”Volkswagen obfuscated, they denied, and they ultimately lied.” These were the words of U.S. Attorney General Loretta Lynch, as she set out how the German carmaker would be punished for attempting to willfully mislead U.S. authorities over the emissions produced by its diesel cars. This indictment by the Attorney General capped a long investigation into Volkswagen’s (VW) decision to find a way around U.S. emissions testing, opting, instead of redesigning its engines to run more efficiently, to “cook the books” by deliberately creating a system to cheat emissions testing. The story of the scandal represents a serious ethical violation that ran right through the organization, from the CEO down to its design engineers, who were asked to find ways to use unethical means to achieve VW’s goals.

The Volkswagen (VW) emissions scandal started in 2006, when VW engineers began designing a new diesel engine for the U.S. market. The U.S. government had been gradually tightening emissions standards, while simultaneously raising fuel economy requirements. The company’s supervisors in the engine department realized that they could not deliver an engine with more power while also complying with the governmental emission standards due to enter in force in 2007. Upper management considered their options and decided to ask their engineers to develop a unique software feature that they would bury in the VW’s 2.0-liter diesel engine software. The code would identify when the car was being tested in a laboratory, such as the controlled settings used to test engine performance, and turn on full emissions controls. In order to deliver a high-performance ride, the code would then turn the emission controls off when the car was back out on the road, leading to higher pollutant emissions. The engines emitted nitrogen oxide pollutants up to 40 times above what is allowed in the U.S. In effect, the software identified the way the engine was being run and delivered two very different levels of engine and emissions performance accordingly.

This “defeat device” software was based on a program developed by VW’s subsidiary Audi, which engineers had specifically stated should ”absolutely not be used” in the U.S. Knowing they were creating a device that was environmentally harmful was not widely popular within VW. In fact, engineers working on the software were uncomfortable with its implications and several of them raised objections within the organization regarding the propriety of the defeat device as early as 2006, when the software was first being developed. In response, an engineering manager decided that production of the diesel engines should continue, using the device. According to internal documents later acquired under subpoena, this manager also

”instructed those in attendance, in sum and substance, not to get caught.” The following year more software engineers objected to the development and several left the company in protest. Again, VW executives made the decision to press on.

As years passed, the software was continually refined and improved. For example, the early software cheating device had trouble transitioning from test settings back to road performance. In fact, several car breakdowns were blamed on the cars remaining in “test” mode while being driven on the road. Supervisors worked with engineers to solve the problem and ”encouraged further concealment of the software.” The engineers were also told to destroy documents relating to the issue.

The deception was finally revealed when, in 2014, the California Air Resources Board (CARB) approached the company to find out why tests had shown that its cars were emitting up to 40 times the permissible amount of nitrogen oxides when driven on the road.

When answers were slow in coming, CARB and the Environmental Protection Agency (EPA) decided to launch a full investigation of the VW diesel engine.

Internal documents obtained from VW show that supervisors ”determined not to disclose to U.S. regulators that the tested vehicle models operated with a defeat device.” Instead, they ”decided to pursue a strategy of concealing the defeat device . . . while appearing to cooperate.”

The investigation also revealed how VW staff were warned by an in-house lawyer that the authorities were about to circulate a so-called ”hold notice,” obliging them to retain and preserve documents under their control. To prevent this notification from getting out to the public, VW engineers were told to ”check their documents,” which several of those present ”understood to mean that they should delete their documents.”

This same message was repeated at several subsequent meetings, and ultimately thousands of documents were deleted.

As the scandal went public, VW’s response was to first deny everything, while blaming lower-level employees for the depth of the disaster. For example, the company’s former U.S. chief executive, Michael Horn, blamed ”a couple of software engineers.” Court documents, however, clearly show that dozens of people were involved in the original project and the subsequent cover-up attempts.

How widespread are VW’s problems?

To understand how very serious this issue is for VW, it is important to recognize that the company’s strategy for the past decade has been to pursue higher sales of diesel-powered automobiles as a response to the U.S.’ tighter emissions controls and fuel economy standards.

Their major push to sell diesel cars in the U.S. was backed by a huge marketing campaign purposely advertising its cars’ low emissions. The EPA’s findings cover 482,000 cars in the United States only, including the VW-manufactured Audi A3, and the VW models Jetta, Beetle, Golf, and Passat. However, VW has admitted that about 11 million cars worldwide, including eight million in Europe, are fitted with the so-called ”defeat device.” As a result, what started in the United States has spread to a growing number of countries. The UK, Italy, France, South Korea, Canada, and Germany, have opened investigations. Throughout the world, politicians, regulators, and environmental groups are questioning the legitimacy of VW’s emissions testing.

In 2016, VW announced that it would recall 8.5 million cars in Europe, including 2.4 million in Germany and 1.2 million in the UK, in addition to the 500,000 in the United States as a result of the emissions scandal.

The company’s share price has fallen by about a third since the scandal broke. Its CEO and Chairman, Martin Winterkorn, resigned in the fall of 2015, acknowledging that the company had “broken the trust of our customers and the public” and claiming he was “stunned that misconduct on such a scale was possible in the Volkswagen Group.” Matthias Mueller, the former boss of Porsche, replaced Mr. Winterkorn as head of the company.

Upon taking up his new post Mr. Mueller said, ”My most urgent task is to win back trust for the Volkswagen Group—by leaving no stone unturned.” Other executives chimed in too. VW America boss Michael Horn stated, ”We’ve totally screwed up.” With VW recalling millions of cars worldwide, it had to set aside $6.5 billion to cover costs. That resulted in the company posting its first quarterly loss for 15 years of nearly $3 billion in late October 2015.

The company has reached an agreement with the U.S.

government to pay $14.7 billion in fines for its role in the diesel emissions violations, with the likelihood of even more penalties to come. The EPA has the power to fine a company up to $37,500 for each vehicle that breaches standards—a maximum fine of about $18 billion. According to VW, “The costs of possible legal action by car owners and shareholders cannot be estimated at the current time.”

Postscript It turns out that Volkswagen is not the only cheater. The scandals that plagued Volkswagen have broadened, as several Japanese firms are now admitting a systematic culture of cheating. In May 2016, Mitsubishi president Tetsuro Aikawa announced he would step down following his company’s admission to cheating fuel efficiency tests, something that dates back to 1991 when Japan introduced new regulations. Elsewhere, two other Japanese carmakers now have their names involved in the controversy. Suzuki has also announced “discrepancies”

in fuel economy and emissions testing of 16 Japanese market models. Nissan, meanwhile, has faced accusations from South Korea that some of its UK-made Qashqais have defeat devices fitted to their engines.

The South Korean government apparently plans to fine Nissan nearly $1 million, but the Japanese company firmly denies any wrongdoing. Investigations are still ongoing. 

Questions

1. How do you think Volkswagen executives could justify this behavior? How do you think the actions of the Japanese automakers influenced VW’s decision-making?

2. How would you personally respond if you were a member of a project team developing a device that was designed to cheat environmental testing?

What if you were the sole support for a large family with three children in college?

3. Is there a “moral” to this story for you? What would that moral be?