The Volkswagen Emissions Scandal

• Mathias Müller became CEO of Volkswagen (VW) in October 2015, succeeding Martin Winterkorn, who resigned amidst an emissions scandal.
• VW admitted to installing "defeat devices" in diesel cars to cheat on emissions tests in September.
• Cars emitted up to 40 times more hazardous gases than legally allowed.
• The EPA halted certification of VW's 2016 diesel models, and VW stopped selling 2015 models.
• VW faced its first quarterly loss in over 15 years, and its stock plummeted due to the defeat devices.
• The company abandoned its goal to become the world's largest automaker.
• VW's reputation as a trustworthy company with outstanding engineering was tarnished.

VW Background

• VW was founded in 1937 in Germany during the Nazi regime, with Ferdinand Porsche's help.
• Porsche invented the Beetle, VW's flagship car.
• VW's Beetle first manufactured in 1945.
• By 1949, VW made half of all passenger cars produced in West Germany.
• VW began exporting cars in the late 1940s, selling over one million Beetles by 1955,
• By 1972, the Beetle reached sales surpassing Ford's Model T, selling more than 15 million.
• The Beetle's sales declined in the late 1970s, giving way to VW models, Passat, Jetta, Golf, and Polo.
• VW became part of Volkswagen AG which owned 12 subsidiaries by 2014, including Audi, Porsche, and Bentley.
• In 2014, VW was one of the biggest firms in the world, owning factories in 31 countries and employing nearly 600,000 people.
• VW sold 10.2 million vehicles in 2014.
• VW reached its goal of taking over the title of "world's largest auto manufacturer" from Toyota in 2014.
• Sales revenue in 2014 totaled EUR202 billion, with an operating profit of EUR12 billion.
• Porsche descendants (50%), Lower Saxony (20%), and Qatar's sovereign wealth fund (17%) largely made up the shareholders of Volkwagen AG.
• VW had a 20-member board, as required by German corporate law with half the seats allocated to VW's union labor force.
• Forbes listed VW as the largest public company in Germany in May 2015, exceeding Daimler USD100 billion.
• Germany provided resources to Wolfsburg town, where VW was headquartered, because they manufactured the VW Beetle there.
• By the mid-2000s, VW owned the town's soccer team, hotels & an automotive theme park, attracting millions of visitors per year.
• VW's values revolved around customer focus, performance, value, renewability, respect, responsibility, and sustainability.
• VW trained its employees, using a 25-page Code of Conduct written in 2009 and systematically rolled out in 2010.
• This Code of Conduct addressed management, anti-corruption, competition & assisted employees in the work place.
• 185,000 VW employees received compliance training in 2014.

Innovation in VW

• VW introduced the three-way catalytic converter.
• The EPA caught VW installing defeat devices in the 1970s to cheat on emissions standards and paid a USD120,000 fine.
• Their advertisement read "Think Small" in the 1950s, encouraging Americans to consider VW's Beetle model.
• In recent years, "the power of German engineering" was stressed through advertisements.
• In 2014, Winterkorn wrote: "We stand for strength, reliability, and long-term success—even under less favorable conditions."
• “The power of German engineering” served as a motto, business strategy, and a badge of national honor.
• The automobile industry was a powerhouse in Germany, and VW became the leader due to German's engineering prowess.
• Automobile exports helped Germany weather the 2008 crisis, making German engineering an economic necessity.

VW Strategy

• Winterkorn aimed to position VW as a global and environmental leader through Strategy 2018 when he took over as CEO in 2007.
• The goal from Strategy 2018 was to transition VW into the world's largest automaker.
• Innovation, perfection & a responsible approach would help VW make the world's largest automaker by 2018.
• To sell 10 million+ vehicles and become the world leader in customer satisfaction and quality was apart of Strategy 2018.
• Attain an 8% return on sales, as well as be the most attractive employer in the automotive industry was part of Strategy 2018.
• Under the leadership of Winterkorn and Piëch, VW became a centralized company with command-and-control culture.
• VW gained a reputation for being hard-charging and competitive with employees fearful of admitting failure.
• Piëch recruited Winterkorn to Audi in 1981 and elicited performance by "terrifying his engineers.”
• Winterkorn was known for his "obsessive attention to detail” when he became CEO in 2007
• Winterkorn promised to take them to the top of the global car industry by 2018 at the opening of VW's new factory.
• To meet Winterkorn's goals US market was a critical component to success, where the company would need to sell 1 million vehicles.

Regulations

• The auto industry had a goal of becoming the world's largest automaker within the next decade in the mid-2000s.
• The auto industry faced engineering challenges due to high gas prices and toughening mileage standards.
• To drive sales, automakers needed to optimize gas mileage and emission rates while designing high-performing vehicles.
• VW opted for a diesel strategy, viewing it as a huge area for potential growth within the US.
• Winterkorn believed it was an ideal time to grow diesel sales in the US while it made up almost half the new car sales in Europe.
• Diesel offered an affordable, powerful substitute to cars running on hybrid while guaranteeing high fuel performance.
• VW faced the need to remove pollutants from its diesel in order to clear the American emission rates.
• Wolfgang Bernhard was in charge of designing VW's next-gen engine, one that delivered high fuel efficiency, while at the same time meeting emission rates.
• BlueTec an idea originally from Daimler was adopted, although seen as controversial by VW.
• It used urea to neutralize NOx which require an extra pump and tank costing EUR300 per vehicle.
• VW canceled the BlueTec deal after Winterkorn ousted Bernhard, reasoning that it was too expensive.
• VW engineers needed to find a way to meet US regulations as soon as possible after being delayed for 6 months.
• To monitor carbon monoxide and NOx emission rates the cars contained 100 million lines of software code.
• Bosch (an auto-industry supplier) gave VW diesel engine-management software for testing.
• Utilizing this software would determine when a vehicle was being tested, thus activating emission limits.
• This practice for emissions-testing vehicles was illegal but believed by Bosch to have only be done during the company's testing.

Clean Diesel

• A new technology called Lean NOx Trap was invented in 2008, which delivered high fuel efficiency while still meeting emission rates.
• VW's 2009 clean diesel Jetta TDI won the Green Car of the Year award.
• Some VW vehicles ran to around 60 mpg, for a nonelectric or hybrid vehicle.
• An executive boasted, at a conference on emissions, that sacrificing power to be environmentally cautious was no longer needed.
• Diesel sales grew by 20% in 2010, 26% in 2011, and 25% in 2012, slowing down in 2013 and 2014 contributing 21% of the company's US sales.
• In 2011, VW's goal of selling 1 million vehicles stateside appeared achievable.
• In 2012, VW hit 3% market share in the US, up almost a percent from previous years.
• VW worldwide sales also grew steadily at around 7.2% from 2007 to 2014.
• The company made its sales goal in 2014, exceeding Toyota's sales and taking their spot as the world's largest automaker.
• VW vehicles did extremely well in China with nearly 10% of the Chinese being sold out to VW.
• In 2014, VW sales lowered to 370,000 while its US market share was 2.2% due to taste shifting over to midsized SUVs.
• EPA would require manufactures to increase fleet-wide efficiency from 35.5 mpg to 54.5 mpg by 2025 although VW invested in its US diesel strategy.
• Cars that used hybrid or electric were given credits that could be used to lower emissions or improve miles-per-gallon, allowing them to exceed the limit standards.
• VW and Mercedes-Benz lobbied for diesel vehicles to be offered credits due to the cars fuel efficiency.
• EPA rejected this request due to NOx emissions being higher.

The Fall of VW

• In 2013, the International Council on Clean Transportation (ICCT) observed that diesel tech looked cleaner in the US.
• ICCT tried to identify which diesel tech was superior in order to improve European emission rate situations.
• Testing was conducted with cars of different types starting with BMW, VW Jetta and VW Passat.
• The first problem lied with that VW emission rates were high on the road, in contrast of them performing flawlessly on the stand.
• With limited information, officials from the EPA questioned VW about any suspicions, but VW firmly denied any accusations.
• Further examinations found that while the vehicle was running using 2 of its 4 wheels (which it would during lab-testing), emission functions were limited.
• In essence, labs recognized when a car was being test & would go straight into test-mode to limit emission.
• Officials threatened to withdraw certification of VW's in 2016 for VW and Audi's diesel.
• In September of 2015, the company admitted to its installation on nearly 500,000 vehicles sold stateside and after was scaled up to 11 million worldwide.
• The vehicles emitted extremely high rates of pollution with numbers being 40x above legal limit.
• VW stated that individuals were to blame for the error, as management was unaware of any wrongdoing.
• Upper management said codes were too complicated to catch single mistakes that have caused detrimental outcomes.
• American operations CEO, Michael Horn, stresses defeat wasn't corporate decision when at a hearing which was deemed very hard to believe.
• Winterkorn later resigned stating he was shocked & stunned, taking the blame on himself althought being unaware.
• EPA stated up to $18 billion in fines & the FBI also launched a criminal probe and the Justice Department launched a civil suit against the company.
• Germany and the EU opened criminal investigations days after scandals were accounted for.
• 20% off VW sales was of diesel vehicles, EPA withheld final certification & VW sold voluntarily stopped selling.
• Reported quarter had them facing 15 years of losses as the company wanted to abandon its goal of the world's largest automaker.
• 9 managers were quickly suspended and the Porsche brand chief, Matthias Müller, was appointed VW's new CEO.
• Volkswagen has had recent TDI issues and has stated they apologize for the overall effect.
• Americans with affected vehicles received good willing packages and the company still faced the challenge of maintaining/repairing the damage done to its reputation.
• Automobile industry which was led by VW accounted for 20% of German jobs and 3% of their GDP.
• Headquartered location issued freezes and halted all infrastructure projects amidst the scandal.
• In June of 2016, VW agreed to a $14.7 billion settlement in the emissions scandal.
• Of the total settlements estimated to provide $10 million to fund buybacks, $2.7 Billion to assist in EPA environmental clean-up, and $2 Billion to focus programs on cleaner vehicles.

Examine the Clean Air Act's goals, amendments, and the concept of 'attainment'. Explore the Volkswagen scandal, focusing on the use of defeat devices and the resulting $14.7 billion settlement. Consider EPA enforcement weaknesses and the call for road emissions tests.