Crisis Management in VW's Dieselgate Scandal

Introduction

Trust is the most important factor in the success of any organization, extending to all levels of stakeholders. If customers feel they cannot trust a company, they will not purchase its products. Shareholders must trust that the organization will make sound business decisions to maintain profitability and manage value. This is increasingly prominent in the global economy, where people of different cultures must interact with one another. Most critically, customers and other stakeholders must be able to believe a company when it tells them something is true. This analysis explores the "Dieselgate" incident involving Volkswagen AG — also known as the Volkswagen Group, commonly referred to as VW.

Background of the Case

Consumers worldwide are becoming more environmentally conscious and more sensitive to vehicle emissions. Features that promise to improve fuel economy, reduce emissions, and deliver other positive environmental benefits are major selling points in today's global market. In addition to consumer demand, federal clean-air requirements are becoming increasingly stringent, with manufacturers required to comply with stricter regulations over time (Bartlett, Naranja, and Plungis, 2017). The case involved several Volkswagen models, including the Touareg, Passat, Jetta, Golf SportWagen, Golf, Beetle, several Audi models, and the Porsche Cayenne (Bartlett, Naranja, and Plungis, 2017). Cars involved in the recall included models from model years 2009 through 2015.

The problem centers on a component called the engine control unit (ECU). The Volkswagen models in question could operate in two distinct modes: an on-road mode and a dynamometer (dyno) mode. In the recalled models, the dyno mode served as a "test" mode, while the on-road mode was used during regular consumer driving. The system could manage engine performance and switch between maximum fuel efficiency and a high-performance mode. In high-performance mode, the car produced more power but also emitted significantly higher levels of nitrogen oxide.

The problem arose because the engines were switched to high-efficiency mode during EPA tests, and then reverted to the high-performance setting once vehicles were sold to consumers. As a result, cars being driven by consumers were producing nitrogen oxide emissions that exceeded EPA standards (Bartlett, Naranja, and Plungis, 2017). Emissions exceeded maximum limits by a factor of 15 to 35 times on some models (Bartlett, Naranja, and Plungis, 2017). Furthermore, Volkswagen admitted to having been aware of the problem as early as 2008. The company knowingly circumvented the law and continued to do so until 2015, when it was caught and issued EPA violations (Bartlett, Naranja, and Plungis, 2017). This analysis examines the consequences of those actions in terms of stakeholder trust, legal liability, and the company's future.

Stakeholder Relationships

Stakeholders in this case include consumers, shareholders, company executives, production workers, vehicle dealerships, parts manufacturers, and other members of the value chain. On a broader scale, stakeholders also include communities and entire countries. This is especially significant because Volkswagen vehicles are manufactured in Germany and exported to the United States, where violations were first brought to the attention of authorities.

There is an important distinction between making a mistake and knowingly concealing an issue from stakeholders at every level. It is difficult to identify any group of stakeholders that was not negatively affected by VW's actions. Moreover, the effects on individual stakeholder groups cannot be neatly separated. For example, when customer trust is compromised, shareholders immediately recognize the likely impact on revenues and may react by selling their positions.

In today's environment, social media plays a critical role in stakeholder relations management. VW's response to the emissions violations on social media significantly shaped public perception and influenced how the crisis unfolded. The EPA's press release was issued on September 18, 2015 (Zhang, Veijalainen, and Kotov, 2016). VW chose to monitor several social media platforms to gauge the public response, including Twitter, Facebook, other official websites, and major news outlets, with particular attention to VW's official Facebook page (Zhang, Veijalainen, and Kotov, 2016). VW responded immediately, offered solutions to affected customers, and issued an apology without delay. It was found that nearly 88% of relevant tweets contained a news link, indicating that consumers and others were actively sharing information about the scandal (Zhang, Veijalainen, and Kotov, 2016).

Prior to the scandal, a reputation tracking firm consistently ranked VW among the top 15 most trustworthy companies in the world (Reputation Institute, 2016). After the scandal broke, VW's reputation score dropped 23 points in Germany and 11 points in the United States over the following four fiscal quarters (Reputation Institute, 2016). According to the firm, trust is driven by a company's ability to deliver tangible results, and is also measured by corporate governance practices, product quality, and global citizenship. VW's failure to address stakeholder needs across these dimensions produced a dramatic decline in its reputation scores.

Conclusion

Prior to the crisis, VW had done virtually everything wrong in terms of communication and in taking actions that eroded consumer trust. The effects on different stakeholder groups cannot be separated from one another — damage to one group inevitably ripples into others. Nevertheless, because the diesel sector represented only a fraction of VW's overall business, the company was able to recover and return to profitability within a year — a testament to effective risk management across its other product lines.

The central question that remains is how VW recovers the reputation of its brand in the eyes of government regulators and consumers around the world. After the crisis became public, VW appeared to do much of what was right: issuing a prompt apology and responding to the situation quickly and transparently. Although the scandal continues to generate legal and regulatory repercussions as new information surfaces through ongoing investigations, it appears that for VW as a whole, Dieselgate has proven to be a serious but ultimately survivable crisis — a significant bump in the road rather than a fatal blow to the company's long-term viability.

References

AFP (2018). Five things to know about VW's 'dieselgate' scandal. Phys.org. Retrieved from

Bartlett, J., Naranja, M., & Plungis, J. (2017). Guide to the Volkswagen emissions recall. Consumer Reports. Retrieved from https://www.consumerreports.org/cro/cars/guide-to-the-volkswagen-dieselgate-emissions-recall-

Continuity Central. (2015). Five crisis management lessons from the Volkswagen incident. Retrieved from

Crete, R. (2016). The Volkswagen scandal from the viewpoint of corporate governance. [University], 7(1): 25–31.

Environmental Protection Agency (EPA). (2018). Former CEO of Volkswagen AG charged with conspiracy and wire fraud in diesel emissions scandal. Press release. Retrieved from

Ferrell, O., Fraedrich, J., & Ferrell, L. (2013). Business ethics: Ethical decision making and cases. Stamford, CT: Cengage Learning.

GEC Risk Advisory. (2015, September 23). The Volkswagen emissions scandal will be one for the books: The long-term effect on stakeholder trust. Retrieved from

Lyons, S. (2015, December 7). Road to recovery: How does Volkswagen bounce back from emissions scandal? Hub. Retrieved from https://hub.jhu.edu/2015/12/07/volkswagen-scandal-explained-sylvia-long-tolbert/

Reputation Institute. (2016). How VW lost the public's trust. Retrieved from https://www.reputationinstitute.com/sites/default/files/pdfs/How-VW-Lost-Public-Trust-2016.pdf

Zhang, B., Veijalainen, J., & Kotov, D. (2016). Volkswagen emission crisis — managing stakeholder relations on the web. In Proceedings of the 12th International Conference on Web Information Systems and Technologies (WEBIST 2016), 1: 176–187. Retrieved from http://www.scitepress.org/Papers/2016/58924/58924.pdf