Mindanao State University – Iligan Institute of Technology

College of Business Administration and Accountancy

Hard NOx: The Volkswagen Emissions Scandal

A Case Analysis

Cuizon, Sheena V.
Jancilan, Frenz Gen T.
Leopoldo, Jeric A.
Pagay, Jean Glorydelle O.
Solatorio, Mariale Mich C.

Social Responsibility & Good Governance

MGT 19

Mr. Anton Cabatingan Jr., MM

February 27, 2019

 HARD NOX: THE VOLKSWAGEN EMISSIONS SCANDAL

I. Perspective Held by the Group

In order to fully grasp what transpired in the Volkswagen Emission Scandal, our group
examined the standpoint of those individuals involved in the case. First is the perspective of the
company which was headed by Martin Winterkorn. The company had an ambitious goal to be the
world’s preeminent car manufacturer in the world and this goal pressured its employees to increase
sales, doing whatever it takes to make ends meet. Second is that of the NGO’s such as the International
Council on Clean Transportation and California Air Resources Board. They were making efforts in
order to have a clean transportation in America and they wanted to make sure that Volkswagen is
following the regulations set for gas emissions of motor vehicles. Third is the standpoint of the
government. The American government is stricter in implementing its regulations against gas
emissions than the European government. Both of them has similar rules regarding defeat devices
and gas emissions but the European government is lax in executing them. Lastly is the perspective of
the customers. American customers were disappointed with the deceit made by Volkswagen because
they were never inclined in using diesel in America but VW’s TDI system changed their minds about
diesel.

Our group has chosen the viewpoint of the company because we want to scrutinize and assess
where Volkswagen failed in its ethical decision making as they were the root cause of the scandal. We
could further understand the factors that may have been influenced VW’s actions that caused
detrimental consequences to many people.

II. Statement of the Problem

Main Problem:

Volkswagen, in its corporate culture of pursuing world dominance in the car industry, made
the unethical decision of installing defeat devices in their manufactured TDI diesel engine cars to
cheat the emission regulatory testing set by the U.S. government.
Sub-problem:

1. High emission of nitrous dioxide in the atmosphere that caused asthma, cardiac problems
and premature deaths.
2. Customers are losing their trust to the Volkswagen’s brand reputation and has caused
abrupt loss of sales.

III. Objectives
This case study analysis aims:

1. To provide the best alternative course of action that may be taken by the management:
a. to keep Volkswagen in business after the hard NOx scandal;
b. to be compliant to imposed environmental laws and regulations;
 c. to restore customer’s trust to Volkswagen and the brand’s prestige; and

2. To provide an insight of the corresponding consequences should they take the alternative
course of action provided.

IV. Analysis of Relevant Case Facts

PESTLE Framework
The Pestle framework analyses the external forces existing in an organization. It is a
management tool used by business experts to analyze macro-environmental (external marketing
environment) factors that have an impact on the organization. With this, the team decided to examine
the external factors involved in the Volkswagen scandal using the PESTLE framework.

Political

As presented in the film, German government seems to care more about protecting their
national car industry than human beings. This lenience of the government tolerated car companies
like Volkswagen to manufacture cars with pollutant emission beyond allowed limits.
Volkswagen tried to get away in the U.S. the same way they did in Europe. Apparently, the
States approached this environmental issue far different from the German government and have set
and enforced strict national policies. Specifically, during the presidency of George W. Bush, he
directed the Environmental Protection Agency (EPA) and the Department of Transportation, Energy
and Agriculture to take steps in regulating greenhouse gas emissions from vehicles.
But this was bound to change during the Trump administration. The United States has
withdrawn from the Paris Climate Accord and declared that corporate profits be given more
significance than the environment. The Trump administration has also threatened to undermine
CARB because of its strict air-pollution controls.
Economic

Economic factors constitute to the major reasons that drove Volkswagen to committing this
ethical misconduct. Despite its successful ascent in the car manufacturing industry at the beginning,
around 1993, its sales in America dropped to roughly 38,000 a year in a market of 16-17 million cars.
This number is considered ridiculous. There was a call for them to innovate in order to respond to
this demand.

Social
Consumers also started to prefer cheaper cars during this time. Aside from the need to
comply with the laws and regulations, individuals and other groups were growing more concerned
as to clean transportation.

Technological
The innovation in the car industry has gone beyond the idea of manufacturing cars alone.
Diesel-engine cars were gaining attention and Volkswagen seemed to have found the technology to
make diesel cars environment-friendly. Ferdinand Piëch was able to invent a turbocharged direct
injection (TDI) machine in smaller diesel engines. This led to Volkswagen’s cheaper cars with great
mileage, higher efficiency, and clean engine emission.
Apparently, this technology of creating NOx traps which caught and burned nitrogen dioxide
before it left the tailpipe is expensive and needed to be replaced every few thousand miles. This
technology is expensive in itself and passes on the same burden to the price of cars.
Despite being able to innovate clean diesel cars, Volkswagen did not stop there. They wanted
to do the easy way and innovated a defeat device. James Liang of Volkswagen, a German engineer,
was the one who helped develop this device which was designed to defeat the results in a lab
emission test. When this was known firsthand by environmental NGOs, Volkswagen admitted and
said it would change their engines, but what they did was further its cheat. Their engineers upgraded
their software so that the pollution controls were able to recognize the test cycle, but when on the
road, were cut off.
Legal
There are existing laws and regulations implemented both in the States and in Europe, but
what differs is their degree of enforcement and tolerance. Apparently, the Clean Air Act of the States
is stricter than that of Europe’s. The laws were not absolute as to eliminating NOx emission by
vehicles, but were meant only to control and minimize it into acceptable levels. Even the emission
tests were not absolute. Emission laboratories even tolerated deviations up to 40 times but
Volkswagen, in many times, exhibited deviations around 80 times.
Environmental

Volkswagen’s diesel cars ignited a huge environmental issue of NOx emission. It damages the
human lungs and is a huge cause of induced asthma, cardiac problem, and cancer. Elements of NOx
mix with ozone chemically change into smog that is a huge factor of acid rain. In Germany, it causes
around 10,000 premature deaths per year and is said to be more than the losses due to traffic
accidents.
Mckinsey 7S Model

Mckinsey 7S Model helps business organizations assess the company’s design through seven
elements: strategy, systems, structure, shared values, styles, skills, and staff. The team employs
Mckinsey 7s model to study the internal environment and the main aspects that revolve around the
issue.

Strategy, system, and structure are placed under the Hard S’s elements whereas styles, skills,
staff, and shared values composed the Soft S’s elements of the model. According to strategic
managers, the Hard S’s elements are feasible, evident, and are easily identifiable within the
organization contrary to the soft factors which are deemed to be hardly feasible yet changes in these
elements might affect the structure and strategy of the company. Taking these into account, the group
decided to apply the Mckinsey 7S Model by discussing first the Hard S’s elements which are then
followed by the Soft S’s elements.

Strategy
To maintain competitive advantage and ensure global dominance, Volkswagen spearheaded
“Strategy 2018” which aimed to make the company the biggest preeminent car manufacturer in the
world by 2018. Ferdinand Piech and Dr. Martin Winterkorn were the key persons behind the project.
Determined to conquer the American market and increase sales, Volkswagen introduced
Turbocharged Direct Injection (TDI) cars that were deemed environment friendly, low cost, and had
very good mileage over other brands. With its green strategy and impressive goodwill, Volkswagen
was able to boost its profitability and eventually achieved its objective to become the largest car
manufacturer in the world.
Structure

Based on the film, it is evident that Volkswagen practiced a very centralized corporate
structure. It is said in the film that at Volkswagen if you want to get a pen, you need three signatures.
Due to this very centralized circle of trust, employees at Volkswagen were not made aware of the
installation of defeat devices into their cars, they were not made aware that they are already selling
deadly machines in the market. Simply put, employees don’t get to participate in the decision-making
process instead only the top management and other direct key entities were involved in the process.
System

Part of the Volkswagen main operations includes installation of specific software that is
attached into their cars to reduce nitrogen dioxide emissions. However, these diesel-fueled cars were
actually reengineered to bypass US emission standards.

Volkswagen Group of America deceived CARB by telling that it would update its software to
more closely comply with regulatory limits but in fact, it was updating its software to further its cheat.
Consequently, the TDI have been producing nitrogen dioxide emission 40 times more than the lab
test had shown.

Style
The organizational culture present in the Volkswagen influenced greatly the leadership style
of the management. Since the upper management was pressured to perform well, leaders had
become way too demanding, were very authoritarian, and worse, less inspiring. With such leadership
style, employees were unable to engage themselves in the organizational processes and were
pressured to deliver.
Shared Values

Global superiority has been the prevalent core value of the Volkswagen Group of America.
The company pervades a culture that prohibits failure and seeks profits rather than delivering value
to its stakeholders. Its goal to become the largest car manufacturing company stifled an innovative
culture to permeate into the organization and had led them to commit fraud.
Skills

In order to compete with the car companies and their goal to penetrate the US market,
Volkswagen has employed skilled workers who can produce a car with great mileage at a lower price.
Because also of the skills of its employees, they were able to come up with a program that enables
TDI diesel engines to only activate their emissions control during regulatory testing but then emit
more NOx which exceeds the US standards.

Staff
The company is considered to be the world’s largest employer in the private sector.
Volkswagen Germany employs over 60,000 workers until now. Volkswagen’s human resources
employed the “empower to transform” strategy where they set innovative trends in their workforce.
But some of this empowerment strategy is not reflected in the movie because most of the employees
are men and the company lacks gender and ethnic diversity which would have helped the
management because of differing valuable perspectives resulting to better decisions to prevent the
scandal.
 V. Statement of Strategic and Alternative Course of Actions

1. Eliminate the sale of diesel cars and re-strategize the company objectives to have a better
corporate social responsibility practices.

2. Continue their diesel car production but be compliant to the laws and regulations for gas
emissions.

VI. Decision Analysis

1. Eliminate the sale of diesel cars and re-strategize the company objectives to have a better
corporate social responsibility practices.

Advantages:

 Rebrand the company’s image to its customers.

As shown in the film, their pursuance to diesel car innovation has led them to downfall.
Eliminating the same will help them re-brand their reputation and start anew to their car
manufacturing business. This will help them earn back the trust they have lost and position a
new image to their customers.

 Avoid incremental cost in maintaining their diesel-car line.

As TDI requires sophisticated parts to function compliantly to regulatory limits, this will
continually entail them cost. This cost will also be felt by its customers because of the sudden
and excessive markup. Eliminating diesel cars will help them reduce cost and subsequently
appease their customers with lower car prices.
Disadvantages:

 Lose their market share in countries tolerant to the issue on NOx emissions.

Addressing this issue does not only concern the American or European market. Volkswagen’s
market share also extends to countries that are less stringent to NOx pollution policies.
Eliminating the diesel-car line, in its entirety, will also hurt their revenue stream.

 Innovate new car technologies.

Volkswagen will have to innovate and focus more on research and development activities to
come up with new technology to offset the loss that they may incur should they drop their
diesel cars. Accordingly, this will consume time, human capital and other resources for this
to be realized.
2. Continue their diesel car production but be compliant to the laws and regulations for gas
emissions.
Advantages:

 Retain their technology invested in producing diesel cars and make use of them.

Ferdinand Piech have come a long way to come up with the idea of diesel-engine cars. Also,
Volkswagen have already invested capital, knowledge and time into furthering this
development. Undeniably, this innovation is not entirely bad. The company was just not
faithfully compliant to the U.S. emission standards. Should they continue manufacturing
diesel cars but strictly complying with the requirements, they will be able to maximize the
resources they already invested.

 Retain their market share in countries tolerant to the issue on NOx emissions.

It cannot be denied that there will still be diesel car users around the world that are within
Volkswagen’s market reach. Continuing the production of such retains their portion of the
global market share and revenue stream.
Disadvantages:

 Customers may have lost entirely their trust as to the diesel car production of Volkswagen.

Despite claiming to now be fully compliant to the rules and regulations, customers may have
entirely lost their trust to anything that is diesel-related from Volkswagen. They cannot
assure the level of acceptance that the customers are willing to give them after they have
repeatedly disappointed their customers.

 Position their products to upper-level car customers as prices will surely go up.
Incorporating the sophisticated device for NOx emission trap and maintaining it is highly
expensive. Volkswagen will have to leave their goal of being the number 1 car manufacturing
company because it will apparently lose a huge portion of its market due to increased prices.

To further examine the case, the group applied the three major ethical frameworks, namely:
utilitarianism, principle-based ethics, and virtue ethics. The group made us of the previously
mentioned frameworks to assess the alternative course of actions proposed by the group.

Utilitarianism

Based on the utilitarian ethical framework, eliminating the diesel line provides better
consequences for the greatest number of people directly or indirectly affected. Unlike the second
alternative of continuing the production which only benefits people who can afford and will
continuously patronize expensive diesel cars, it would ensure less NOx pollution and a cleaner
environment that would benefit not just today’s generation but the generations to come.
Principle-based Framework

Either alternatives will lead to compliance with the environmental laws and regulations
imposed by the government.

Virtue Ethics
The impact of both alternatives will be detrimental to Volkswagen’s revenue stream and
market share. It will have to bargain its goal to be the world’s leading car manufacturer.

VII. Conclusion

Eliminating the sale of diesel cars is the best course of action available to Volkswagen. Despite
having invested too much in the diesel technology, too much damage has been done to the
customers, legislators, and other stakeholders. The intensity of the repercussions the scandal entails
is beyond what they can manage should they continue their diesel car manufacture.
Perhaps sustaining this product line indefinitely would cost Volkswagen more if they drop
the line today. Sophisticated parts, such as NOx traps, are way too expensive and are only temporarily
effective. Moreover, it benefits a greater number of stakeholders that are and may be affected in the
future.

VIII. Recommendations

To fully implement the elimination of their diesel cars in the market, Volkswagen’s current
response of buying back subpar TDI engine cars should be continued until all cars sold are retrieved.
This does not only satisfy the required actions imposed by the government following the scandal, but
also shows their remorse to the customers on what they have done. These cars may be used for
reconstruction of new models that are efficient and conscientiously compliant to rules and
regulations.

Furthermore, the company should invest more in research and development to come up with
new innovation that is at par or even beyond what car manufacturers can offer today. In this way,
Volkswagen may be able to rebrand itself to its original goal of being the world’s leading car
manufacturer.

IX. Reference

Aguilar, F. (1967). Scanning the business environment. New York, Macmillan.

Gibney, A. (2018). Dirty Money Hard NOx. U.S.A.: Jigsaw Productions.

Peters, T. and Waterman Jr., R. (1982). In Search for Excellence. New York, NY, U.S.A.:
HarperTrade.