MGT 316T Wk 4 – Apply: Management Case Studies

How Did Decision Making Contribute to Volkswagen’s Emissions Cheating Scandal?

Apply the knowledge of management presented in this chapter to the following case. The goal of this case analysis is to enable you to understand what happened at Volkswagen by applying theory.

Read the case below and answer the questions that follow.

The top two global automobile manufacturers in 2017 were Volkswagen (10.41 million units sold) and Toyota (10.16 million units sold).193 Interestingly, both have been involved in scandals involving millions of automobiles during the past decade.

Preliminary investigations suggest that a purposeful effort to deceive was the root cause of the Volkswagen scandal. Let’s explore the case in more detail to determine the role of decision making, beginning with the details of the cheating.

The Process of Cheating

“Volkswagen installed emissions software on more than a half-million diesel cars in the U.S…. that allows them to sense the unique parameters of an emission drive cycle set by the Environmental Protection Agency.” These “so-called ‘defeat devices’ detect steering, throttle, and other inputs used in the test to switch between two distinct operating modes.”

“In the test mode, the cars are fully compliant with all federal emissions levels. But when driving normally, the computer switches to a separate model—significantly changing the fuel pressure, injection timing, exhaust-gas recirculation, and in models with AdBlue, the amount of urea fluid [cat pee] sprayed into the exhaust. While this mode likely delivers higher mileage and power, it also permits heavier nitrogen-oxide emissions (NOx)—a smog-forming pollutant linked to lung cancer—that are up to 40 times higher than the federal limit.”194

It appears that Volkswagen used defeat devices because it could not satisfy the tough U.S. emission standards while trying to grow market share in the United States. According to The Wall Street Journal, the origins of the “cheat” go back to 2012, when “EPA officials and California regulators were in touch with European counterparts about high emissions in diesel vehicles. California regulators tested Volkswagen cars and continually found them to pollute more on the road than in the lab.” Volkswagen was informed about these irregularities at the time and executives concluded that they were the result of “technical glitches.”

Three years later, then CEO Winterkorn “acknowledged ‘misconduct’ on Volkswagen’s part while pledging ‘Everything will be put on the table at this time, as quickly, thoroughly and transparently as possible.’”195

The Role of Vision, Strategy, and Goals

Volkswagen had pursued a goal of being the largest automobile manufacturer by 2018, selling 800,000 vehicles in the United States alone. To achieve this goal, VW made a strategic decision to dominate the diesel market. Diesels were a niche market in the United States in the mid-2000s, but they represented more than 50% of new car registrations in the European Union. The company thought diesel was the way to grow revenue because “They were cheaper than hybrids and packed more muscle under the hood yet still often got more than 40 miles to the gallon.”196

To grow the diesel market, VW needed to invent a way to deal with the sooty exhaust produced by diesel engines. The company knew it had to meet tougher emission standards in the United States than in Europe.

The company hired Wolfgang Bernhard to solve this problem, and his team came up with a solution that appeared very promising. Bernhard found a system created by Daimler called BlueTec. “It sprayed urea [cat pee] into the exhaust stream to neutralize harmful nitrogen oxides. . . . To make it work, cars need to be fitted with an extra pump and a tank of what is essentially cat pee.” Unfortunately, Bernhard had a falling out with CEO Winterkorn and was fired. Wolfgang Hatz took over and quickly dropped BlueTec because of the classic case of “not-invented here,” according to Bloomberg Businessweek. He replaced BlueTec with a system that was supposed to trap harmful emissions in the tailpipe. We now know that Hatz’s decisions were ineffective at satisfying U.S. emission standards.197

Given the scandal, Volkswagen has changed its overall goal to achieve “qualitative growth” over sheer volume. Former CEO Matthias Müller said that “many people outside of Volkswagen, but also some of us, did not understand that our Strategy 2018 is about much more than production numbers. A lot of things were subordinated to the desire to be ‘Faster, Higher, Larger,’ especially return on sales.”198

Some VW employees agreed with Müller’s conclusions. They believed that the “cheat” occurred because Müller’s predecessor, former CEO Martin Winterkorn, established goals that were too difficult to achieve. German newspaper Bild am Sonntag reported that “several engineers said that they had overinflated tyres and mixed motor oil with diesel to make the company’s cars use less fuel in tests, a deception that began in 2013 and carried on until the spring of this year [2015].”199

Other Contributors to the Problem

VW sought employees’ input to determine the causes of the “cheat.” A memo was sent by Herbert Diess, head of VW’s brand division, to all employees, asking them to come forward with any information related to the emissions scandal. According to the memo, “Employees have until Nov 30 [2015] to provide ‘complete and truthful’ information about events as part of the internal investigation. . . . Those who come forward before the deadline ‘have nothing to fear from the company in the way of repercussions on the job such as being fired or held liable for damages.’”200 This only applied to people covered by collective bargaining contracts.

For all others, VW reserved “the right to transfer employees or change their responsibilities if they incriminate themselves. The company also warned that it has no influence over a decision by German prosecutors to seek criminal charges against any employees who confess to being part of the deception.”201

The organizational culture and structure are also seen as contributing to the problem. Former CEO Müller believed that decision making was too centralized at the top, where a triumvirate of forces—“heirs to original Beetle designer Ferdinand Porsche, the German state of Lower Saxony, where most of Volkswagen’s German factories are located, and labor representatives that control half the seats on the company’s supervisory board”—have too much power. He also perceived that “the top-down power structure under Mr. Winterkorn had begun to slow down the business, most noticeably in the United States. . . . Müller pressed for far-reaching decentralization of the company and the greatest possible autonomy for the brands.”202

What’s Been Happening Since the Scandal Came to Light?

A fix has been found for diesel engines used in Europe. Repairs started in 2016.203 In contrast, VW’s proposed fix in the United States has been deemed “unacceptable because they lacked detail and inadequately addressed concerns about vehicle performance, emissions, and safety.”204

Volkswagen agreed to plead guilty to three criminal felony counts in January 2017 and pay a $2.8 billion criminal penalty as a result of the company’s long-running scheme. The company also agreed to pay $1.5 billion in separate civil resolutions of environmental, customs and financial claims.205 Former CEO Winterkorn was separately charged in May 2018 with conspiracy and wire fraud. He is the ninth individual against whom U.S. criminal authorities have announced charges in connection with the scheme.206