The VW Emissions Scandal

July 12, 2016

After years of marketing “Clean Diesel” as an alternative to hybrid and electric vehicles in an effort to win over environmentally conscious consumers – and gaining a U.S. market share of 70 percent of passenger-cars – the Volkswagen company’s diesel emissions scandal has rocked the trust of its customer base worldwide. The automaker is now contending with record losses from the fallout over its cover-up of its diesel engines’ failure to pass emissions regulations imposed by the EPA and reeling from settlement payouts resulting from litigation.

A Corporate Culture That Breeds Cheating

Some blame the management culture of Volkswagen on the company’s deception – a cut-throat, inflexible ethos that was founded in the World War II era by the German nationals with the assistance of Ferdinand Porsche, the inventor of the Beetle. A company that, today, is half-owned by Porsche’s descendants, with the state of Lower Saxony and Qatar’s sovereign wealth fund owning most of the rest of the company, and only 12 percent ownership by independent shareholders. Others believe that the scope of the problem falls outside of management’s direction and suggests the involvement of separate engineering teams.

The company has been conducting internal investigations of the people who may have had knowledge or involvement in the deception. VW Chairman Hans Dieter Pötsch called it the result of a “chain of errors,” and believes the fault is with the company as a whole, not something that can be pinned to a small group of miscreant engineers.

Das Auto Discovery

Volkswagen has admitted that software was installed to circumvent the system on approximately 11 million vehicles with the diesel engine. The software could sense when the car was undergoing testing, triggering activation of equipment that reduced emissions to pass the test. When the car was driven normally, the software turned down the components that reduced emissions of nitrogen oxide, increasing emissions to far above legal limits.

In 2014, testing on two Volkswagen models equipped with the 2-liter turbocharged 4-cylinder diesel engine revealed that some cars were emitting up to almost 40 times the permitted levels of nitrogen oxides. The EPA has since ordered Volkswagen to recall seven American car models with the affected engine (about 600,000 vehicles), and later disclosures uncovered the same software on additional VW models, some Audi models and a Porsche diesel model (an additional 75,000 vehicles).

“R” Is for “Restitution”

Volkswagen has set aside about $17.9 billion for costs related to the scandal. The company has reached settlements with the Department of Justice (DOJ), the U.S. Federal Trade Commission, and the state of California.

The DOJ deal covers vehicle buybacks and pollution control program funding worth up to $14.7 billion. A possible Clean Air Act civil penalty may still be imposed, and the DOJ is pursuing a criminal investigation into the company and its individuals.  Outside of the DOJ $14.7 billion settlement, VW has agreed to pay $86 million in civil penalties to California. The California settlement is a carve-out of a bigger $603 million settlement that the auto giant has agreed to with the attorneys general of 44 states, the District of Columbia, and Puerto Rico.

Volkswagen will offer consumers a buyback and lease termination for the approximately 475,000 of the 2009-model-year diesel vehicles sold or leased in the U.S., costing VW up to about $10 billion in revenue.

VW will also be required to fund projects to reduce noxious emissions where the vehicles were sold under the $2.7 billion pollution-reduction program, and, as part of the zero-emissions vehicle program, the Clean Air Act settlement, VW is required to invest $2 billion over 10 years on improving infrastructure, access and education to support and advance zero-emission vehicles.


While to date VW has not been required to compensate car owners or dealers in Europe – where most of the affected diesel models were actually sold – the pressure is mounting as settlements in the U.S. are reached. There are currently no plans for Volkswagen to buy back diesel models in Europe; rather, repairs to the affected models will be performed with software patches and installation of “flow straightener” devices. The recalls have been going on in Europe for months, following a phased-process according to engine type, with models requiring a mere software patch being the first to receive the updates.

Most of the lawsuits in Europe stem from shareholders, arguing that VW executives should have disclosed to shareholders sooner than it did the imminent disclosure of the emissions-cheating software, with a focus on recovery of lost investments. Politicians in Germany are now balancing the tight-rope between inflicting more financial damage on VW and acknowledging that the company did not act in an ethical manner, even if it did not violate European emissions regulations.

Pötsch has committed Volkswagen to earning back the trust of its customers. Steps will be taken to prevent dishonest engineering from making it to the production line, emissions tests will require third-party verification, and the introduction of “universal real-life tests in on-road driving” are all part of VW’s future.

The biggest challenge for VW going forward might not be earning back the trust of its customers (after all, public prosecution is fickle in a time where something is tweeted as hot news and then becomes dust in the wind mere seconds later), it may be changing the company culture. Certainly changing top management assists with shaking things up, but in fact, culture starts with leadership and strategy developed over time by which behaviors are deemed acceptable and are rewarded as such. As the late management consultant guru and author Peter Drucker once said, “culture eats strategy for breakfast.”

Strategically, then, it’s time for a culture change at VW HQ.

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