The Volkswagen 2015 'Dieselgate' Scandal and its Aftermath

Green Credentials for Diesel Engines?

In the decade leading up to 2015, diesel-engine cars seemed an obvious choice for budget conscious motorists who cared about the environment. Unlike petrol-engine cars, dieselengine vehicles are naturally low in tail-pipe emissions of the green-house gas CO2. These engines also enjoy 26% greater fuel economy than petrol-engine cars . To help meet their Kyoto (1997) obligations to reduce green-house gas emissions, European countries pushed a 'go-diesel' initiative in the mid-1990s, offering tax breaks for diesel fleet-vehicles, and lower excise on diesel fuel . By 2015, around 40% of all European cars were diesels . Unfortunately, although diesel was low in CO2 it was higher in other, potentially harmful emissions, including toxic particles contributing to smog, plus nitric oxide and nitrogen dioxide (collectively known as nitrogen oxides or NOX). NOX has been linked to a series of health issues including respiratory diseases such as emphysema and bronchitis, premature deaths, and cancer. It had been suspected for some time, both in Europe and in the USA, that diesel vehicles were emitting far more NOX than permitted under vehicle emissions standards. These suspicions came to a head when a serious corporate scandal broke late in 2015. On September 18, the American Environmental Protection Agency (EPA) issued a notice of violation (NoV) of the Clean Air Act to the Volkswagen group of car companies. VW was accused of importing diesel vehicles that emitted 10 to 40 times the levels of emissions permitted under US law .

VW goes 'green' with diesel

With twelve different car brands including Volkswagen, Audi, Seat and Skoda, and annual revenue in 2014 of 202.4 billion EUR, VW was the largest auto manufacturer in Europe, and German's largest company (Verschoor, 2016). In line with other European carmakers, VW had invested heavily in diesel-engine models, and in bringing such vehicles to the market. In December 2007 VW set an ambitious goal to become the world's largest car company by 2018. VW briefly overtook Toyota car sales in the first half of 2015 . When aggressively targeting the US market as part of 'Strategy 2018', VW made the decision to go with its existing diesel car technology, rather than competing with Toyota in the hybrid car market (Jung & Park 2017, p. 129). This proved a costly decision for VW.

Causes of the Scandal and the 'defeat device'

In 2005, VW began designing a new EA 189 diesel engine for the North American market. Their 'Clean TDI' technology would be marketed as maximizing fuel economy and power whilst minimizing emissions (Troop & Ressler 2016, p. 15; Verschoor, 2016). However, VW engineers hit a serious problem early in the design process. The EA 189 engine could not 2 provide both key marketing requirements for the North American market (low emissions and good fuel economy) at the same time. To make it work efficiently, the NOX trap in the car exhaust required unspent fuel to enter the exhaust. Keeping emissions low (as required under the stringent US emissions standards) meant compromising on the fuel economy that American green consumers demanded. Faced with failure in a company with an inflexible senior management structure, headed by an autocratic CEO who refused to listen to bad news reports (Trope & Ressler, 2016; Jung & Park, 2017), engineers resorted to deception. Engineers installed into each car a 'defeat device', or a software program that could detect when the car was stationary and undergoing tests. During testing, the car would emit low emissions meeting the stringent North American standards. The moment testing ended, VW cars would return to ordinary fuel economy, and emit anything from 5 to 40 times the US legal limits for emissions (Schiermeier, 2015). Early in 2014, an investigation of American diesel cars revealed that on-road, VW diesels seriously exceeded the emissions standards set by the Environmental Protection Agency (EPA). Asked to explain the gap between test and on-road performance, VW stalled for 15 months. VW only revealed the defeat device deception in late 2015 when regulators threatened to bar VW's 2016 diesels from the market (Anon., 2015; Trope & Ressler, 2016).

Who knew about the deception?

In testimony before a Congressional sub-committee in October 2015, the CEO of VW America attributed the deception to the "work of a couple of software engineers' (Crete 2016, p. 27). The notion that VW's deception was unknown to senior management was difficult to believe, since the use of the defeat device represented anything but a one-off action, or a momentary lapse in judgement. Worldwide, the defeat device was installed across a total of 30 models of car and 11 million vehicles in the seven years between 2008 and 2015. To secure import of vehicles, a Certificate of Conformity (CoC) was lodged for each model brought to the US market and for each year of import. Each signed CoC confirmed that there was no defeat device present in that car model. Furthermore, Trope & Ressler (2016, p.21) speculate that engineers would have repeated the same painstaking steps: design, verification and testing of software details, for each of the 30 car models involved. In the two years following the scandal, at least 40 persons who were aware of the scheme had been identified by prosecutors in both the US and Germany (Parloff, 2018). Economic Costs of the Dieselgate scandal

In the immediate aftermath of the scandal, shares in VW lost about one third of their face value (Anon., 2015). In the third quarter of 2015, VW announced its first operating loss in 15 years (Jung & Park, 2017). Between 2015 and 2018, VW has paid out 27 billion EUR covering fines, penalties, remedies for excessive car emissions, plus settling lawsuits with the owners of the 580,000 substandard diesels it sold in the USA (Parloff, 2018). The company CFO budgeted a further 8.5 billion EUR to cover further costs across 2018 - 2020 (Seeking Alpha, 2018). Nunes and Park (2016, p.292) point to the existence of the 'inertial effect': the tendency of market scandal events to spread throughout an industry and its supply chain. To this end, they explored an 11-day window on the US stock market, taking in 5 days either side of the original scandal, to see the likely flow-through effects of the scandal for related companies. Nunes and Park discovered that for American firms in the VW supply chain and firms that might be considered for possible mergers or take-overs by VW, there was an immediate share-value loss of USD $6.44 billion. 3 As well as hurting the brand image of VW, the scandal posed a threat to the 'made in Germany' label as a guarantor of engineering and manufacturing excellence (Anon. 2015; Nunes & Park 2016, p. 289). Given the size of the VW company, the scandal posed a threat to Germany's export earnings (Anon., 2015). Competitors of VW would have suffered competitive disadvantage in the markets where they competed with the VW 'Clean TCI' technology. In the minds of many, the Dieselgate scandal called into question the long-term viability of diesel car technology (Anon. 2015, Carvalho, 2016), with at least short- to medium-term effects upon the economic sustainability of companies already heavily invested in such technology.

Social costs of the Dieselgate scandal for:

Employees: In 2015, one in seven of all German workers was employed, directly or indirectly, in the automobile industry. Local jobs were certainly at risk in the city of Wolfsberg, home to the VW headquarters and the capital of the German auto industry, with 72,000 autoindustry jobs concentrated in the city. The mayor of Wolfsberg cited a temporary hiring freeze by VW, plus decreased tax revenue (Jung & Park 2017, p. 132) as consequences of the scandal.

Customers: The dieselgate scandal had a serious impact upon would-be customers of VW. American car owners were deceived into believing that they were buying powerful cars with good fuel economy, that were also good for the environment. In the immediate aftermath of the scandal, up to half a million American car owners were left with cars that were safe to drive, but with reduced resale value. They also faced a vehicle recall that would change the internal software of their cars, to make the NOx exhaust traps maximally efficient in regular driving conditions (The Verge, 2015), removing the benefits of fuel economy.

Local Communities: Excessive diesel emissions could lead to ill-health, especially in urban centres where there was a concentration of such vehicles.

questions:

1. Create a list of 'winners' and 'losers' in the 'dieselgate' scandal.

2. Do you believe that VW was achieving environmental sustainability when it promoted diesel cars in the US market? Briefly explain your answer.

3. Considering the ultimate costs borne by the VW group as a consequence of the scandal, would you say that VW's behavior eventually proved economically sustainable?

4. Given the fall-out of the scandal for the VW staff in Germany and the US, would you say that the actions of VW throughout 'dieselgate' were socially sustainable? Which social groups would you say were most negatively impacted by this scandal?