VW’s smoke and mirrors

The German car giant Volkswagen (VW) is in crisis. In a scandal labelled “diesel dupe”, the world’s largest automaker has admitted that it rigged diesel vehicles in the US to pass emissions tests in the lab. According to the U.S. Environmental Protection Agency (EPA), some VW diesel cars sold in America had devices that could detect when they were being tested, and then change the engine performance to improve emission results. Once on the road, the engines switched back from this testing mode, and emitted nitrogen oxide pollutants up to 40 times higher than permitted. The EPA’s findings cover 482,000 cars in the US only, including the VW-manufactured Audi A3, and the VW brands Jetta, Beetle, Golf and Passat. However, VW has now confessed that about 11 million cars worldwide are fitted with the so-called “defeat device”. There are growing concerns that these emission rigging devices may have been fitted into other brands owned by the VW group, such as Skoda and Seat.

These revelations have exposed VW to as much as $18 billion in U.S. fines. With VW recalling almost 500,000 cars in the U.S. alone, it has set aside €6.5bn to cover costs. However, this contingency is unlikely to cover the cost of future legal actions from consumers and shareholders, and there is speculation that the US Justice Department will launch a criminal probe. These events are a massive setback for the automotive industry in general, which for decades had long resisted new environmental or safety measures. Half of VW’s European sales – its biggest market – are for diesel cars. There are now realistic fears that governments around the world may legislate for a great reduction in the global use of diesel engines.

Unsurprisingly, VW’s shares plunged more than 30% in the first couple of days after the scandal broke – with other carmakers also seeing big falls in their stock prices as investors wonder whether the scandal may spread to other manufacturers, who may also be cheating emissions tests. The trust in VW’s brand disappeared almost overnight, and it will certainly take years for its reputation and stock price to recover. The group chief executive, Martin Winterkorn, said his company had “broken the trust of our customers and the public”. Shortly after making this statement he was forced to resign.

Michael Horn, the head of the VW brand in the U.S., was profusely apologetic for the diesel-emissions cheating scandal and has vowed to win back the trust of the U.S. consumer:

“Our company was dishonest with the EPA, and the California Air Resources Board and with all of you. We have totally screwed up. We must fix the cars to prevent this from ever happening again and we have to make this right. This kind of behaviour is totally inconsistent with our qualities.”

In light of the emissions scandal, it seems hardly credible that at the beginning of September 2015, Volkswagen topped the Dow Jones Sustainability Index for the automotive sector. VW’s actions hardly match the commitments in its 2014 sustainability report, found on the group’s corporate website:

We aspire to shape the mobility of the future – making it responsible, environmentally compatible and beneficial for everyone. For us, being the most sustainable automobile manufacturer means that in everything that we do, we must act in line with the interests of the environment and of climate protection, as well as adding value for everyone associated with the Group and its brands. That includes customers, employees, suppliers, investors and the local communities at our production locations. This applies on all continents and in all regions and throughout the value chain.

These words will come back to haunt VW over the next few months and probably far beyond.

In an effort to sell more diesel cars in the U.S., VW recently ran huge marketing campaigns proudly proclaiming the low emission credentials of its vehicles. These boasts have been totally undermined by recent events. Worldwide, studies estimate that air pollution is responsible for more deaths than malaria and HIV-Aids together. Among other negative health impacts, high pollution levels can lead to heart attacks, asthma, cancers, low birth weight, low verbal IQ, poor memory and attention among children and is also linked to early onset dementia. In economic terminology, VW’s falsification of emissions tests is a classic example of externalisation of costs: the dumping of costs that VW  should have carried, onto its consumers and onto society in general.

As corporate scandals go, the VW events must be placed among the worst. It looks highly likely that this story not only will run and run, but also escalate. The banking crisis, and global recession of 2008, began with the collapse of a single bank, Lehman Brothers, but quickly engulfed many others. It is not inconceivable that the scandal might see the VW group close or significantly restructure, and other automakers being dragged into the mire. VW and its portfolio of brands are a critical cog in Germany’s economic engine. If consumers worldwide start rejecting German cars, this may have serious economic impacts on the world’s fourth largest economy, just as it copes with an additional one million people who have crossed its borders.

Is there any good news?

For IB Business Management students, the answer may be yes. The new BM programme requires the linking of the three Cs – concepts, content and contexts. This means that students must look for case studies that are sufficiently broad to exemplify all 6 concepts and also to be linked to subject content. The VW group now looks like it would be an ideal case study to follow over the life of the course, and to provide a ‘vehicle’ (no pun intended), for answering paper 2, section C questions. For example:

• With reference to one or two organizations that you have studied, evaluate different strategies that organizations can implement to respond to the impact of a sudden change in the external environment.
• With reference to one organization that you have studied, examine the effects of globalization on the ethics of its marketing policies.

There are plenty of content links with VW and with the burgeoning scandal, for example:

Unit 1: Business organisation and environment

• Vision and mission statements
• Ethical objectives and corporate social responsibility
• The reason why organizations set ethical objectives and the impact of implementing them
• Possible areas of mutual benefit and conflict between stakeholder’s interests
• Consequences of a change in any of the STEEPLE actor for a business’s objectives and strategy

Unit 2: Human resource management

• How ethical considerations may influence human resource practices and strategies
• How ethical considerations may influence leadership and management styles
• How individuals influence organizational objectives and how organizational culture influences individuals
• How ethical considerations may influence employer-employee relations

Unit 4: Marketing

• How ethical considerations may influence marketing practices and strategies
• How organizations can differentiated themselves and their products from competitors
• The importance and aspects of branding

Unit 5: Operations Management

• Opportunities and threats posed by entry into international markets
• The importance of research and development
• How pace of change in an industry and ethical considerations may influence research and development practices and strategies
• Crisis management and contingency planning

Student activity

Take the six business concepts (CUEGIS) and link each of the concepts to VW. You may wish to read the Lenovo post first to provide some ideas about how this might be achieved.

Sources

• BBC
• Bloomberg Business
• TriplePundit
• RobecoSAM