Volkswagen Scandal
Dear XYZ,
In response to the work assigned for preparing a report on Volkswagen emission controversy, please find enclosed the detailed internal report containing my findings and recommendations pertaining to the issue. As I found, the company is going through the tough time when it is facing actions from the regulators and other agencies for violating the emission norms of the different countries. Also, there is a big blow to credibility in the eyes of customers. Concerted efforts of all the stakeholders are required to tide over the crisis. Based on the sources I referred to, the report goes deep into the root causes and finds the ways out to recover from this situation.
I sincerely hope that you will find my report helpful for chalking out the strategy to bail the company out of the present crisis.
The Letter of Transmittal i
Executive Summary ..iii
Introduction 1
Nature of the Problem 1
The Root Causes .2
Explanation of the Defeat Device ..2
The Impact ..4
Possible Remedies ..4
Conclusions.6
References ..8
Executive Summary
2015 was the year when Volkswagen (VW) surged ahead of Toyota to claim the position of largest carmaker in the world. But the same year, the VW faced a severe blow which is likely to wipe out not only its financial wealth but also the goodwill it has earned over the years of auto manufacturing. Certain models of VW diesel cars have been found to be fitted with the so called ‘defeat device’ that would deceive the regulators by manipulating the emission results to get a go ahead for the sale. There was a big difference between the emission results when the car was tested in labs and when the car plied on the roads. The United States Environment Protection Agency has found the results extremely objectionable and directed the company to take the affected cars off the road for the required fix. Subsequently, the company’s diesel cars are also under the lens of the regulators of other countries. Approximately eleven millions cars are believed to be affected due to the defeat device. The issue has severe financial implications with the possibility of steep fines being imposed by the different agencies. Another jolt is the loss of credibility of the company’s brand name.
The report finds the company’s dictatorial culture responsible for this unfortunate episode. There was no open communication channel available in the company; the innovation was on decline; the targets were stringent; there was also haste to capture the market share. All these moves resulted in finding a quick solution by unfair means.
As the remedial measures, the company needs to strengthen the internal vigilance by conducting the external audits; it needs to fix the problem caused by the cheating device in the affected cars on priority basis; it should also compensate the owners by providing them with financial compensation for the breach of trust; the company should also keep pace with time on innovation and should chase the realistic targets. Though the road of recovery is difficult, it is very much within Volkswagen’s reach with the help of collective efforts.
Volkswagen Scandal
Introduction- Environmental protection agency (EPA) of the US has found that some diesel cars of our brand Porsche, Audi and VW are fitted with the software controlled ‘defeat device’ that alters the performance of the engine to fulfil the emission criteria. However, these cars, while running on the road, emit toxic gases (Nitrogen Oxide) fourty times higher than the permissible level. As the time passed, the regulators of other markets, where the company operates, have found the similar problems with our diesel cars. The company has admitted to the emission cheating with the help of special software device fitted in eleven million cars worldwide. Consequently, VW is facing legal actions from the regulators of various countries. The issue also has financial implications in the form of penalty imposed by the various agencies. This fiasco has also dented the image of the company as the manufacturer of the world class cars. Considering the scale of this problem, there is a need to completely overhaul the existing system in the company. It may take considerable amount of time to regain the lost glory but the company has the manpower and expertise to pull the customers back to its fold.
Nature of the Problem- The nature of the problem lies in the company’s haste in tapping the diesel car market by promising good fuel efficiency with better emission standard. The fuel efficiency was targeted at the individuals and the emission norms at the regulator. To capture the big market pie of the diesel market, both the fronts had to be strong. Unfortunately, the two factors are diametrically opposite to each other in the case of diesel cars and the company could not develop a technology to address the two requirements. As a solution, which is now considered a deception, the software controlled ‘defeat device’ was conceived and fitted in cars to convince the regulators of emission compliance. The prospective customers were lured with the better fuel efficiency. The strong media campaign convinced the customers and that showed in the sales figures. This duping trend started in 2009 and continued till 2015 when the scandal broke out.
The root causes- The VW scandal is mainly because of three factors- Unrealistic growth targets, the opaque leadership and lack of innovation. When the market leader like Volkswagen takes up a seemingly difficult task, it sets an ambitious and uncompromising target. In the event of innovation required for the success failing, the employees become desperate to meet the committed target by fair or foul means. This is what happened to VW when it decided to create ripples in the diesel car segment with the promise of better mileage and emission compliance. The marketing campaign to highlight the so called breakthrough was launched to provide credibility to the promise made by the company. But when the innovation fell short, there was a single option left-manipulation.
Lack of open communication among employees contributed immensely to birth of misdeeds that snowballed into a scandal. The top level leadership behaved in a dictatorial manner which left no scope for the voice of dissent. The fear prevailing in the company silenced the voice of whistle-blowers. The company operated under the shadow of few individuals at the helm. The external supervisory intervention was bare minimum. Above all, the pressure of unions and labor worsened the situation. Had there been a strong watchdog to monitor the company affairs, the malpractice would not have continued for so long.
Explanation of the ‘defeat device’ -To understand the functioning of the defeat device, the peculiarity of the diesel engines functioning needs to be understood. As a pollution control measure, the diesel cars are equipped with a special anti-pollution device that reduces the impact of pollution but causes more fuel consumption. The diesel cars made by Volkswagen are fitted with special NOX trap device that absorbs and traps Nitrogen Oxides, the air pollutants, from the exhaust. (Verge, 2015) The more effective the NOX trap device, the more is the amount of unburnt fuel coming out of exhaust, leading to less fuel efficiency. In order to change the functioning the anti- pollution device, it was put under the control of a suitably developed software that could detect the testing conditions. The software can detect the testing conditions by the indicators-steering movements, atmospheric pressure and speed of the wheels- and activates the Nitrous Oxide absorber for better emissions compliance. When it finds the operation of the vehicles under these conditions, it would suppress the fuel economy mechanism and invoke the better emission control. This could deceive the regulators with the better emission output and the vehicle would be approved for the sale in the target market. However, when the vehicles run on the roads, the software would deactivate the emission control mechanism and would support the fuel economy phenomenon for better mileage. Consequently, the emission data of the VW cars while running were significantly different from the data collected at the time of emission test. (Bloomberg, 2015). So, a single software was capable of fetching victories on both the fronts-people and regulator. The idea was profitable but infected with deceit.
Looking at the multi-dimensional feature of the software in question, the strategy to circumvent the emission requirements appears to be well thought of and points towards the involvement of top level executives of the company. It is still not known who had conceived and approved the plan of fitting these cheating devices in the diesel cars. (Hotten, 2015). The investigation is in progress and only the findings will reveal the names of the culprits.
The impact- The fallout of the scandal is multi-dimensional- financial, legal, social and credibility- related. The legal and credibility impacts will manifest in the form of financial damage. For instance, if the authorities rule against the company, which seems very likely, heavy penalties and fines are waiting to be imposed, resulting in a big financial liability. On the other hand, the credibility of the brand has suffered a big blow and it is bound to lead to stunted sales figure arising out of the poor response from the prospective customers. The social impact too is deep. Now the company is considered as the set-up which has no respect for the social responsibility of contributing to the clean environment. When there is so much clamour around for preserving the environment, the company is found trapped at the place, where money making alone matters. The social scar is so stubborn that it will take years for the company to get rid of it.
The shadow of the scandal has not only hit the Volkswagen prospect but also tarnished the image of ‘Made in Germany’ tag. The automobiles made in Germany are considered one of the best in the world. Post this scam, the people will think twice before giving thumbs up to the German made automobiles. Apart from this, the regulators across the world will look at the German cars with a magnifying lens to detect shortcomings.
Possible Remedies- If it takes innumerable actions to build a credible image, it requires double such efforts to repair the tarnished reputation. VW has to tread on a difficult path that requires the support of all stakeholders-employees, customers, investors. The immediate priority of the company should be to fix the cheating device that allows the vehicles to pollute the environment and endanger many lives across the world. The company has started the recall of the affected vehicles, whose numbers are around eleven millions, in all the markets where it operates. These efforts should be intensified and executed in the time bound manner. Proper arrangements should be made to bring the vehicles to the repair points so that the owners don’t have to bear much inconvenience. The company should fix the time limit for returning the repaired cars to the owners after repair. The number of the affected cars is high, so it will require huge amount of manpower for the speedy recovery.
It will be easy for VW to convince the loyal customers that this cheating incident was an isolated case that will not recur. The idea of gifting the vouchers of $1000 to the existing customers is a good idea of doing some damage control (Tolbert, 2015). More such possibilities of compensation should be explored because, if they forgive, the possible lawsuit can be prevented, and they can also positively influence the new customers. Volkswagen has already apologised to its customers for breaching its trust, but this alone will not suffice as the customers deserve to know what remedial steps are going to be taken to prevent the recurrence of cheating. (O’Boyle & Adkins, 2015). Therefore, the company needs to make future corrective actions public.
In the wake of raging controversy, there is a need to completely revisit the sales and growth target. All the targets linked to the innovative product should be as per the rate of progress of Research and Development in the company. It is advisable to take a hit on the sales figure instead of inviting troubles, due to betrayal, from different quarters. Recovery is more important than the growth at this juncture.
The opaque work culture of the company is also responsible a lot for the scam. At last, much needed change is happening in surveillance department with the appointment of the federal judge Christine Hohmann-Dennhardt as the board member of the company’s integrity and legal affairs (Hetzner, 2015). This will help curb the wrongdoing at the top level. Similarly, there should be vigilance at all levels so that the detection of malpractices happens right there. Peer review of the decisions taken by the employees can also infuse the fear, among wrongdoers, of being watched. Internal detection of the flaw has much lesser impact than the discovery made by the authorities as the internal findings remain confined to the limits of the company.
The companies desirous of surging ahead of the competitors must make the innovation as their top priority. The product backed by the sound technology pleases the customer without displeasing the regulators. This is what the giants such as Apple and Google have done to rise to the top. Therefore, Volkswagen has to step up the efforts to develop the cutting edge technology with the objective of delivering on promise. The option of focusing on electric cars can be very attractive in the long run. Being smokeless, these cars will not hit the speed-breakers in the form of regulators. It is understandable that that the technology of the electric car is at the nascent stage and the infrastructure to support these cars is yet to be fully developed. In future, electricity powered automobiles can shield the company from the onslaught of environment related issues. Thus, such cars offer a promising future to the company.
Conclusion- Volkswagen is going through one of the worst phases since its inception in 1937. The unfolding of the defeat device episode has eroded the credibility of the company and put the huge financial burden in the form of fines and penalties. The morale of the employees has hit the rock bottom and the company seems to be in complete disarray. Despite all the negative consequences, the brand Volkswagen is still dear to its loyal customers because of the emotional connect. This is where the company can make a significant headway by winning back the confidence of the customers. As remedial measures, the company management team will have to open up to allow the flow of information and set the achievable targets for future growth. The company should aim at developing the innovative technology that is eco-friendly too. Considering the gravity of the damage, it will take considerable time to recover from this mess. The whole world will wait and watch for the return of the past glory of the brand Volkswagen.
References
Verge, T. (2015, September 24). Volkswagen's diesel scandal, explained. Retrieved April 09, 2016, from https://www.youtube.com/watch?v=CQ4irwe3ZDk
Bloomberg. (2015, September 24). Volkswagen Cheating Scandal: How It Was Exposed. Retrieved April 09, 2016, from https://www.youtube.com/watch?v=hOTKIZgppbs
Hotten, R. (2015, December 10). Volkswagen: The scandal explained - BBC News. Retrieved April 09, 2016, from http://www.bbc.com/news/business-34324772
Tolbert, S. L. (2015, December 08). Road to recovery: How does Volkswagen bounce back from emissions scandal? Retrieved April 10, 2016, from http://hub.jhu.edu/2015/12/07/volkswagen-scandal-explained-sylvia-long-tolbert
O'Boyle, E., & Adkins, A. (2015, December 3). Can Volkswagen Salvage Its Damaged Brand? Retrieved April 10, 2016, from http://www.gallup.com/businessjournal/187472/volkswagen-salvage-damaged-brand.aspx
Hetzner, C. (2015, November 2). How VW stumbled so badly and what it needs to do to recover. Retrieved April 10, 2016, from http://europe.autonews.com/article/20151102/ANE/151029784/how-vw-stumbled-so-badly-and-what-it-needs-to-do-to-recover
