010, From People’s Car to New Beetle: The Transatlantic Journeys of the Volkswagen Beetle. The Journal of American History, vol. 97, no. 1, p. 91-115. Volkswagen 2015, Matthias Mueller interview Presentation, Wolfsburg, Volkswagen AG. Bocsi/Bloomberg Volkswagen 2014, Moving Progress: Annual Report 2014, Wolfsburg, Volkswagen AG. Read More