Volkswagen Emissions Scandal: Causes, Impact & Cover-Up

Introduction

Why would a highly successful automobile manufacturing company — the largest car company in the world, having overtaken Toyota in early 2015 — deliberately and stealthily develop technologies that hide the truth about carbon-related emissions? And what are the financial and social ramifications of the deception that Volkswagen engaged in? This paper reviews the Volkswagen Company, its history, its success, and its decision to create software that cleverly — yet reprehensibly — hides the fact that diesel exhaust is dirty, fouls the air, and fails to meet clean air standards.

The technical decision-making process at Volkswagen is clearly among the corporate culprits that contributed to this enormous scandal. But moreover, the executive decision-makers and the board of directors share responsibility for the shaming firestorm of public outcry that followed revelations of the scandal.

Volkswagen had made plans to launch a massive marketing campaign in the United States in 2005, promoting its diesel vehicles; but when the company learned that its automobiles would not meet the "strict nitrogen oxide requirements in the U.S. within the required time frame and budget," the company had to make adjustments to its cars' emissions (McGinty, 2016). That decision ultimately led to the massive public relations nightmare that resulted from revelations of the deceptive software installed to mask the true amount of emissions.

The problem that Volkswagen faced in terms of meeting emission standards led to decisions that ultimately proved not only embarrassing but costly — both in financial and image-related terms. Stakeholders in this case — Volkswagen owners, dealers, and vendors supplying parts and service — were left with significant problems; but the bigger problems were to be borne by the manufacturers of these automobiles.

This paper reviews the history of the Volkswagen automobile, the decisions made to hide the true amount of emissions, and the resulting crisis for the company and its management hierarchy. Any consumer who plans to buy an automobile, or is simply interested in the business and environmental side of the auto industry — and seeks background, in-depth narratives that explore decision-making and corporate corruption — would find this report of value.

Indeed, the scandal created through Volkswagen's deception carries enormous economic, political, and environmental themes that extend well beyond corporate wrongdoing. An alert citizen who encountered the headlines and watched business reporters cover the story would very likely want to go well beyond surface-level explanations for this debacle, and this paper seeks to provide that deeper level of understanding.

A Brief History of Volkswagen

Author Bernhard Rieger, who published The People's Car: A Global History of the Volkswagen Beetle in 2013, explains that the Volkswagen Beetle was the first car to have sold "more often than Ford's Model T" (Scholz, 2014). Sales of Volkswagens hit the global market — in particular in Brazil, Israel, South Africa, Mexico, Germany, and the United States — which lifted the brand well above the commercial success of the Model T. Because of its sales around the world, the VW "embodied a larger variety of cultural meanings" (Scholz, 667).

Apparently the success of Ford's revolutionary production methods "fascinated Hitler and his followers," and since the goal of Nazi Germany was to create a socialist consumer society, the promotion of the Volkswagen "went hand-in-hand with anti-Semitism" (Scholz, 668). Although the VW Beetle did not achieve overwhelming success during the Third Reich — Rieger claims the car was an "economic failure" — after the war the car "embodied values such as reliability that Germans could identify with," and it became an enormous success internationally (Scholz, 668). Even though it carried the negative connotation of "Hitler's people's car," it transcended that association, and especially in the United States the car "filled a void in the niche market" for smaller automobiles (Scholz, 668). Because of the company's brilliant marketing strategy ("Think Small") — presenting the Beetle as an honest, economical car in contrast to Detroit's big, "flashy sedans" — the American consumer underwent what Scholz describes as "historical amnesia" and largely forgot that the car had a Nazi history (Scholz, 668).

How the Scandal Evolved

Volkswagen engineers created a "defeat device" that could detect when a vehicle was being tested for pollution emissions. In other words, the car would produce results within the limits of U.S. emission standards when hooked up to a smog-testing system. But on the road, the car would seamlessly switch out of its test mode and emit nitrogen oxide pollutants "up to 40 times above what is allowed in the U.S." (Hotten, 2015).

The scandal broke in September 2015, after the Environmental Protection Agency (EPA) announced that the German company had programmed up to half a million vehicles with the defeat device. Shortly thereafter, Audi (owned by VW) acknowledged that 2.1 million Audis were also equipped with that deceptive software, including 13,000 in the United States (Thompson, et al., 2015). After news broke about the deceptive devices in VW vehicles, shares in Volkswagen (VLKAY) fell approximately 17%; in fact, within a week of the EPA findings and company admissions, "about a third of the value of the group" was lost (Thompson, p. 1).

The financial damage VW is incurring is enormous. An estimated $46 billion in fines is expected for various violations of the Clean Air Act, based on a lawsuit by the U.S. Department of Justice (DOJ). Beyond that, the cost of recalling 580,000 diesel Volkswagens, Porsches, and Audis sold in the U.S. since model year 2009 will certainly cost billions more (McGinty, p. 2). Those 580,000 vehicles emitted an estimated 56,000 tons of nitrogen oxide into the air in the U.S. above what is legally allowed, McGinty explains. The DOJ arrived at its $46 billion figure by requesting $37,500 per vehicle for violating emission laws; $37,500 for tampering; $37,500 for employing defeat devices; and $37,500 per day for false reporting of emission data (McGinty, p. 2).

Conclusion

Is this blatantly deceptive scheme on the part of Volkswagen a unique situation? Kevin O'Marah writes in Forbes that "masters in the intentionally insensitive world of high finance never stop pushing for an edge" (O'Marah, 2015). Research shows that there has been a "long history of regulatory cheating" in which "the auto industry has been caught and fined dozens of times" over the past half-century for rule-breaking similar to what VW has done (O'Marah, p. 5). Even if VW can devise a technical fix for its automobiles and the recall proceeds relatively smoothly, a much larger fix is needed to mend VW's reputation in the eyes of the public. "The company must communicate in a new way," and future "software needs to be evaluated by commissions under regulatory control" (Nelson, 2015). Moreover, the company must be 100% transparent as it takes the steps it must now take to truly reduce dirty emissions and achieve compliance with federal clean air regulations.

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