Case Study

Volkswagen's "Dieselgate" Nightmare

In November 2015, VW faced even more bad news.It was revealed that some three-liter, six-cylinder engines in cars produced by Audi, one of Volkswagen AG s luxury brands, also contained defeat devices.Audi is the world s number 2 premium auto brand, behind BMW.Two Audi engineers who were suspected of designing the engine software were suspended.In the United States, the EPA began developing enforcement options.

With VW in crisis mode, its public relations team created and implemented a series of communication tactics and strategies designed to restore consumer trust.In the United States, the company bought full-page ads in national newspapers with the headline We re working to make things right.The ads announced that the company was offering affected owners a goodwill package consisting of a $500 prepaid Visa Card, a $500 Volkswagen Dealership Card, and free roadside assistance for three years.Owners were also directed to a Web site, vwdieselinfo.com, for more information.Michael Horn, president and CEO of the Volkswagen Group of America, signed the letter at the bottom of the ad.

As the investigation expanded, some industry observers were convinced that VW s problem involved more than a handful of engineers.According to this view, the crisis was attributed to VW s insular, engineering-based corporate culture and potentially involved hundreds of people

In Europe, partial blame was directed at regulators at both the national and EU levels.The auto industry is one of Europe s biggest employers and has a powerful lobbying presence in Brussels (home of the EU headquarters) and elsewhere.The industry had successfully pushed for laboratory-based emissions tests that yielded more positive results than tests under real-world driving conditions did.Indeed, the European Union itself was pressuring automakers to produce cleaner cars;new emissions limits were established in 2007 and entered into force in 2014.Many believed that advanced diesel technology Exhibit 13-12 Source: Jeremy Banx/Banx Cartoons.represented a promising solution.Even so, it was alleged that regulatory officials had known for years that NOx levels under actual driving conditions exceeded the legal limits.

The Fix Is In

VW engineers created inexpensive software and hardware updates that fixed the emissions issue for the 9 million affected cars in Europe. Due to differences in emissions standards, however, a separate solution was required for the 500,000 affected cars in United States. In January 2016, regulatory officials in California rejected a proposed fix on the grounds it was vague and inadequate. The regulators were particularly interested in the effect of any proposed fix on automotive performance and safety. Meanwhile, U.S. sales of some of Volkswagen s diesel models were suspended because a fix had not been approved. In the end, VW was forced to buy back 85 percent of the affected diesel vehicles purchased by U.S. drivers. Some drivers who qualified for free repairs and updates were offered payouts ranging from about $5,000 to nearly $10,000.

Mller, the new Volkswagen CEO, took a team to Washington, D.C., to meet with Gina McCarthy, the EPA s chief administrator. McCarthy told Mller that her agency agreed with the findings in California. For his part, Mller said his goal was to rekindle Americans love for the Volkswagen brand and regain their trust. Meanwhile, a Volkswagen team visiting the Detroit Auto Show offered apologies for misleading American consumers and regulators.

VW Motors On

Chance played an important role in helping VW rebound from the crisis. A previous scandal involving BP and the lawsuits resulting from the Deepwater Horizon oil drilling platform tragedy had resulted in a streamlined process for consolidating claims coming from the federalstate, and consumer levels.Meanwhile, the attention of the media and the general public shifted to a new hot-button topic: the 2016 presidential campaign of Donald Trump.

Even as Volkswagen spends billions of dollars on reparations for the scandal (the final tab amounts to nearly $15 billion), it is also investing heavily on new technology.In 2016, Volkswagen launched a new division, Moia, marking the company s entry into ride-sharing and related mobility services.Volkswagen also acquired PayByPhone, a firm based in Canada that processes mobile payments for parking spaces.

As is true with most automakers, VW is investing heavily in nextgeneration vehicles that do not have internal combustion engines gas or diesel. This was partly in response to the scandal, and partly in response to Tesla chief Elon Musk s vow that his company s annual production will reach 1 million electric cars by 2020. In addition, industry changes are being driven by recent announcements that the United Kingdom, France, and the Netherlands will ban the sale of conventional vehicles starting in 2030

With sales of VW s diesel vehicles declining in the wake of the scandal, Mller announced a Vision 2025 plan to significantly cut VW s environmental impact. The CEO pledged that, by 2030, VW would offer 300 electric vehicle (EV) models across its 12 brands. The EV team took over space in the Wolfsburg plant that had been occupied by engineers for Phaeton, the first super-luxury sedan to bear the VW nameplate. Developed at a cost of $700 million, the Phaeton boasted the world s finest automotive air conditioning system and carried a price tag of more than $100,000. Mller shut down production of the vehicle.

With sales of VW s diesel vehicles declining in the wake of the scandal, Mller announced a Vision 2025 plan to significantly cut VW s environmental impact.The CEO pledged that, by 2030, VW would offer 300 electric vehicle (EV) models across its 12 brands.The EV team took over space in the Wolfsburg plant that had been occupied by engineers for Phaeton, the first super-luxury sedan to bear the VW nameplate.Developed at a cost of $700 million, the Phaeton boasted the world s finest automotive air conditioning system and carried a price tag of more than $100,000.Mller shut down production of the vehicle.lithium ion EV batteries. And one more thing: Because the EV future is still a few years away, VW must still find a way to persuade consumers to keep buying its diesel cars.

A New CEO Takes Charge

In spring 2018, the diesel cheating scandal at Volkswagen continued to make news. In connection with the ongoing investigation, German police raided the offices of senior executives at luxury car maker Porsche. Volkswagen owns Porsche; allegedly, an internal investigation at Porsche revealed that some diesel engines sourced from sister company Audi contained defeat software, but the executives had failed to take action in removing the software

In other news, Volkswagen board hired a new CEO. Herbert Diess said that he would speed up the pace of corporate reforms that were initiated by his predecessor Matthias Mller. It was also anticipated that Diess would move ahead with a separate stock market listing of Volkswagen s heavy-truck unit, a restructuring that was designed to appeal to investors.

Discussion Questions

13-7. Assess VW's response to the Dieselgate scandal in terms of the effectiveness of its marketing communications.

13-8. Some VW diesel owners were reluctant to get the emissionscontrol updates because they were satisfied with their cars' performance. Is it ethical for car owners to continue driving their cars even though they know the vehicles are emitting high levels of pollutants?

13-9. Do you think VW will be able to transform itself into a leader in electric vehicles? Or does Tesla have an insurmountable first-mover advantage?