Volkswagen had come a long way. In 1934, Hitler challenged German industry to come up with an inexpensive vehicle for ordinary families––“a People’s Car.” Ferdinand Porsche’s design got the nod, and construction began on a factory to produce Beetles in modern-day Wolfsburg, Germany––still the corporate headquarters. By 2015, VW was the world’s second largest automaker, producing 10.2 million cars annually. Not content with second, CEO Martin Winterkorn announced plans to pass Toyota and lead the industry “economically and ecologically” by 2018. Then, on September 18, 2015, Volkswagen’s fortunes changed. The U.S. Environmental Protection Agency (EPA) charged the company with deliberately programming diesel engines on eight passenger models to fool emissions tests. Allegedly, “defeat devices” enabled the cars to meet government standards during testing, despite spewing up to 40 times permissible levels of nitrogen-oxide pollutants in ordinary driving. VW later conceded that roughly 11 million cars worldwide contained such devices. Volkswagen paid a big price immediately. Within days, the EPA ordered VW to recall nearly 500,000 diesel cars, and the company suspended U.S. sales of all 2015 and 2016 models alleged to have defeat devices. Within a week, VW stock plummeted 33%, the yield on its outstanding five-year debt doubled, and Winterkorn resigned. Within a month, Standard & Poor’s downgraded the company’s short- and long-term debt from A to A- and indicated further downgrades were possible. By November, it was clear the scandal wasn’t going away. On top of the cost of recalls, Volkswagen faced staggering government fines and civil settlements. Even worse, the scandal was damaging the brand––sales of VW-group cars worldwide fell 5.3% in October 2015. The capital budget took the first hit. Net present value was under assault from two directions––a higher cost of capital and lower expected cash flows. With lower credit ratings, VW would now pay more for debt financing. Declining sales meant lower expected cash flows from R&D and new factories. Accordingly, VW forgot about burying Toyota and cut the capital budget roughly 8%––the first reduction since global auto sales crashed during the Great Recession. In March 2017, Volkswagen pled guilty in U.S. court to conspiracy and obstruction of justice. The record fine pushed the cost of the emissions scandal in the U.S. alone to roughly 1.3 times the entire company’s net income for 2014. For its ethical transgressions, VW saw not only current earnings but also growth opportunities squashed like a bug.

a. What role did VW’s desire to be the world’s largest automaker play in the emissions scandal?

b. What role did insider succession play in the scandal?