Case Study Volkswagen Disaster 2015 PDF

Volkswagen
Engineering a Disaster
This document is provided as a convenience to licensed users of the raw case Volkswagen.
Resources described below are an integral part of the case study. If you only read this text
summary, you should NOT consider yourself prepared for class.
Overview Introduction
http://vol12.cases.som.yale.edu/volkswagen/overview/introduction
In 2015, the United States Environmental Protection Agency (EPA)

Resources discovered that German automaker Volkswagen A.G. (VW) used
software to cheat air emissions testing in about 590,000 "clean diesel"
vehicles under the Volkswagen, Audi, and Porsche nameplates in the
Resignation Letter United States. All told, VW included the software defeat switch in
The press release issues by VW in about 11 million diesel cars worldwide. Some assessed that up to
which Martin Winterkorn 1,000 employees in the organization had known about the fraud and
announces his resignation in kept silent for over a decade.
September 2015.
Once the beacon of the German auto industry, enjoying a reputation for
reliable products, innovative engineering, and sustainability, VW risked
EPA Notice of Violation losing the trust of its customers, and billions of dollars in fines. On
The notice of violation sent by the
September 18, 2015, the EPA officially filed a notice of violation,
EPA to VW's U.S. based legal referring the matter to the U.S. Department of Justice for further
counsel in September 2015. enforcement actions, including possible criminal prosecution. European
enforcement agencies quickly followed suit as the news of the scandal
shook the VW group and the entire European auto industry.
NPR Interview with VW On Wednesday September 23, 2015, in an attempt to control the
CEO fallout, VW CEO Martin Winterkorn resigned, stating, "I am shocked
Mueller said Volkswagen did not
lie to U.S. regulators about
by the events of the past few days. Above all, I am stunned that
emissions problems with its diesel misconduct on such a scale was possible in the Volkswagen Group."
engines but chalked it up to a Nonetheless, the company sought to minimize the damage by claiming
misunderstanding of U.S. law. that the fraud was the product of rogue engineers. New CEO Matthias
Mueller denied that the fraud pointed to an ethical problem within
VW, explaining,
Volkswagen TEXT ONLY Resources described below are an integral part of the case study. Proper
preparation requires logging in and consulting the materials.
It was a technical problem. We made a fault, we had a ... not the right interpretation of the
American law. And we had some targets for our technical engineers, and they solved this problem
and reached targets with some software solutions which haven't been compatible to the American
law. That is the thing.
Some analysts saw a more systemic explanation, stemming from Volkswagen's history and governance.
Others blamed the company's culture and strategy. While still others saw the fraud as the result of
differences between European and U.S. environmental standards and goals. Most agreed that unraveling
the causes of Volkswagen's actions would add to understanding how a prominent corporation could
concoct such an elaborate fraud and might serve to help others avoid a similar fate.
Overview Timeline of the Scandal

http://vol12.cases.som.yale.edu/volkswagen/overview/timeline-scandal
2000
Resources
California Air Resources Board (CARB) and the Environmental
Protection Agency (EPA) promulgate new NOx regulations.
The Volkswagen Scandal:
We Have Been Here Before 2004
An excellent article on emissions
fraud in the auto manufacturing
Audi customers complain about an unpleasant rattle noise when cars
industry. start. Audi engineers have a solution, but it requires modifying fuel
injection, which causes cars to fail emissions testing. Audi engineers
deploy software on the auto's computer to turn off the noise
reduction technology during emissions testing. The software patch
Who Knew? cheats emissions tests on Audi 3.0-liter diesels for the European
A list of people reported to have
known about the defeat devices
market and is dubbed the "acoustic function."
prior to 2015 according to court
documents. 2005
The EPA discovers excess carbon monoxide emissions during a
routine test of VW cars. VW, the EPA, and the DOJ enter into a
How a Little Lab in West settlement agreement under which VW will pay $1.1 million in civil
Virginia Caught fines and agrees to recall 326,000 of their 1999, 2000 and 2001
Volkswagen's Big Cheat
Golfs, Jettas, and New Beetles at a cost of $26 million for failure to
A short NPR story on how VW's
defeat devices came to light.
promptly notify and correct a defective oxygen sensor. The DOJ
states that despite receiving numerous warranty claims in 1999 and
2000, VW did not report the defect to the EPA until June 2001, after
it was caught. VW commits to improving its emissions defect
investigation and reporting system to ensure future compliance.
The EPA announces stricter NOx standards for 2009.
This document is governed by the same license and copyright restrictions as “Volkswagen” Yale Case Study 18-
018. Distribution independent of the case web site is strictly prohibited. 2
2006
Daimler AG introduces technology to reduce NOx emissions from
CAFEE In-Use Emissions diesels based on SCR called 'BlueTEC' to the U.S. market. Wolfgang
Testing of Light-Duty Diesel Bernhard, head of the VW brand, champions an agreement with
Vehicles in the United
States Daimler and other automobile manufacturers to co-develop an SCR
The report prepared by the Center system for all diesels.
for Alternative Fuels, Engines &
Emissions at West Virginia Volkswagen engineers take a look at Audi's 'acoustic function'
University that provided the software defeat switch. In October, VW officials meet with CARB to
smoking gun for regulators to discuss emission control strategies, including instances in which
investigate VW.
"emission-increasing auxiliary emissions control devices" might be
legal, such as when the software is designed to run in limited, extreme
circumstances to protect the engine, and if disclosed to regulators, and
Volkswagen’s Excess if regulators determine the software is not designed primarily to cheat
Emissions Will Lead to emissions testing.
1,200 Premature Deaths in
Europe In November, a team of about 15 VW employees and management in
An article by MIT News Office R&D meet to discuss whether to include a software defeat device in
introducing the results of an Volkswagen cars. Court documents reveal that the illegality of the
updated study on the human
health consequences of the VW scheme is mentioned and that some objected. The head of R&D
scandal. warned the team to "not get caught."
Daimler Chrysler, Volkswagen, and Audi announce that they intend

to market vehicles under a BlueTEC brand name in the U.S. VW
Former CEO of Volkswagen plans market launches for 2008 using SCR technology under product
AG Charged with name AdBlue for large vehicles and with LNT technology for vehicles
Conspiracy and Wire Fraud
like Passat or smaller.
A press release for the Department
of Justice on the indictment of
VW CEO Pischetsrieder is forced out.
2007
Martin Winterkorn becomes CEO of VW.
Wolfgang Hatz, Audi's head of transmission and engines development, says about meeting Californian
emissions standards during a public demonstration that VW "can do quite a bit and we will do a bit, but
‘impossible’ we cannot do... From my point of view, the CARB is not realistic ... I see it as nearly
impossible."
Winterkorn appoints Audi engineer Ulrich Hackenberg and Wolgang Hatz to lead R&D on TDI engines
for VW. Hackenberg and Hatz are asked to develop a diesel engine that maintains the performance of
traditional gasoline engines with reduced carbon dioxide emissions and lower gas mileage, while meeting
the American NOx emission standards.
Hatz publicly supports the technology sharing deal with Daimler for SCR, but privately pushes for LNT
systems.
VW introduces the EA189 TDI engine, later used in vehicles under Volkswagen, Škoda, Seat, and Audi
brands. The engine is heralded as a technological feat and "the cleanest ever TDI engine."
VW announces that the first clean diesel to be launched in the U.S., a VW Jetta, will comply with CARB's
standards and use LNT. The first production run is scheduled for 2008.
Supporters of the SCR system, who think it is the only viable system to meet emissions standards, are
pitted against others, who oppose the cost. The deal with Daimler for technology sharing is scrapped
and VW announces that it will use its own method for controlling emissions. Bernhard, who supported
the agreement with Daimler, resigns.
The release of the Jetta is delayed because it fails emissions testing. VW still claims to be the first
automaker with a "clean diesel" in the U.S. despite Mercedes-Benz already leasing 2008 E320 BlueTEC
in California.
Someone makes the decision to install the acoustic function software defeat switch in the 2008 Jetta.
2008
Employees are told, "[y]ou will sell diesels in the U.S., and you will not fail. Do it, or I’ll find somebody
who will."
The first "Clean Diesel" VW Jetta is marketed in the U.S. with the defeat switch software, which turns on
NOx emissions control systems only when in test environment. VW Golf and Audi A3s later also enter
the U.S. market with similar software.
VW's 2009 Jetta model named "Green Car of the Year" by Green Car Journal. (The magazine rescinded
the award in 2015)
2009
Volkswagen incorporates test defeat switch software into 2009-2014 Jettas, Golfs, A3s and New Beetles
that enter the U.S. market with LNT technology.
2011
VW introduces a new generation of SCR systems in Audis Q7 and Volkswagen Touaregs. Nonetheless in
order to pass emissions tests, VW introduces defeat device software that contains a "urea dosing"
function, which increases NOx stripping during lab-testing and reduces it under normal conditions in
order to enable undersized urea tanks and long service intervals.
Volkswagen 2012 Passats are too heavy for LNT and switch to SCR technology, using the same defeat
device software.
Porsche approaches Audi about acquiring Audi's 3.0-liter V6 diesel engine for use in the Cayenne. Martin
Gruber, head of VW engine development, Carsten Schauer, Porsche's electronics development chief,
Hatz, and Hackenberg discuss the engine's features, including the test defeat software.
2013 Porsche Cayenne diesel SUVs enter the U.S. market with SCR technology and test defeat software.
2012
After a series of tests showing higher on-road emissions for both gasoline and diesel vehicles than lab tests
in Europe, the nonprofit International Council on Clean Transportation (ICCT) starts taking a closer
look at emissions testing in the U.S. It offers a $70,000 grant to the Center for Alternative Fuels, Engines
& Emissions at West Virginia University (CAFEE).
CAFEE students measure the on-road emissions of a Volkswagen 2011 Jetta, a BMW X5 3.0d, and
Volkswagen 2012 Passat. The Jetta features LNT technology while the Passat uses an SCR system. The
BMW has both.
2013
VW discontinues LNT and implements an SCR-based system for all 2015 Beetles, Golfs, Jettas, Passats,
and A3s. All still require test defeat software to comply with NOx standards.
2014
Early March
VW applies to CARB and EPA to certify 2015 model year diesel vehicles.
March 31
CAFEE presents their results during a conference in San Diego. The study shows that:
The vehicles exceeded the EPA and CARB emissions standards during on-road testing; and
The vehicles performed below the EPA and CARB emissions standard when in an indoors test-
environment.
May 15
The ICCT and CAFEE paper is published.

May 23
Winterkorn receives a letter from Frank Tuch, VW's head of quality assurance, about the ICCT and
CAFEE report stating,
A thorough explanation for the dramatic increase in NOx emissions cannot be given to the
authorities. It can be assumed that the authorities will then investigate the VW systems to
determine whether Volkswagen implemented a test detection system in the engine control unit
software (so-called defeat device) and, in the event a "treadmill test" is detected, a regeneration or
dosing strategy is implemented that differs from real driving conditions.
In Drivetrain Development, modified software versions are currently being developed which can
reduce the RDE, but this will not bring about compliance with the limits, either.
An internal VW presentation shortly thereafter discusses strategies to allay suspicions:
Refuse to acknowledge a problem;
Offer to update the engine software, but the update would not bring emissions down to the
required levels; or
Admit the problem and buy back diesel cars sold in the U.S.
May
CARB begins meeting with VW engineers. The meetings take place on at least 10 occasions from May
2014 to September 2015. VW continues to assert to CARB and EPA that "increased emissions from
these vehicles could be attributed to various technical issues and unexpected in-use conditions."
Numerous emails and meeting reports document panic.
June
In an attempt to cover its tracks, VW updates the software of the 2015 model year cars waiting in U.S.
ports, turning it down and increasing urea injection under real driving conditions.
October 1
VW Oliver Schmidt and Stuart Johnson tell CARB that a plan to recall cars to update engine software for
2009 diesels is forthcoming. VW assures CARB that the updated software will fix the emissions issues.
CARB and EPA provisionally allow 2015 diesel vehicles to go on sale in the U.S.
November
Winterkorn receives a memo in which VW estimates it will cost VW about €20 million to settle the issue,
using the voluntary recall.
December
VW issues a voluntary recall of 280,000 vehicles, during which it plans on updating the "faulty
software."
2015
VW introduces a third generation of "clean diesels" in the U.S., also equipped with test defeat software.
April
Piëch steps down as board chair after a failed attempt to oust Winterkorn.
May
VW's legal team learns about the use of defeat software in the U.S.
June
CARB observes that NOx emissions increase after the end of a testing cycle and changes its in-lab testing
settings. CARB suspects that the cars are equipped with a test defeat software and demands to see the
software code governing emissions controls in 2016 models.
July
After further investigation by CARB and EPA, none of the technical rationale offered by VW seem to
explain discrepancies between road and lab testing. CARB and EPA tell VW that VW's 2016 2.0-liter
diesel vehicles will not receive a notice of conformity.
VW vehicles pile up in U.S. ports.
July 21
A VW committee discusses the issue and creates "a task force to achieve 'fast and effective de-escalation of
the issue with officials.' (...) VW should approach the regulators 'offensively.' "
July 27
Engineers brief Martin Winterkorn.
September 3
VW admits to the EPA and CARB that it had "designed and installed a defeat device in these vehicles in
the form of a sophisticated software algorithm that detected when a vehicle was undergoing emissions
testing." The defeat device was meant "to bypass, defeat or render inoperative elements of the vehicle's
emission control system."
The standard U.S. emissions test lasts 1,370 seconds. The software was calibrated to emit a legal amount
of emissions for precisely 1,370 seconds and to switch off emissions control on the 1,371st second.
Fortune Magazine asks "How’s that for German engineering?"
September 18
The EPA sends a formal notice of violation to VW, asserting multiple violations of the Clean Air Act, and
refers the matter to the DOJ. Fines per vehicles can go up to $37,500 so that VW can face up to $18
billion in civil penalties in the U.S. alone. Affected vehicles are:
Jetta (2009-2015)
Jetta Sportwagen (2009-2014)
Beetle (2013-2015)
Beetle Convertible (2013-2015)
Audi A3 (2010-2015)
Golf (2010-2015)
Golf Sportwagen (2015)
Passat (2012-2015)
September 21
VW orders a stop to sales of all four-cylinder diesel cars under VW brand, and of the four-cylinder diesel
Audi A3.
September 22
VW announces that 11 million cars worldwide are affected.
September 23
CEO Martin Winterkorn resigns.
September 25
Matthias Mueller is named CEO of VW. He announces,
My most urgent task is to win back trust for the Volkswagen Group – by leaving no stone
unturned and with maximum transparency, as well as drawing the right conclusions from the
current situation. Under my leadership, Volkswagen will do everything it can to develop and
implement the most stringent compliance and governance standards in our industry. If we
manage to achieve that then the Volkswagen Group with its innovative strength, its strong brands
and above all its competent and highly motivated team has the opportunity to emerge from this
crisis stronger than before.
October
Ulrich Hackenberg, head of development for all VW group brands, Heinz-Jakob Neusser, head of
development for the VW brand, and Wolfgang Hatz, head of engines and transmissions development for
all VW brands are suspended.
VW continues to deny 3.0-liter engine diesels are affected.
VW appoints law firm Jones Day to conduct an internal investigation.
November 2
The EPA issued another notice of violation of the Clean Air Act to Volkswagen, Audi, and Porsche for
3.0-liter diesel cars and SUVs model year 2014-2016.
November 19
VW officials inform the EPA that the defeat device has existed in all of its U.S. 3.0-liter diesel models
since 2009.
2016
January 4
The DOJ files a complaint on behalf of the EPA against Volkswagen AG, Audi AG, Volkswagen Group of
America, Inc., Volkswagen Group of America Chattanooga Operations, LLC, Porsche AG, and Porsche
Cars North America, Inc. under the Clean Air Act.
February
A statement of defense prepared by VW for European proceedings states:
Under the Clean Air Act, violations of the statutory emission standards may be sanctioned by
fines called civil penalties. While these fines may be as much as U.S.-$ 37,500 per vehicle and are
thus in theory quite high, the statutory maximum amounts have to date played no role in practice.
(...) [F]ines in practice do not even approach the upper end of the range, especially in cases
involving passenger cars in large numbers (instead of heavy trucks).
April
VW asserts that the defeat device originated with a "group of persons at levels below the Group’s
management board in the powertrain development division, [who] decided to modify the engine
management software using relatively small changes, within the budget that was available for the
development of the engine management software, and without the need to involve superior levels."
Volkswagen, Audi, and Porsche engines are developed by separate engineering groups in different
research centers in Wolsfburg and Ingolstadt.
June 28
VW enters into a multi-billion dollars settlement to partially resolve CAA violations for 2.0-liter diesel
engines. Under the settlement, VW must remove from commerce or modify the emissions system of at
least 85% of all affected vehicles and 85% of Californian vehicles by June 2019. The penalty for failing to
reach the target is the payment into a mitigation trust of $85 million for each percentage point by which it
fell short of the national recall target, and $13.5 million for each percentage point by which it fell short of
the California recall target.
VW must offer owners and lessees the opportunity to have their vehicles bought back at a fair replacement
value or to have their leases terminated at no cost for two years. Under a Federal Trade Commission order
and a class action settlement agreement, VW also agrees to pay compensation for consumer damages.
Assuming timely compliance, the total cost of the settlements for 2.0-liter vehicles in the U.S. is $10.033
billion.
July 5
The UK House of Commons Transport Committee issues a report on the scandal discussing new testing
rules in Europe. The report states, among other things,
It is not credible for Volkswagen Group to apologise for its conduct only to then deny that it had
done anything wrong. (...) The Volkswagen emissions scandal has brought the integrity of the
auto sector into disrepute. VW’s conduct since the scandal has only served to further damage its
reputation. It has communicated poorly with customers which has led to confusion over when
and how affected vehicles will be fixed. Furthermore, VW has not been open about the nature of
the defeat device software that it installed in millions of vehicles worldwide. Instead of answering
many of our questions directly, VW asked us to await the results of an internal investigation by
Jones Day. We do not believe that the internal investigation will provide the answers that are
needed urgently. VW has used the investigative process to make announcements that only served
to exonerate senior management. Approval authorities and regulators cannot depend on VW to
co-operate and in this report we have called upon the Department for Transport to use its powers
and resources to properly investigate VW which we believe it has failed to do, so far.
December 20
VW enters into a multi-billion dollars settlement to partially resolve CAA violations for 3.0-liter diesel
engines. Under the settlement, VW must remove from commerce or modify the emissions system of at
least 85% of all affected vehicles and 85% of Californian vehicles by November 2019 or May 2020
depending on the technology used. Various penalties apply for failing to reach the targets, from
$900,000 to $21 million for each percentage point by which it falls short of the national and Californian
recall targets. As with 2.0-liter vehicles, VW must offer owners and lessees the opportunity to have their
vehicles bought back or their leases terminated, and pay consumer damages under an FTC order and a
class action settlement agreement. Both settlements require payment into a mitigation trust of a total
$2.9 billion, and an investment in zero emissions vehicle infrastructure of $2 billion.
2017
January 9
The FBI arrests VW German engineer Oliver Schmidt at the Miami International Airport on his way to
Germany. He is charged with violating the CAA and defrauding the U.S. government.
January 11
VW agrees to plead guilty to three criminal felony counts and to pay $2.8 billion in criminal
penalty. Under a third civil settlement, VW agrees to pay another $1.45 billion in civil fines to be
distributed to the EPA for CAA violations and to the U.S. Customs and Border Protection for customs
fraud.
January to July
The EPA and CARB approve emissions modifications (i) for model year 2015 VW Beetle, Beetle
Convertible, Golf, Golf SportWagon, Jetta, Passat, and Audi A3 diesel vehicles, (ii) for model year 2012-
2014 VW Passat diesel vehicles with automatic transmissions, and (iii) for model year 2009-2014 diesel
Jetta, Golf, Beetle, and Audi A3 diesel vehicles.
January 19
Winterkorn appears before the German parliament for inquiry and maintains he did not know about the
defeat software.
March 3
A study by MIT finds that "1,200 people in Europe will die early, each losing as much as a decade of their
life, as a result of excess emissions generated between 2008 and 2015 by affected cars sold in Germany."
March
German authorities raid Jones Day's Munich offices arguing that the firm failed to turn over evidence.
December 6
Oliver Schmidt is sentenced to seven years in prison by a U.S. district judge. The judge tells Schmidt that
it is a case of "good people just making very, very bad decisions." Five other people indicted on federal
charges are thought to be in Germany. Extradition to the U.S. seems unlikely.
2018
February 28
A German court orders the release of the May 23, 2014 letters to Winterkorn.
Stuttgart’s regional court hears a case brought by private and institutional investors and German
prosecutors are continuing their investigations.
May 3
Winterkorn is indicted on four counts of violating federal law by a grand jury in the Eastern District of
Michigan, bring the indictement count in the U.S. to nine.
The estimated cost of the scandal is €25 billion. At least 11 executives have resigned or have been
suspended. Hundreds of class action lawsuits have been filed on behalf of consumers and independent car
dealerships. States, including Kentucky, Massachusetts, and California, are also suing VW.
European civil and criminal suits proceed. As of May 2018, despite defeat devices having been found in
Germany, Italy, France, and the UK, none of these countries have taken action to revoke VW's licenses.
This timeline was put together using a variety of sources including official documents from the U.S. Environmental
Protection Agency (EPA), the California Air Resources Bureau (CARB), and the U.S. Department of Justice
(DOJ), press reports from the New York Times, the Guardian, Fortune, Cars, Süddeutsche Zeitung, Der
Spiegel, Handelsblatt, the Wall Street Journal, Bild am Sonntag, as well as other publicly available court
documents.
VW Structure Structural History

http://vol12.cases.som.yale.edu/volkswagen/vw-structure/structural-history
Nazi-era roots
Resources
Even though Volkswagen produced only a few cars before World War
II, much of the structure of the automaker was determined during the
period of Nazi control over Germany. After coming to power in 1933,
VW's Government Adolph Hitler took up the idea of building a “people’s car” – a vehicle
Connections that working-class people could afford (as opposed to the pricier
Reuters article that details the
relationships between current
offerings of Daimler-Benz). The organization the Nazis created to
government figures in Germany realize this ambition had lasting consequences for the modern
and VW. corporation.
The initiative to build a people’s car began in March 1934 when
Adolf Hitler recruited Austrian engineer Ferdinand Porsche to
The Architecture of develop the design for the vehicle. At the time, Porsche operated a
Wolfsburg
well-known auto design consultancy, having done work for Daimler-
Photos and models of the
Wolfsburg VW plant. Benz and other automakers. His design for the Volkswagen, a small
humped shaped car with an air-cooled engine located in the rear,
became the iconic Beetle that drove VW sales for decades after the
war. The design and his work for the new company gave Porsche and
his family the standing to claim partial ownership of the firm following the war.
Another element of the modern ownership structure that predated the war was the government’s direct
involvement in the firm. After the war, control of Volkswagen reverted to the West German federal
government and the company remained a majority state-owned enterprise until 1960. Even after the
federal government privatized their stake in the company, 20 percent of the voting rights and 13 percent
of the share ownership of the company remained in the hands of the local Lower Saxony state
government.
Nazis also chose the location of VW’s production facility in Lower Saxony. The state of Lower Saxony was
primarily known as an agricultural and mining area of Germany, far from the manufacturing and financial
centers of the country. The Nazis placed the production facility in this rural zone close to a canal and rail
line that would support operations, but in a place without urban infrastructure. They also designed and
built a massive plant, one that would rival Ford's large plant at River Rouge, that they hoped would send
a message to the world about Germany's economic prowess.
Another component of the firm’s governance came through the deal the Nazis made with the German
Labor Front, an organization that had brought German labor unions under Nazi control. In exchange for
giving away rights to organize the new manufacturing operation, the government granted labor half the
seats on the supervisory board of the company. While Germany had a tradition of involving workers in
firm or industry-level decision-making (a process called codetermination), this level of representation was
unprecedented. The arrangement with labor survived the war and continues to this day.
After the plant was built, the new company only produced a handful of cars before the machinery was
converted to the manufacture of armaments. The plant was extensively damaged by Allied bombers, but
remained salvageable after the war.
Post-war success
While the roots of Volkswagen were created during the Nazi era, most people associate the company with
West Germany’s postwar economic resurgence. To some observers, VW has come to be "more a national
institution than a corporation. (...) A little socialism, a little capitalism, and a consensus that building cars
in Wolfsburg is about more than just making money." The company had close ties with both the state
government in Lower Saxony and the national government in Berlin.
After the war, the damaged plant fell into the British zone of occupation. A retired British major, Ivan
Hirst, was placed in charge of the automaker and in short order was able to begin production of the
Porsche designed automobile. Initial sales were to occupation troops needing transport, but the low cost
vehicle started selling in the rest of Germany as well. With the end of allied occupation, the corporation
reverted to German control and very quickly began exporting Beetles to the world. The car’s low purchase
price, low cost operation, and reputation for reliability insured sales throughout the world.
Volkwagen’s success in the postwar period became emblematic of Germany’s rise as a manufacturing force
in the global economy and of its economic resurgence after the war. In 2017, the auto industry
contributed 2.7% to GDP and constituted the largest industrial group in the country, representing 20%
of Germany's exports in 2017. Volkswagen, itself, had become one of the largest firms in the world,
dominating the European market for automobiles and making inroads globally.
VW Structure Governance
http://vol12.cases.som.yale.edu/volkswagen/vw-structure/governance
Board of Supervisors
Resources
Volkswagen’s Aufsichtsrat (supervisory board, equivalent to a board of
directors) represented stakeholders intimately involved in the
production of automobiles. Of the members of the board in 2014,
Board Bios only one was outside the company’s immediate circle of investors,
Board Bios from VW website as of government, and labor.
2014.
Most large German companies had labor representation as laws
stipulate that workers control about 1/3 of the seats of the
Aufsichtsrat, a structure called Mitbestimmung (co-determination).
2010 Code of Conduct
However owing to deals made before the war and codified after it,
The Code of Conduct rolled out in
2010 at VW. workers at Volkswagen controlled 10 of the 20 seats on the
supervisory board.
Labor’s power was augmented by the politicians on the board. In
Volkswagen's Takeover of 1960 when the federal government privatized Volkswagen, the state
Porsche of Lower Saxony retained 20% of the voting shares in the company
The complicated way finance and and was guaranteed at least two seats on the supervisory board. Since
family dynamics interacted to the war, the state of Lower Saxony has been ruled largely by the Social
allow VW to take over Porsche
and landed Qatar on VW's board.
Democratic Party (SDP) of Germany, a left-leaning party with close
ties to labor. Local politicians and labor saw eye-to-eye on many
issues, especially those related to maintaining full employment at the
sprawling Wolfsburg plant.
Despite the fact that the federal government held no formal role in the government after 1960, many
federal political figures from the SDP had built their careers from bases in Lower Saxony. Most notably,
former Chancellor Gerhard Schröder served as premier of Lower Saxony before becoming Chancellor in
1998. Influence reportedly passed both ways as Volkswagen was able to influence federal policy, but was
in turn influenced by federal officials.
The Piëch and Porsche families controlled a major block of shares as well as seats on the supervisory
board. Observers noted that the family had long cultivated warm relations with labor, leading to
unusually harmonious relations. As long as the family insured that Volkswagen kept steady employment
at its factories in Germany, labor seemed to be content to let the family pursue its objectives in building
Volkswagen.
The Piëch and Porsche families also controlled Porsche AG, manufacturers of legendary sports cars.
Porsche and Volkswagen had a long history of collaboration. Porsche provided research and design
services to Volkswagen and Volkswagen manufactured many Porsche models.
While the family voted as a block on the Volkswagen board, behind the scenes there was tension. These
erupted in 2008 when Porsche launched a bid to take over Volkswagen. Porsche had secured financing
from Qatar, but was unable to purchase a sufficient number of shares to insure control. Mired in debt,
Porsche turned to Volkswagen to bail them out and Volkswagen was therefore able to absorb Porsche.
The bizarre takeover bid also led to a considerable ownership stake in Volkswagen for Qatar (the Qatari
sovereign wealth fund had invested in Porsche).
Compliance
In 2010, Volkswagen created a new Governance, Risk, & Compliance Division, the head of which
reported to the chair of the executive board. VW also developed a 24-page document meant to guide
employee decisions throughout the company and "help them deal with the legal and ethical challenges
they face in daily work situations," the VW Code of Conduct. The Code of Conduct was rolled out group-
wide and incorporated into onboarding procedures for employees.
With the new division, VW hope to manage risks by "promoting a culture of openness with regard to
risks, aligning the Risk Management System and the Internal Control System with corporate goals,
weighing up risks and opportunities so as to be able to leverage opportunities where the related risks are
transparent and manageable, [and] complying with rules."
The 2010 annual report presented risk management processes by type. The Environmental Protection
Regulations section of the document noted, "The increasing global convergence of regulatory approaches
and targets concerning emissions control may lead to significant benefits worldwide in introducing new
and sustainable technologies."
VW Culture Engineers
http://vol12.cases.som.yale.edu/volkswagen/vw-culture/engineers
As with much of German industry, engineering dominated

Resources Volkswagen’s professional culture. An engineer founded
Volkswagen, a family of engineers owned the largest block of stock,
and engineers generally have been the CEOs and division heads of the
company.
Dr. Piëch's Legacy
Car And Driver recount Piëch's Perhaps no engineer was as associated with Volkswagen as Ferdinand
biggest successes and failures at Porsche’s grandson, Ferdinand Piëch. Piëch graduated from Swiss
VW.
technical school ETH Zurich and went to work for Porsche. He
developed high performance racing engines, as well as working on
consumer models.
Ferdinand Piëch’s influence
Legendary as an automobile
Piëch joined Audi (a faceplate owned by Volkswagen) in 1970,
engineer and for saving VW from showing "fearless determination, a fascination with technology, and a
collapse in the early 1990s, Mr. genius for engineering." His engineering talent, along with a flair for
Piëch was almost as famous for his office intrigue and theatrics, catapulted him to the top job at Audi by
austere leadership style.
1988.
Piëch played a personal role in developing advanced technologies at

Audi. Early in his career, he developed the first four-wheel drive passenger car, the Audi 80, in secret, to
"avoid meddling from Wolfsburg." He named the technology "quattro" and had VW managers test it
driving up a ski trail in Austria, without revealing it was a four-wheel drive.He was also the first to use
lighter aluminum body parts, and revolutionized diesel engine technology.
In 1993, when Piëch took over as chair of VW's management board, he started working to infuse VW
products with "technical showmanship" and rejuvenate VW brands and products. Within five years, VW
started making profits again.
Though he had great technical skills, Piëch, as CEO, did not micromanage his engineers. Rather he
outlined what he wanted and then expected his subordinates to execute. Bob Lutz, a well-known auto
executive in the United States, recounts this interaction with Piëch,
I sat next to him at an industry dinner in the Nineties, just after the fourth-generation Golf had
debuted at the Frankfurt show. I told him, "I'd like to congratulate you on the new Golf. First of
all, it's a nice-looking car, but God, those body fits! I wish we could get close to that at Chrysler."
He [Piëch] said, "I'll give you the recipe. I called all the body engineers, stamping people,
manufacturing, and executives into my conference room. And I said, 'I am tired of all these lousy
body fits. You have six weeks to achieve world-class body fits. I have all your names. If we do not
have good body fits in six weeks, I will replace all of you. Thank you for your time today.'
That's the way he ran everything. It's what I call a reign of terror and a culture where
performance was driven by fear and intimidation… The guy was absolutely brutal.
Though he personally held a major block of VW's shares, Piëch defined success not in wealth but in
technological innovations and industry influence. Observers argued that Piëch's fascination with technical
advances led to Volkswagen's purchases of many high-end auto manufacturing companies such as
Bugatti, Lamborghini, and Bentley.
In 2002, Piëch left his position as CEO and became the chair of the supervisory board. The supervisory
board named Bernd Pischetsrieder, an engineer and the CEO of BMW, as his successor. While as
committed to engineering excellence, Pieschetsrieder wanted to reform VW's culture, which he found too
centralized and autocratic. One employee recounted that during a visit, when Pieschetsrieder asked what
goals employees had for their units, they sat in stunned silence; they had never been asked for their
opinions before.
After the revelation that the previous Volkswagen administration made payments to a labor leader's
mistress, Pieschetsrieder used the opportunity to push for a thorough investigation and more internal
controls, including the creation of an ombudsman position to hear workers' complaints. However,
Pieschetsrieder was forced out, reportedly because he alienated the labor faction on the board and Piëch
saw his actions as insubordination. Piëch remained as chair of the supervisory board and came out of the
scandal relatively unscathed.
Martin Winterkorn replaced Pieschetsrieder as CEO. Winterkorn was a PhD physicist and came from
Audi where he led design and development. He was seen as a protégé of Piëch with a similar managerial
approach though one he practiced at higher decibels. He has been described as "a yeller with a short
fuse," and shared Piëch's meticulous approach to technology.
Winterkorn demanded solutions rather than an airing of problems. One engineer recounted "If you
presented bad news, those were the moments that it could become quite unpleasant and loud and quite
demeaning."
Piëch and Winterkorn had a falling out in 2014. Piëch looked to force out Winterkorn, but Winterkorn
was able to gain the support of other members of the Porsche family as well as labor. Piëch was forced to
resign as chairman of the supervisory board, before the diesel scandal hit.
VW Culture Labor
http://vol12.cases.som.yale.edu/volkswagen/vw-culture/labor
Volkswagen had outstanding relations with its workers in at the

Resources Wolfsburg plant. This was in part because German law mandated a
system of Mitbestimmungsgesetz (codetermination) that gave
workers voice in a company’s affairs. But given the specifics of VW’s
governance structure, workers actually had far more significant
VW's System Failure participation in the company’s decisions than at other German firms.
The carmaker’s German
employees are so influential that Codetermination of corporate action in Germany began in the early
some critics say it resembles a co-
operative. 1900s, but was codified only after the Second World War. For large
enterprises, the codetermination law required that workers make up
more than a third of the company’s supervisory board. This board
then elected both the CEO of the firm as well as named the executive
VW's Labor Problem board (Vorstand) that oversaw the everyday decisions of the
Volkswagen is doomed to remain company’s management. The supervisory board named one worker to
a mediocre company by global the Vorstand.
standards because of its weak
management ultimately controlled
by unions. Worker participation in management extended to the shop floor.
Labor was organized in work councils that elected representatives to
the board and advised management and the unions on plant-level
worker concerns. The workers at Volkswagen were represented by IG
VW's Chronic Inefficiency Metall, the German metal workers union. IG Metall was the largest
VW brand’s costs have been out of union in Germany, representing some 2.3 million workers in 2015.
line with its competitors for a long
time, and it persists because of the The system of corporate governance gave workers voice in the affairs
intransigence of the governing
structure. of a given company, while insuring that shareholder concerns would
still be favored. In most German companies, the chairman would
discuss sensitive matters with the shareholder side first, settling an
issue before bringing it before the full board with worker
VW's Vertical Integration representatives.
In a minority view, this
automobile industry analyst At VW however, the CEO, particularly Piëch, would often begin by
argues that VW's strategy getting agreement with labor. According to a former director, “Piëch
concerning labor makes perfect
sense. would first talk to the works council and agree to a position. Then he
would bring it to the shareholder side.”
For Volkswagen, the principle of co-determination became something

VW and the UAW akin to co-management, with workers actively helping shape
VW balks at bargaining with the decisions. Together with the presence of Lower Saxony politicians on
UAW micro-unit. the board, it meant job losses in Wolfsburg were taboo. Observers
describe the situation as a quid pro quo: VW agreed to preserve jobs if
the employee bloc agreed with management on other initiatives.
One example of the close relationship between Piëch and workers was
when Gunnar Kilian, a spokesman for the works council, left to work in Piëch’s personal office, only to
return to the works council a few years later as general secretary. “It is hard to exaggerate what kind of
atmosphere this created,” says a former supervisory board member. “It was very difficult to do anything
that hurt workers or Lower Saxony. But beyond that it just killed the board as a place of proper
discussion.”
Many observers argued that the close relationship between management and labor had led to
inefficiencies in the production process. The Wolfsburg plant remained the largest automotive factory in
one location in the world, and analysts argued that it was overstaffed.
Volkswagen also was far more vertically integrated than other auto companies. Most automakers
outsourced parts to subcontractors, saving costs while still maintaining control through just-in-time
manufacturing techniques.
VW Strategy Beetles to Bentleys

http://vol12.cases.som.yale.edu/volkswagen/vw-strategy/beetles-bentleys
In the years since the Allies victory in 1945, Volkswagen surged from
Resources triumph to decline a number of times. Each cycle required rethinking
strategy and altering the company's product line.
After the war, the Volkswagen plant was located in the British zone of
VW's Historic Ads occupation. To forestall unrest and begin to rebuild West Germany,
A mini-documentary on Doyle the British encouraged the rise of industry. British officials asked Ivan
Dane Bernbach's ads for Hirst, a former British Major, to rebuild the bombed-out plant in
Volkswagen in the 1960s that are
credited with making the Beetle
Lower Saxony and restart Volkswagen. Hirst directed the company to
the best-selling automobile of all produce Porsche’s ‘Beetle” design and soon was selling cars to serve as
time. transport for occupation forces.
By October 1949, when the British turned over administration of

Volkswagen to the West German government, Volkswagen had
10,000 employees. The company built 4,000 cars a month, representing half of the country’s total
vehicle production. Heinrich Nordhoff, a German engineer, took the reins of the company, and directed it
toward export markets. Beetles caught on in a number of markets around the world and production
surged.
Nordhoff’s strategy for VW ran counter to the prevailing trends in the car industry. The existing big car
companies offered a range of product lines and introduced new models every year. However, the Beetle
remained the same year in and year out, featuring only incremental innovations under the hood to make
the car more comfortable and reliable.
In the United States, VW contracted Doyle Dane Bernbach (DDB) to build a brand image around the
Beetle’s idiosyncrasies. The DDB “Think Small” campaign for Volkswagen may have been one of the
greatest advertising campaigns in history and helped make Volkswagen the leading foreign car in the
United States. In 1972, the Beetle surpassed Ford’s model ‘T’ as the most manufactured model of all
time.
After over a decade of success, the Beetle’s fortunes waned and in the early 1970s, Volkswagen was in
serious trouble. In the United States, Japanese automakers had captured market share from
Volkswagen. Volkswagen had acquired Audi in 1965 and it began to rework Audi designs to build a line-
up of cars. Though Volkswagen sales in the U.S. improved over the course of 1980s, the company never
regained the market it had enjoyed during the 1960s. The company primarily recovered by expanding in
Europe and in emerging markets.
The strategy proved expensive as the company was producing many versions of its cars for a variety of
global markets. In 1992, VW barely broke even, and bankruptcy was mentioned.
On January 1, 1993, Piëch took over as CEO and VW's chair of the management board. His strategy was
to rationalize production and a "platform strategy" where different models used the same components.
From then on, parts would be shared across brands (Audi, Skoda, Volkswagen) and models (Golf, A3,
Octavia, TT), saving money on development, and bringing economies of scale to supply operations.
Once stabilized, Volkswagen began buying other car companies to supplement its line-up. In a transaction
that began in the 1980s, VW bought SEAT, a Spanish carmaker. In 1991, Volkswagen bought Skoda
from the Czech government and used the faceplate as a budget brand. Volkswagen expanded into trucks
by buying the Swedish company Scania and the German company MAN.
In 1998, Piëch went high-end and bought British luxury carmaker Bentley Motors, Italian sports car
maker Lamborghini, and luxury brand Bugatti. Later, Volkswagen was to add Porsche to its line-up as
well as Italian motorcycle maker Ducati. With the exception of Porsche, these companies were glamorous
and chronically unprofitable, founded by inventors intent on testing the limits of motor vehicle luxury
and performance. As journalist Jack Ewing wrote,
For Bentley, Bugatti, and Lamborghini, the benefits of being part of Volkswagen were clearer.
Volkswagen provided the consistent financing they needed to develop new models, a deep pool of
engineers they could draw on for the labor-intensive process of designing a new car, plus the procurement
power of a huge corporation. Despite their exclusivity, the luxury brands discreetly borrowed Volkswagen
parts in places that were invisible to customers… [The luxury brands] declared to the rest of the auto
industry once and for all that Volkswagen was striving for a new identity beyond the confines of the
overcrowded, marginally profitable mass market. Bentley, Lamborghini, and Bugatti were evidence that
the company that had built one of the most practical cars in history, the Beetle, also had the engineering
know-how as well as the ambition to build some of the most over-the-top vehicles ever to hit the road.
VW Strategy Strategy 2018

http://vol12.cases.som.yale.edu/volkswagen/vw-strategy/strategy-2018
Shortly after taking over in 2007, VW's new CEO Martin

Resources Winterkorn announced his intention to make VW the world's largest
automobile manufacturer, and sell 10 million cars and trucks per year
by 2018. With 6,437,414 cars and trucks sold in 2008, compared to
2014 Annual Report 8,282,803 for General Motors and 9,237,780 for Toyota,
Volkswagen annual report from Winterkorn and VW had a ways to go.
the year before the scandal hit.
As he was upping production, Winterkorn also was interested in
building on the success of Piech's platform strategy. In 2011, VW
announced its plans to extend the standardization of parts further,
including axles, steering columns, and chassis. The strategy aimed to
lower production costs by 20% and reduce assembly time by 30%,
saving a total of $6.5 billion per year to the group. At the time, some
worried that the standardization was too extreme. IHS Automotive

analyst Christoph Stuermer told Automotive News, "If something
goes wrong, then one may get hit by an epidemic plague. The more
VW in the US connected the structures, the higher the threat of contagion."
A 2012 presentation by Michael
Lohscheller, executive vice- A key to the strategy was to increase sales in the United States. VW
president and chief financial
officer of VW U.S., on delivering had become the dominant automaker in Europe, its market share had
Strategy 2018. steadily increased since the 1990's, from slightly above 15% to a high
of almost 25% in 2014. However, VW was still behind in the
American market where it held about three percent of the market in
2013.
Suicide-Proof
Dramatic or situational irony in The answer Volkswagen’s management believed was to sell US
this dark Audi ad? consumers on "clean diesel." Diesel cars already were selling well in
Europe. VW eyed Toyota and Honda’s environmental niche in the US
and believed its clean diesel cars were just as green. But unlike its
competitors, VW argued that its cars were more fun to drive and
Old Wives' Tale #6
would deliver higher performance. Winterkorn believed that its clean
A VW Ad attempting to dispel the
notion that diesel is dirty.
diesel models could take on and possibly even surpass the hybrid
models in the US market.
The 2008 annual report read:

Green Police A key element in our "Strategy 2018" is to position the Volkswagen
A VW advertisement. Group as an economic and environmental leader among automobile
manufacturers worldwide. By launching the "18 plus" program, the
Board of Management has reinforced efforts to remain on track with
Oil Parade
this, even in economically difficult times.
Another VW ad promoting clean Against this backdrop, all planned vehicle projects were reviewed,
diesel for the Audi brand.
and high priority was given to aspects of ecological relevance and
profitability. In this way, the company can grow with the right
products even in the current difficult economic environment, while at
the same time keeping capital expenditure at a manageable level.
An environmentally oriented range of vehicles and our excellent position in the markets
worldwide enable us to leverage the strengths of the Group and to systematically increase our
competitive advantage. We are aiming for new environmental standards in vehicles, powertrains
and lightweight construction.
(…) In fiscal year 2009, we will continue to enhance the entire vehicle range with a view to
reducing fuel consumption and emissions. More than 100 Volkswagen Group models already fall
below the CO2 emissions threshold of 140g/km, and we aim to increase this number even
further in the future.
(…) The pace of innovation in reducing other harmful emissions also remains high. The new
milestone in environmental technology is the Passat Blue TDI. Although the Euro-6 emissions
standard will not enter into force until 2014, one range of new Volkswagen models already meets
this standard. The Blue TDI name stands for a significant reduction in nitrous oxides in exhaust
gas. These outstanding results are achieved thanks to an innovative catalytic converter in
conjunction with the AdBlue additive. The Passat will be launched in some European markets at
the beginning of 2009 and additional Volkswagen Blue TDI models will follow.
In the American market, Volkswagen is the first manufacturer to offer a diesel car approved in
all 50 states, the Jetta TDI CleanDiesel. This example illustrates the future potential of diesel
technology in this market.
(…) The US automotive market is the largest in the world. Vehicle sales in 2008 amounted to
13.2 million units (passenger cars and light commercial vehicles). The Volkswagen Group aims
to transform its operations here from a niche player to a volume supplier offering local production
of market-specific products and efficient sales structures.
(…) The construction of a local manufacturing plant in Chattanooga, Tennessee, is designed to

ensure the sustainable development of the US dollar area. Among other things, this move aims to
minimize sales risks arising from exchange rate fluctuations. Production at the Chattanooga plant
is scheduled to begin in 2011.
VW reached its goal to become the largest auto manufacturer in the world in 2014, selling 10.2 million
cars and trucks worldwide, and grossing €202 billion in sales.
Diesels Taming the Diesel

http://vol12.cases.som.yale.edu/volkswagen/diesels/taming-diesel
The design of every automobile presents an illusion. A smooth metal

Resources body encases a windowed chamber that holds comfortable seats, an
instrument panel, a steering wheel, and pedals to speed and stop the
machine. Designers hide the violent machinery that actually moves
the vehicle beneath the body. In contrast to the exterior, the internal
2015 Diesel Fact Sheet
combustion engine that powers most vehicles operates through
A fact sheet on diesel-powered
passenger cars and light trucks controlled explosions in an enclosed chamber that pressure pistons to
statistics prepared by the U.S. move.
Department of Transportation in
2015. Internal combustion engines come in two flavors: compression
ignition (such as diesel engines) and spark ignition (such as gasoline-
powered engines). In spark ignition engines, an electric spark serves
to combust petrol sprayed into a chamber. Diesel engines, in contrast,
TDI Engine Animation
self-ignite as a result of compression. The difference in combustion
An animation from VW
explaining how a TDI engine
methodologies requires different fuels. Put regular gasoline into a
works. diesel engine and it will damage the engine and vice-versa.
The differences extend to more than the type of fuel and existence of
spark plugs. Diesel compression engines are more efficient than spark
Defeat Device ignition engines; they convert 45% of the energy stored in fuel into
A short video from The Verge mechanical energy as opposed to the 30% efficiency that spark
explaining how the defeat device engines achieve. Diesel engines also achieve more torque and faster
worked. acceleration than similarly sized petrol engines. In addition, diesel
engines have a longer useful life and work better in damp
environments. On the other hand, diesel engines are louder, noisier,
and dirtier. Early carmakers therefore gravitated toward spark ignitions, leaving diesel engines to power
weighty machines like trucks, busses, ships, and tractors.
But the oil crisis of the 1970s prompted reconsideration. With gas prices soaring and actual shortages
occurring throughout the west, carmakers, especially German, started to bring diesel automobiles into the
market. US carmakers also experimented with diesels, but abandoned the effort when diesel models
malfunctioned.
To make diesel acceptable, German engineers, especially at Volkswagen and Audi, engineered new
solutions to diesel’s deficiencies. It was Ferdinand Piëch at Audi that led the charge. His team designed
more sophisticated injection systems that could adapt to driving conditions. They utilized advances in
computer technology to create a "turbocharger" that adjusted air delivery and injectors, which controlled
fuel, to optimize the air to fuel mix sent to the engine's cylinders. In 1989, Piëch installed the first so-
called "turbocharged diesel injection" engine, or TDI, in the Audi 100. The new injection system also
helped control benzene, carbon monoxide, and nitrogen oxides emissions from the engine.
Cleaning up Diesel’s Act

In the 2000s, Volkswagen planned to introduce its latest generation of “clean diesel” models to the
United States. The cars had been selling well in Europe. They developed excellent reputations for
reliability. Most importantly, the cars boasted strong miles-per gallon for their classes, meaning not only
lower out-of-the-pocket costs for drivers, but also the perception of lower carbon emissions.
However, Volkswagen’s tests revealed that the cars produced more NOx and soot than the US would
allow. A mix of technological solutions could be applied to counteract the excess NOx emissions. VW
engineers considered two technologies: selective catalytic reduction (SCR); and lean NOx trap (LNT).
Volkswagen decided to go with LNT combined with EGR in their first “clean diesel” models in
2008. LNT traps NOx from exhaust in a compartment and burns it off using additional fuel. LNT is
relatively inexpensive, less cumbersome than SCR, and easier to implement, but it is less effective than
SCR and lowers fuel efficiency. Nonetheless, the LNT system couldn’t keep nitrogen oxide emissions
under control without help from an exhaust gas recirculation system, or EGR. The EGR pushed exhaust
back into engine reducing NOx emissions, but increasing soot. The soot had to be filtered so it wouldn’t
escape. But the amount of soot overwhelmed the filter during sustained operation, causing the entire car
to fall below US standards.
So the Volkswagen engineers attacked the problem through the car’s computer. The computer could sense
when the car was being tested and in this mode, shifted the LNT and ERG into full operation. When the
car was not in test mode, the auto reduced the emissions going into the LNT and the amount of air being
recirculated. In this ‘normal operation’ mode, Volkswagens would preserve the filter, increase gas mileage,
and spew out poisonous NOx and carcinogenic soot at levels 10 to 30 times the legal limit.
In 2011, Volkswagen decided to replace the LNT with a SCR system in all of its clean diesel models. SCR
systems inject urea into the exhaust to convert NOx into nitrogen, carbon dioxide, and water. Truck
manufacturers have long used SCR tanks to clean up the emissions from their models. Volkswagen
engineers discovered that they faced a daunting tradeoff when it came to putting SCR systems into their
cars. If they put in a tank big enough to supply urea for the 10,000 miles between oil changes, the car’s
trunk space would be severely compromised. If they put in a smaller tank, owners would have to replace
the urea every 5,000 miles or so.
So Volkswagen decided to do neither. They put in smaller urea tanks and tuned the system to work for
10,000 miles. Of course, this meant that the system would not clean a sufficient amount of NOx from the
exhaust to comply with regulations. The solution to this problem was once again to code the computer to
run the system at high levels during tests and then slip into a lower ‘normal’ mode to preserve urea.
On the other hand, manufacturers of luxury diesels such as BMW and DaimlerBenz elected to put in
larger urea tanks or equip cars with both types of NOx systems.
Diesels Consumer Preferences

http://vol12.cases.som.yale.edu/volkswagen/diesels/consumer-preferences
United States
Resources
When the oil crisis hit in the 1970s, U.S carmakers rushed to provide
diesel automobiles that could get better mileage without sacrificing
the size and comfort that U.S. consumers demanded. The effort was
EU Auto Industry an abject failure. For example, Oldsmobile, a General Motors
A deck of charts and slides about nameplate, introduced diesel-powered models that had an
the European auto industry.
extraordinarily high failure rate, and the company spent decades
trying to live down the fiasco. Even in 2005, an Automotive
News columnist wrote,
EU Cars by Fuel Type
Country by country data on
In North America, the specter of the GM diesel disaster clanks
vehicles in use by fuel type in the around in the auto industry's attic like a restless ghost that won't
EU in 2015. disappear. Responding to the high fuel prices and odd-even
rationing of the 1970s, GM rolled out the diesel engines to boost
fuel economy of its bigger cars. The defunct Oldsmobile Division
EU's Tax Deals for Diesel
produced a 5.7-liter V-8 and two different 4.3-liter diesel
A detailed report on the tax deals
engines for mid-sized and large cars that were used by all GM car
that consumer found for diesel divisions. GM sold around 1 million vehicles with diesel engines
fuel. from 1978 to 1985. GM developed the diesels on the cheap.
The 350-cubic-inch (5.7-liter) V-8, for instance, was based on a
gasoline engine. The diesels were notoriously unreliable. They
often suffered catastrophic internal failures curable only by a
U.S. Automotive
replacement engine that - made with the same defects - also
A 2014 presentation by a trade
group on the state of the U.S. failed. GM's engineering reputation took a major bruising. GM
automotive market, green diesels stunk up the market so badly that other automakers'
vehicles, and fuel type statistics. diesel sales suffered.
A senior GM executive noted about these engine problems,

This an example of having technology that you know that you want, but because you move too
fast, you create this disastrous ill will in the consumer community…We should have known it
was going to take time. We took an existing engine and tried to transform it into a diesel and it
was a failure. You can’t do an engine program from the ground up in a short time because a
powertrain is a very complex beast.
In 2007, diesel cars made up less than 1% of the new cars sold in the United States.
Even with concerns about the relationship of carbon and climate, surveys indicated that while consumers
were interested in environmental features, they were unwilling to give up any of the performance
associated with traditional vehicles or pay a significant premium. A GM executive observed,
Customers in our industry have become pretty spoiled. Consumers want their cars to come in at
the right price point; they want all the performance that they are used to, and they never want to
bring it in for any maintenance. They want the same interior space and the same range [about
250 miles between refueling] … There is a small subset of the consumer market who have both
the economic resources and the commitment to buy the hybrids, but it is naïve to think that there
is a substantial population out there that is willing to invest thousands of dollars into vehicles that
don’t produce greenhouse gases.
By 2014, hybrids car models were widely available in the United States, but their sale was limited to
about 3% of the cars sold each year. Nonetheless, this was far greater than the acceptance of hybrids in
Europe.
Europe’s Diesel Boom

Diesels made up a modest share of European car fleet until the late 1990s. Then EU consumers went on a
diesel buying spree. New diesel sales went from about 23% of the new car registrations in 1996 to more
than 50% a decade later. The rise in diesel market share was by no means the same across countries, with
customers in countries giving more diesel incentives, buying more. In the UK, diesel share went from a
25% share in 1999 to over 50% a decade later, while in the Netherlands share fluctuated between 22-
28% throughout the period with no clear trend. In total, diesel cars made up over 40% of the entire car
fleet in Europe by 2014.
Analysts traced the European public’s embrace of diesel technology to a number of factors
Governmental economic incentives – With advice from the auto industry, the European Commission
promoted the use of diesel automobiles and urged member governments to do the same. Therefore, a slew
of EU governments lowered the tax on diesel fuel, making diesel about 20% less expensive than petrol
from the late 90s through the early 2000s (when this was coupled with the fact that one could get farther
on a liter of diesel, this meant an even more significant savings of fuel cost per mile). The fuel subsidy per
diesel car, assuming it consumed 15,000 liters of fuel over its lifetime, and including 21% average VAT,
amounted to €2,600.
Some European governments, like the UK, lowered vehicle excise taxes or registration fees to make diesel
cars cheaper than petrol cars. Consumers in these jurisdictions reaped two streams of benefits; a direct
discount on the purchase and registration of their new diesel automobile and discounts every time they
went for a fill-up of fuel.
Well-established diesel infrastructure – Besides Volkswagen, many European carmakers produced diesel
vehicles. Peugeot, DaimlerChrysler, Renault, Fiat among others had substantial diesel programs that had
spanned decades. Consumers were familiar with diesel cars and saw them on the road. Furthermore, the
infrastructure for diesel was in place. Customers could find diesel parts in auto shops, diesel mechanics in
garages, and diesel fuel in petrol stations.
Indeed, the fuel industry may have been one of the reasons that European carmakers had launched and
maintained diesel programs. In the 1970s, Europe underwent a dramatic change in the way electricity
and heating were produced with most countries replacing fuel oil-powered generators with natural gas or
nuclear. This meant that most refineries had excess capacity in fuel oil that could be easily converted to
producing diesel. Two academics, Cames and Helmers, noted:
Europe was confronted with shrinking fuel oil markets from 1970 onwards and more
dramatically, after 1979… We believe the European oil industry co-initiated the shift to diesel
cars in the 1980s and 1990s in order to find outlets for middle distillates. Even though the
outstanding diesel car boom has nowadays resulted in diesel fuel demand above the ‘natural cap’
provided by the average composition of raw oil, the oil company ARAL expresses the need of
diesel fuel outlet clearly: ‘Combined production requires the sale of certain amounts of gasoline
and middle distillates. Since fuel oil sales are declining, this share has to be marketed as diesel
after appropriate conversion.’
Attractive diesel features – During the 1990s, diesel-makers introduced new features such as improved
fuel injection systems that improved the ride and convenience of driving diesels. Customers were also told
that diesels would improve a person’s carbon footprint, as evidenced by diesel’s better gas mileage.
Unfortunately, the comparisons failed to take into account the difference between diesel and petrol with
diesel containing more carbon that gets transmitted to the atmosphere. Cames and Helmers observed,
According to the IPCC, ‘Direct injection diesel engines yield about 35% greater fuel economy
than conventional gasoline engines’, enhancing thereby the market value of diesel cars. The US
federal office of transportation quantifies the fuel economy advantage of diesel cars over gasoline
cars as up to 63%. All too often, however, the higher calorific value of diesel fuel is not taken into
account. Diesel fuel contains, dependent to fuel quality, about 14% more carbon per litre. This
effect reduces the CO2 emission advantage of diesel cars suggested by favourable fuel efficiency
measured in volumetric terms (l/100 km or miles per gal).
Environmental Regulation United States

http://vol12.cases.som.yale.edu/volkswagen/environmental-regulation/united-states
United States
Resources
In 1959, California became one of the first jurisdictions in the world
to regulate emissions from cars and trucks, like NOx, VOCs, and
particulate matter. In that year, the California legislature ordered its
How the US Protects the
Environment Department of Health to set statewide air quality standards and
A guide to how US environmental
vehicle emission controls.
laws are promulgated and
enforced. In 1965, the federal government set the first countrywide emissions
standards in the Motor Vehicle Air Pollution Control Act. The
standards were promulgated in 1966 and became effective for 1968
car models. The Act also prohibited the sale of vehicles that did not
CAFE Standards conform with emissions controls, and any action that would render
A Brief History of U.S. Fuel pollution devices inoperative before sale to consumers. A 1967
Efficiency Standards.
amendment precluded states from adopting their own standards, but
the Act grandfathered California in, explaining the special status the
state holds in regulating vehicle emissions.
In 1970, Congress passed the Clean Air Act, which required the
newly created Environmental Protection Agency (EPA) to set national
standards for ambient air quality for air pollutants that may
US Emissions Control reasonably be anticipated to endanger public health or welfare. The
The EPA's Automobile Emissions
Reduction Efforts in the U.S. –
standards, called NAAQS, traditionally applied to a list of six "criteria
Chronology. pollutants," including NOx. NAAQS are implemented through state-
level plans, focusing on specific pollution sources.
In addition to NAAQS, Title II of the Clean Air Act gives broad
LA Smog powers to the EPA to set prescriptions for classes of new motor
Los Angeles still has smog, of vehicles that cause, or contribute to, air pollution and may reasonably
course, but it’s not nearly as bad be anticipated to endanger public health or welfare. In 1970, the
as it used to be. How did the city
get its act together?
emissions standards for motor vehicles were applicable to
hydrocarbons, carbon monoxide, NOx, and particulate matter, and
required a 90% reduction of NOx from the previous standard for
1971 model year cars. Under the Clean Air Act, emissions standards
US Environmental applied to all engines, regardless of fuel type.
Protection
How the U.S. Protects the Until 1970, car prototypes were tested on a voluntary basis, but the
Environment, From Nixon to Clean Air Act required that certification programs be made
Trump. A curious person’s guide mandatory, with the EPA issuing a "certificate of conformity" to the
to the laws that keep the air clean
and the water pure. emissions standards before a vehicle could be sold. Testing occurred
indoors, and required placing cars on "chassis dynamometers," or
"dynos," where the car's wheels spun in place in a controlled, and
thus replicable, environment. The Clean Air Act also required that
CAFE Standards manufacturers warrant the performance of emissions control
Infographic showing the evolution equipment to the vehicles' ultimate purchaser.
of CAFE standards.
Since the 1970s, the US Congress has enacted no new air pollution
standards. The EPA’s broad regulatory powers, however, have
Clean Air Act Civil Cases allowed the agency to introduce and implement greater emissions
and Settlements controls over the decades.
A link to the EPA's repository of
information on violations of the NOx
Clean Air Act and settlements by
auto manufacturers and others. One of the reasons that California jumped to the forefront of emission
control is that smog in the Los Angeles area became a nightmare for
residents in the 1950s. Scientists identified NOx (nitrogen oxides), a
byproduct of combustion in automobiles, as a culprit. In addition to being harmful to human health in
their own right, NOx react with sunlight to form tropospheric ozone (smog) in the presence of other
volatile organic compounds (VOCs). The smog problem in Los Angeles became particularly bad because
the topography of Los Angeles trapped gasses and the sprawl of the city forced residents to be unusually
dependent on cars for transport.
Cars and trucks, and internal combustion engines in general, are heavy contributors to NOx pollution
worldwide. In the U.S., 50% of NOx emitted in 2000 came from mobile sources. By 2011, the share of
NOx attributable to mobile sources had grown to 58%.
In the 1960s, the California Air Resources Board (CARB) established the first standards for NOx
emissions and the National Clean Air Act in 1970, created national NOx standards. In 1990, further EPA
regulations significantly tightened these standards. For cars, the NOx emissions were reduced by 50%.
These so-called "Tier 1" standards were phased in over the 1994-1996 model years, before "Tier 2"
standards were implemented in 2000 for model year 2004-2009. California started implementing its
own emissions standards in 1990, through the California Air Resources Board or CARB. CARB
standards mirrored the structure of federal standards, but were stricter. Like with EPA certifications, auto
dealers cannot sell cars in California unless they receive a certificate of conformity from CARB. In 2018,
14 states in total have adopted CARB's latest standards.
In 2014, the EPA adopted yet more stringent "Tier 3" standards for light duty vehicles and trucks,
medium duty passenger vehicles, and some heavy-duty vehicles, to be phased in for vehicles in model
years 2017-2025.
The EPA has claimed that standards have improved air quality in the United States. The EPA
estimates that “compared to 1970 vehicle models, new cars, SUVs and pickup trucks are roughly 99
percent cleaner for common pollutants (hydrocarbons, carbon monoxide, nitrogen oxides and particle
emissions), while Annual Vehicle Miles Traveled has dramatically increased.” The air standards forced
automakers to equip cars with increasingly better catalytic converters that helped control emissions of
toxic pollutants.
Climate Change
While the United States was a leader in control of toxic pollutants, the country has refused to enact
legislation that would deal with climate change. In the 1980s, scientists argued that GHGs (Green House
Gasses) were altering the planet’s climate. From 1992 on, the nations of the world have met periodically
to work to find ways to limit GHG emissions and have ratified a series of treaties (the most prominent of
which was Kyoto Protocol in 1997) in an effort to get industrial countries to limit or reduce the amount
of GHGs they put into the atmosphere. The United States has refused to ratify a single one of these
treaties. Indeed, prominent political factions in the United States have described climate change as a hoax
and have blocked various national measures to come to grips with the problem.
The most prevalent GHG is CO2. In 2016, greenhouse gas emissions from transportation accounted for
about 28.5% of total greenhouse gas emissions, making it the largest contributor in the country. In
automobiles, CO2 emissions are directly correlated with gas mileage; the less gas a car uses, the less CO2
it emits.
US carmakers have resisted measures to limit CO2 from automobiles. One automobile executive noted,
“Prior to the 90s, if you could have everything end up as a CO2 emission, you were a hero. It has been all
about toxic emissions for thirty years.”
Despite the reluctance, the EPA had gained some instruments to regulate CO2. Following a law suit by 12
states and cities to force the hand of the EPA to act on climate, in 2007, the U.S. Supreme Court held that
greenhouse gases could be considered air pollutants under the Clean Air Act, thus laying the legal
foundation for the EPA to set CO2 emissions standards for vehicles as well as stationary sources. In
2009, the EPA issued an endangerment finding, arguing that CO2 and several other greenhouse gases
could be covered under the Clean Air Act.
In addition, the United States has CAFE (Corporate Average Fuel Economy) standards. The Congress
created these strictures to regulate fuel economy in new vehicles in response to the oil embargos of the
1970s. While they have not be revised in 30 years, in 2011, the Obama administration announced an
agreement to increase fuel economy to 54.5 miles per gallon for automobiles by the year 2025. In 2018,
a roll back of these standards was proposed by the Trump administration.
Environmental Regulation Europe

http://vol12.cases.som.yale.edu/volkswagen/environmental-regulation/europe
While member states in the EU had promulgated rules for

Resources environmental standards, the European Union only passed legislation
significantly after the United States. For automobiles, the EU initially
was far more interested in making sure that no country’s automaker
gained a competitive advantage. Rather than protecting people and
NOx
ecosystems from harm, the EU sought to ensure that environmental
NOx - what is it, what does it do?
regulations did not impinge upon fair trade among member states.
In 1970, spurred primarily by national emissions legislation in France

Comparison of EU and US and Germany, the European Council issued Directive 70/220 EC to
Regs preclude member countries from limiting the distribution of vehicles
A European study of the on the basis of non-compliance with national legislation on emissions
differences between within their borders.
environmental regulations in the
EU and the US. In time, the EU did pass standards for emissions for NOx and Green
House Gasses (GHGs). However implementing standards without a
central environmental regulator proved difficult. Autos certified in
Nitrogen Dioxide in any member state were required to be accepted by all other states.
Germany Testing standards differed from state to state and procedures for
A link to a short summary of NO2 approval were relatively opaque. Furthermore, the EU did not require
exceedance data in Germany in testing under real driving conditions Testing data were not made
2017. public, and member states' interpretation of European regulations
differed, leading some to argue there is "no effective in-use
compliance" in Europe.
Mind the Gap
Given the lack of central regulation, automakers were accused of
A 2015 report on the gap between
test and real-world car CO2 venue shopping, in other words, of seeking the EU state where it was
emissions highlights deficiencies the easiest to have their cars gain certification.
in European regulatory
enforcement. Like compliance, enforcement was largely left to member states that
must "lay down the provisions on penalties applicable for
infringement by manufacturers of the provisions of [the] Regulation
and take all measures necessary to ensure that they are implemented."
The rise of diesel in Europe
In a bid to reduce CO2 emissions The relatively lax enforcement mechanisms may have promoted the
in the 90s, Europe backed a major
switch from petrol to diesel cars
belief that emissions fraud would be undetectable. Jack Ewing, a
but the result was a rise in deadly journalist who covered Volkswagen, observed:
air pollution.
In Europe, the risk was not that high. There were almost no
penalties for carmakers that violated the emissions rules. The
United States, where penalties were routinely in the tens or
hundreds of millions of dollars, presented a different story. But,
ensconced in Wolfsburg, the engineers believed there was little

chance of getting caught. As far as they knew, there was no
technology available to measure emissions from a car that was
Diesel and VW driving on the road, exposing the huge discrepancy between the
VW has a legacy as a quasi-state amount of pollution that the car produced in the lab and what it
entity that has long steamrolled produced under normal driving condition.
regulators there. The company
and the auto industry are so
crucial to Germany that Greenhouse Gasses
Chancellor Angela Merkel has
repeatedly intervened to stave off Climate change efforts advanced faster in the EU than in the U.S. All
or weaken emission regulations. of the EU member states were signatories to the Kyoto Accords and
the EU implemented many different mechanisms for curbing GHGs.
Most prominently, the EU sponsored an ambitious emissions trading

Diesel Subsidies in Europe
program where companies could trade carbon allocations as well as
Diesel fuel, a major cause of toxic
air pollution in cities, was handed
create additional carbon allocations by sponsoring projects in the
€63 billion in tax breaks in the EU developing world. While the carbon program suffered during the
between 2014 and 2016, new global financial crisis in 2008, European politicians were proud to
research has found. point out their efforts in the fight against climate change. One veteran
environmentalist observed that EU determination on GHGs may have
been spurred by US intransience on the topic. It was a way of
demonstrating superiority over their trading rival.
For automobiles, the EU decided to go all in on diesel to curb emissions. Europe had a considerable diesel
infrastructure built up since the oil crisis of the 1970s. Good fuel economy—the diesel engine’s long
suit—reduces CO2 emissions and many EU states started to tax vehicles according to their CO2 output.
Furthermore. the European commission was lobbied strongly by big German car makers BMW,
Volkswagen and Daimler, to incentivize diesel. A switch to diesel was said by the industry to be a cheap
and fast way to reduce the carbon emissions that drive climate change.
After the Kyoto Protocol in 1998, the European Commission and the Association of European
Automobile Manufacturers (ACEA) reached a voluntary agreement under which the industry would
reduce CO2 emission from 186 g/km to 140 g/km by 2008. Mandatory standards for all passenger
vehicles were introduced in 2009, time-bound to 2015 at a level slightly below the previous voluntary
target. Further mandatory fuel economy CO2 emission standards for 2020 were agreed upon by the
European Parliament and the Council of the European Union in 2013, with a 95 g/km emission
limit. The target meant that vehicles on average would consume around 4.1 L/100 km of gasoline or 3.6
L/100 km of diesel.
EU member states sought to encourage the use of diesel fuels as well, with many member states taxing
diesel at a lesser rate than petrol. These incentives led to a boom in the sales of diesel automobiles in
Europe during the late 1990s and early 2000s, despite the fact that petrol was cheap and plentiful during
the time.
NOx
The EU was slower than the US to adopt standards on NOx. In response to the acid rain crisis in the
1980s, the EU started a long process to mandate catalytic converters on all cars. However, it was not until
1992 that the technology was made mandatory for all vehicles in member states and that the first
European standards, EEC Euro 1, were introduced to sets limits on NOx.
Government regulators were aware of the trade-off between gas mileage and NOx when it came to diesels,
but came out solidly in favor of working on GHGs. The Guardian noted:
David Fisk, chief scientist and policy director in the department of environment and transport in
the 1990s, told the Guardian that there had been “concern” in government when it was proposed
that diesel be backed over petrol. “Air quality was just not on the political agenda in the late
1990s. In 1997, Labour’s policy was for a 20% cut in CO2 emissions by 2020. Tony Blair
wasn’t obsessed with climate but he saw the political and soundbite advantage.”
A senior civil servant, now retired, who worked in the department for transport but asked not to
be named, said that cost-benefit studies of a switch to diesel were done by government but
climate change was “the new kid on the block” and long-term projections of comparative
technologies were not perfect.
The preference for diesel cars extended into the way emissions standards were written. While climate
GHG emissions standards from cars and trucks were technology-neutral, air pollutants emissions
standards like those for NOx, total hydrocarbons, or carbon monoxide were fuel specific. For instance, in
2015, the diesel standard for NOx was 25% less stringent for diesel engines than petrol engines. The
carbon monoxide standard for diesel was twice that of gasoline.
The view that diesel was the preferred solution to the climate change issue was a viewpoint shared by
many automotive engineers. European political figures promulgated this view, widely. German Prime
Minister Angela Merkel even tried to lobby US regulators to follow the European lead, speaking directly
to CARB officials about relaxing their standards on NOx.

Case Study Volkswagen Disaster 2015 PDF

Uploaded by

Copyright:

Available Formats

You might also like

Case Study Volkswagen Disaster 2015 PDF

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Case Study Volkswagen Disaster 2015 PDF

Uploaded by

Copyright:

Available Formats

Volkswagen

In 2015, the United States Environmental Protection Agency (EPA)

Overview Timeline of the Scandal

Daimler Chrysler, Volkswagen, and Audi announce that they intend

The ICCT and CAFEE paper is published.

VW Structure Structural History

As with much of German industry, engineering dominated

Piëch played a personal role in developing advanced technologies at

Volkswagen had outstanding relations with its workers in at the

For Volkswagen, the principle of co-determination became something

VW Strategy Beetles to Bentleys

By October 1949, when the British turned over administration of

VW Strategy Strategy 2018

Shortly after taking over in 2007, VW's new CEO Martin

worried that the standardization was too extreme. IHS Automotive

The 2008 annual report read:

(…) The construction of a local manufacturing plant in Chattanooga, Tennessee, is designed to

Diesels Taming the Diesel

The design of every automobile presents an illusion. A smooth metal

Cleaning up Diesel’s Act

Diesels Consumer Preferences

A senior GM executive noted about these engine problems,

Europe’s Diesel Boom

Environmental Regulation United States

Environmental Regulation Europe

While member states in the EU had promulgated rules for

In 1970, spurred primarily by national emissions legislation in France

ensconced in Wolfsburg, the engineers believed there was little

Most prominently, the EU sponsored an ambitious emissions trading

You might also like