Volkswagen scandal – Reasons behind the fall of an industry giant

During a historic public statement, Mr. Müller and Hans Dieter Pötsch, chairman of Volkswagen’s supervisory board admitted that Volkswagen had installed special software in millions of cars in the United States and Europe designed to deceive emissions-testing procedures. Internal investigations have found significant discrepancies in 11 million vehicles worldwide, turning this revelation to be one of the biggest corporate scandal. To cover the cost of recalls and other efforts to limit the damage, the company has set aside $7.3 billion, cut down its R&D budget and plans to sell airbus from the fleet of aircraft it owns.
In 2007, Winterkorn became CEO of Volkswagen. Taking the legacy of Volkswagen a notch higher, Winterkorn embarked on ‘Strategie 2018’ with the goal to bypass GM and Toyota by the year 2018 to become the world’s largest automaker in profit. This was a lofty goal, which pressurized the company to come up with the solutions to the imminent challenges in the technology that Volkswagen faced against its competitors in US. In the years that preceded a marketing push that began in 2009, there was an intense internal debate about the emissions technologies to use to keep pace with ever stricter limits on emissions of nitrogen oxide by Environmental Protection Agency (EPA) in US. Some Volkswagen managers argued in favour of using Selective Catalytic Reduction (SCR) technology.
Though effective, SCR costs more, adds weight to the car and takes up more space than other methods. It would have taken away the competitive advantage of Volkswagen compact cars against the US companies. As the story unfolds, Volkswagen dropped SCR and beginning 2009, Volkswagen sold cars in the US that had lean NOX traps. Though NOX traps typically costed several hundred dollars less than an SCR system, it were less reliable at controlling emissions. Moreover, Volkswagen vehicle were equipped with software that was used to cheat on emissions tests. The software sensed when the car was being tested and then activated emissions controls fully to reduce emissions. During regular driving, the software turned off the equipment, which increased the emissions far above legal limits but improved the car’s torque and acceleration.
The fact that an illegal diesel software installed in Volkswagen, Audi and Porsche models went unnoticed for so many years point to systemic failure of Volkswagen’s corporate culture. Post scandal, there are revelations that Volkswagen was rife with the problems of principal-agent or post-contractual opportunism. The much of Volkswagen’s company culture has been shaped in the past 20 years by Ferdinand Piëch, the chief executive from 1993 until 2002, and Martin Winterkorn, the chief executive from 2007 until his resignation after the scandal became public. After 20 years under Piëch and Winterkorn, Volkswagen had become a place where subordinates feared contradicting their superiors, executives indulged in opulent corporate lifestyle and often took short term suboptimal investment decisions or not promote those who threatened them. After the scandal became public, it has come to notice that Volkswagen managers who advocated SCR system were sidelined or pushed out of the company. Moreover, the opulent corporate lifestyle of Volkswagen’s executives is in public as the current management plans to sell the company owned airbus to mitigate the litigation expenses arising out of the scandal.
Winterkorn was so strongly bought in the narrative of making Volkswagen the world’s largest automaker in profit that he pursued that lofty goal with unflinching passion. Coupled with the systemic failure of Volkswagen’s corporate culture, the narrative inadvertently led the company to its doom, the scandal that the company is currently engulfed in.
The scandal couldn’t be confronted for so long reveals a systematic pattern of deviation from norm or rationality in judgment by EPA and other regulatory bodies. This could be explained by cognitive bias that is a by-product of bounded rationality. The early signs of scandal came in 2011, when the European Commission’s Joint Research Centre published a report which found Volkswagen diesel vehicles emission exceeding Euro emission limits substantially. In the UK, the Department for Transport received a report from the International Council on Clean Transportation in October 2014, which stated that there was a “real world nitrogen oxides compliance issue” with Volkswagen’s diesel passenger cars. Going ahead, more and more researchers and environmental groups were sharing their findings that Volkswagen vehicles such as Jetta and Passat exceeded US emissions limits by 40 times than the allowable limit under real-world driving conditions.
On 18 September 2015, the US EPA served a Notice of Violation to Volkswagen Group alleging that approximately 480,000 VW and Audi automobiles equipped with 2-litre TDI engines, and sold in the US between 2009 and 2015, had an emissions-compliance “defeat device” installed. When the scandal was revealed, Volkswagen blamed a small group of engineers for the misconduct, and said that members of its management board did not know of the deception. But, soon it was evident that the problem was deep rooted and soon heads started to roll and the number of Volkswagen executives or engineers suspended in connection with the emissions cheating has crossed 10. Going by the claims, 50 potential whistle-blowers had come forward, hinting at wider knowledge of the cheating.
The Volkswagen scandal is a typical story of company focusing too much on maximizing shareholders’ value, a strong narrative build by an ambitions CEO and the systemic failure of corporate culture led by post-contractual opportunism. Volkswagen did become the largest automaker in the world, surpassing Toyota in July 2015, but the acclaim could last only for two months.

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