Introduction
Towards the closure of 2015, customers, government authorities, and the automotive industry as a whole were shocked by the unethical conduct by the Volkswagen Group, which is among the leading automakers around the world. The unethical conduct arose from emissions testing cheating done by the Volkswagen Company, using the software manipulation of their diesel cars to pass during emissions tests (Mansouri, 2016). In essence, the company programmed its cars that they would meet emissions standards while being tested, but would release more than acceptable levels, while under everyday driving conditions. The factors underlying the company’s unethical conduct include that the United States Environmental Protection Agency (EPA) had imposed very stringent emissions standards on automakers. As a result, some managers in the company decided not to strain to comply with the stringent standards, and instead, to cheat using special programming during emissions testing, which allowed the cars to pass the tests. Another factor that played a key role in the making of the ethical dilemma includes the limited allocation of financial resources and time to comply with the emissions standards, which drove the engineers and managers to look for a shortcut. The third factor underlying the unethical conduct of the company is that its corporate culture encourages compliance with rules, which drives employees and managers to meet the expectations of the company at all cost (Mansouri, 2016). This report explores the unethical conduct by the Volkswagen Group; the ethical dilemma that led to the issue, the financial and stakeholder impacts; and the ways the company handled the issue.
Company History
The Volkswagen Company was founded in 1937 by labor unions, in collaboration with Ferdinand Porsche, during the Nazi era (Harvardbusiness, 2017). Ferdinand Porsche is the man that helped develop the Beetle (the people’s car), which was meant to be affordable for all people. The Beetle became Volkswagen’s flagship car and was first released to the market during the late 1940s, and in ten years, the company had sold millions, to all parts of the world. After the sales for the Beetle began dwindling during the late 1970s, the company began building other car models, including the Jetta, Passat, Polo, and Golf (Harvardbusiness, 2017). Later on, the Volkswagen Company grew to become the larger public holding company Volkswagen AG, which operated twelve subsidiaries, as of 2014 and employed over 600,000 people globally. The subsidiaries include Audi, Bentley, and Porsche, among others. During the middle 2000s, after Martin Winterkorn took office as the company’s CEO, the automaker made the public announcement that it sought to become the world’s leading car maker in the coming decade. Unfortunately, the ambitious goal was set in a company led by autocratic leaders, during a time that the global auto industry was facing major engineering challenges as a result of high fuel prices, the pressure to improve fuel economy and the growing concerns over climate change. The various areas and sources of pressure drove the company to the limit, and due to the leadership style, the managers and employees had to do whatever they could to meet the goal set by the CEO, Winterkorn, and to also compete in the global auto industry.
Ethical Dilemma faced by the Volkswagen Company
At the time that Winterkorn set out to make the company the number one automaker in the world, the global auto industry was facing major engineering challenges. The challenges were the result of factors such as high gas prices; the push to improve fuel economy and the growing concerns over climate change, which underlies the stringent emissions regulations by the EPA (Harvardbusiness, 2017). In the environment of pressure, the company had to find ways to improve fuel economy, while also delivering on the promise of the powerful vehicles that Americans love to drive (Harvardbusiness, 2017). The trend reflected in the success of hybrid-electric vehicles, especially Toyota’s Prius, and therefore, the VW Group was driven to develop competitive cars, and it opted to exploit the diesel option. As of 2007, half of the European cars were diesel-driven, as compared to only 5 percent in America, and Winterkorn saw the opportunity to grow the company (Harvardbusiness, 2017). The massive development of diesel cars led to the pressure to meet emissions standards, which was impossible at the time, due to the designs of the engines developed by the company. As a result, the CEO, who set the goal of making the VW Group the number one automaker, opted for the option of developing as many diesel cars as possible, which he saw as the most promising potential growth area.
It is possible that Winterkorn knew that the diesel engine designs that the company produced at the time could not pass US emissions tests, and therefore, made the unethical choice to move on with the ambitious but harmful choice (Harvardbusiness, 2017). The evidence that Winterkorn may have started the chain of unethical decisions leading to the scandal includes that, after taking over, he abolished the idea of collaborating with the Daimler Company and the use of the BlueTec invention to keep emissions low (Lynch, 2016). As highlighted before, the company’s leadership is autocratic, and as reported by Lynch (2016), the consequences of disobedience could be as severe as facing threats from company executives to losing their jobs. In such a high-pressure environment where managers and employees could not question executive decisions, Volkswagen engineers had little time, and probably resources, to meet the ambitious goal set by the executives that would not accept failure. As a result, the engineers did what they could to overcome the pressure, and installed software that would cheat during emissions tests. In essence, the ethical dilemma arose from the massive pressure by executives to develop more cars, the easy but harmful opportunity to install cheating software, and the history of emissions cheating during the 1970s (Lynch, 2016). The three factors made making the unethical decision a viable option and thus led to the diesel-gate scandal.
Financial Impact on the Volkswagen Company
The unethical conduct of lying to customers, the company’s shareholders and the entire public had a major financial impact on the Volkswagen Company. The financial impacts include that it lost the loyal customer following, which affected the flow of business to the company. Unfortunately, it is impossible to measure the exact financial losses triggered by the unethical conduct, in terms of the customers that would have bought the company’s vehicles, but did not. The measurable metrics of the financial impacts on the Volkswagen Company include that during the few days following the uncovering of the company’s unethical conduct, the company lost 37 percent of its share value. The company lost its share value because of the high levels of pollution and the poisonous nature of the gases released by diesel vehicles produced by the company (Schwartz, 2018). Snyder (2016) also revealed another aspect of the financial impacts that the company suffered due to the revelation of the unethical conduct that characterized the scandal. The impacts include that by the end of 2015, the company had lost $18 billion in lost business, which led to a loss of $4.6 billion (Snyder, 2016). Some of these loses include the amounts paid as fines and the loss of the sales the company had previously made, for example, the cars it bought back. Finally, as of 2018, the company faced the risk of losing money in the excess of $10.7 billion as damages to its shareholders, due to the losses they faced as a result of the scandal (Schwartz, 2018). As of now, it is impossible to estimate the exact financial impact of the scandal, as more financial losses continue to unravel due to the case.
Impact on Stakeholders: Consumer, Shareholder, Employees, and the Public
The most glaring impact of the diesel emissions scandal on consumers included the recall of the cars produced between 2009 and 2012, due to the fact that they did not meet emissions standards. In essence, the customers lost the cars they used for months or years, due to the company’s conduct. Secondly, Volkswagen consumers will lose a lot of money in the form of low car resale values, which would not be the case, if not for the company’s unethical conduct (Newman, 2015). The company’s shareholders were also affected by the company’s unethical conduct, noting that the scandal reduced their expected financial returns greatly, as compared to those they enjoyed before. As an example, Schwartz (2018) notes that the company lost 37 percent share value, which was equally matched by the returns for shareholders. As an example, the company registered a loss at the closure of 2015, which means that the shareholders may have gotten zero returns. Similarly, Schwartz (2018) notes the financial losses and probable loss of the investments made by shareholders, which is evident from the suits leveled against the company. The company’s employees were equally affected by the scandal, noting that the company fired at least 30,000 workers, due to the financial impact of the diesel emissions scandal (McHugh, 2016). Further, it is likely that even the workers that will stay in the company will not enjoy the same wages, returns, and benefits they enjoyed before the scandal. Finally, the Public was equally affected by the deception, noting that some that may have planned to buy Volkswagen cars will not. Similarly, the release of dangerous emissions by Volkswagen diesel vehicles may have caused many health complications, despite that it is impossible to quantify the affected number.
Marketing/ Public Relations Impact on Volkswagen
According to Boudette (2017), the Volkswagen Company’s unethical conduct and the scandal it caused had a major impact on Volkswagen’s marketing department and operations. The article notes the case of a Volkswagen dealership owned by Jeff Williams, which did not attract any customers, immediately after the diesel emissions scandal. For weeks, the dealership did not register any customers coming in to buy, and as a result, the owner had to cut down the number of salespeople by half, from four to two (Boudette, 2017). However, the marketing impact began to dwindle towards the start of 2016, and the recovery continued into 2017, marking a journey of recovery for the company. The scandal’s public relations impact was equally severe, noting that the company spent over a year cheating US officials that the differences in emissions levels were the result of technical errors (Joshi & Hakim, 2016). However, that all changed, and the company shifted to explaining and apology mode on 18th Sept 2015, after the scandal became public and the EPA issued a violation notice. At that point, the company’s previous “clean diesel” slogan became irrelevant, and even a part of the problem it was facing. After the company’s admission that it used defeat devices in its cars, the then CEO, Winterkorn switched to blaming the mistake on a few people (Joshi & Hakim, 2016). Later on, Michael Horn, the president of Volkswagen America division acknowledged that the company had messed up. After the admission, the company began the public relations attempts to appeal to customers by offering incentives worth $1,000, primarily as goodwill payments, which it did not offer in countries such as Britain (Joshi & Hakim, 2016). The company’s conduct shows that it admitted its errors after claiming no fault on its part, and began pushing to rebuild its reputation, by offering benefits in the US.
How Volkswagen Handled the Situation
After the public disclosure of the problem of emissions cheating, the company did not acknowledge that it had used cheating devices in their cars. Instead, the company insisted before US officials that the differences in emissions testing were the result of technical errors, and not a deliberate attempt to cheat (Joshi & Hakim, 2016). However, after 18th September 2015, when the cheating scandal became public and the EPA made the notice of legislative violation, and then the company admitted using emissions cheating devices to give false information during testing. However, even after admitting to the use of cheat devices, the then CEO issued a public apology but kept on insisting that it was the fault of a few staffs. The handling of the solution was not the best, and it may have triggered the deeper adverse effects.
The Rightness of Volkswagen’s Choice
For over a year, the company insisted that it had not cheated during emissions testing, despite the knowledge that it had installed the cheat software in their diesel cars. The rejection of the reality they knew shows that the company’s choice and course of action was not the best, noting that it may have led to the loss of more business that it should have lost. The evidence that the company had made the wrong decision includes that it only accepted that it had cheated after September 18th, after the EPA offered the notice of violation, and the scandal became public (Joshi & Hakim, 2016). Instead, the company should have done all the research required to prove that their vehicles had a problem, and then went on to acknowledge the fault of using cheat software. If the company had done that before the EPA issued the notice, it is likely that many customers would not distrust it as it happened.
Conclusion
The research paper showed that the company’s organizational culture, which may have played a key role in the making of the scandal, may have resulted from its Nazi roots. The company is led autocratically, and the setting of the goal of becoming the world’s largest automaker set in place the factors that led to the diesel emissions cheating scandal. The goal set and the culture of not questioning top leadership drove the company’s managers and engineers to use emissions cheating devices, which would allow the company to exploit the growth frontier that diesel cars offered. The scandal had a major financial, marketing, and public relations impact, and also affected the various stakeholder groups. The handling of the situation by the company was inappropriate, noting that it maintained that the emissions testing discrepancies were the result of technical errors. In the same position as the company’s senior management, the best solution to the unethical conduct of the company was immediately investigating the problem, towards ensuring that the emissions levels discrepancies were true, as reported by US officials. After investigating the problem and establishing that it was factual, the company would not wait for the EPA to issue a notice in September 2015. Instead, the admission would have come before, which would help to create a sense of accepting responsibility for the unethical conduct, especially in the eyes of customers. The admission would be best followed by public relations aimed at restoring customer confidence in the company and probably restore its credibility as an automaker.
Essay: Unethical conduct – Volkswagen Group
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