The Impact of Dieselgate Scandal on Volkswagen

Businesses are required to operate in accordance with the codes of ethics pertaining to the provision of a particular product or service. The governance and supervisory aspects of a business must observe the Corporate Social Responsibility (CSR) measures as well as promoting compliance with existing laws (Thompson & Kottasova, 2015). In an automobile industry, the emission policies is a major area of consideration that must be observed by producing vehicles that do not contribute to the production of nitrogen oxides (NOx) and other gases that exceed the permissible levels. Volkswagen (VW) is regarded as a motor vehicle manufacturer that incurred significant financial and reputational losses as a result of illegal production of vehicles that exceeded the maximum amount of NOx to be produced by automobiles and designed engines using the ‘defeat device’ which enabled its products to pass emission tests. Such an act has the implication of preventing a company from achieving sustainable growth due to sanctions, damage to reputation, and destabilized performance during an investigation process. The focus of this paper is an examination of the issues pertaining to the Dieselgate case study in the perspective of business, government, society, ethics, and the impact of these issues on the future implications.

Case Study of Volkswagen

VW was started in 1930s and has undergone significant improvements. When Martin Winterkorn became the CEO in 2007, he introduced a strategy of promoting VW’s global presence and environmental sustainability. The company’s vehicles were regarded as the most environmentally friendly (Schuetz, 2018). However, on September 18, 2015, USEPA reported that VW had been producing automobiles that have high amounts of emissions, but used the ‘defeat device’ to prevent the detection of NOx. The discovery of the use of the ‘defeat device’ has resulted into a halt in the sales of VW brands of vehicles, and the investigation commenced. There was a plunge in VW stocks by 20%, and customers were not sure whether VW had the capacity to give them a positive return on investments (ROI).

Issues from the Perspective of Business

In the context of business, it was a disastrous situation for VW to be involved in a scandal of producing vehicles that emitted NOx beyond the required limits since most clients would not want to purchase its cars in the future. Being implicated in the use of the ‘defeat device’ is likely to affect VW’s ability to operate competitively to achieve high profits due to the negative public perception towards it. The reduction in sales also implies that the company would incur losses that would not be easy to recover (Siano, Vollero, Conte & Amabile, 2017). The act of using the investor’s money to produce faulty cars that use the ‘defeat device’ implies that the firm will be neglected by most investors which will also affect its financial position and the ability to finance business activities such as operations, advertising, remuneration of workforce, and the purchase of spare parts for the production of more fleets of vehicles. Due to the scandal, some distributors of its cars may not accept to sell VW cars because the company already has a damaged reputation, and final users will be unwilling to purchase them. Other car manufactures are likely to be preferred by buyers which will make VW less competitive in the car manufacturing industry. The fact that VW incurred several categories of fines implies that it has been forced to incur significant cost in the ‘defeat device’ scandal. VW will experience a significant amount of loss such as being fined £2 billion by investors, and another fine for the repair of the vehicles in which the ‘defeat device’ was installed (Rhodes, 2016). Civil fines of $37,500 per vehicle and $18 billion for VW is a major business loss for VW. A number of customers filed suit against the company for the sale of defective vehicles to them. If they won these cases, it would mean that VW will incur additional fine in compensating the buyers. The scandal also implies that VW could not operate during the period of investigation and resolving the issues pertaining to the use of the ‘defeat device’ which further affected its ability to generate profits. In order to build its reputational image after the scandal, VW will need to engage customers and promote public relations about its commitment to avoid a similar situation.

Issues from the Perspective of Government

The Dieselgate scandal implies that VW had breached the government trust towards it as an authorized company in the manufacture and sale of vehicles. The governments of Germany and Britain have the right to impose fines on VW for the sale of motor vehicles that produce 40% emissions beyond the recommended limits of 10% (Preston, 2015). The authorities of foreign countries are also able to impose sanctions against the importation of VW authomobiles until it resolves the issue of producing cars with the ‘defeat device’. The former CEO has the responsibility to be accountable to the government of Germany for allowing the production of vehicles that emit high amounts of NOx despite the existence of laws that prohibit such a practice. In the United States, the government has the right to impose sanctions against VW for violating various forms of acts such as the Clean Air Act 1970 that states that all vehicle users must not use cars whose amount of NOx is greater than 10 per cent (Jung, Chilton & Valero, 2017). The supervisory board of VW should be held responsible for their negligence and inability to conduct an effective monitoring to enable the identification of vehicles that used the ‘defeat device’. The management governance of VW also needs to be held accountable for not complying with the principle of allowing external auditors to conduct an independent examination of the activities of VW which could have led to the anticipation of the ‘defeat device’ incident.

Issues from the Perspective of Society

As for the society, there is an expectation that VW would operate its activities in a manner that is beneficial to them rather than causing harm through its corporate social responsibility (CSR) initiatives. For instance, people would expect that the company should play a role in improving their lives through education and enabling access to health care services in the same manner as the previous years (Blackwelder et al., 2016). The act of producing cars that exceed the permitted NOx emission standard implies that VW has not put the interests of the society into consideration since the most affected people are the local residents and the general population in the areas where VW vehicles are used. During the operation of VW with the ‘defeat device’, the automobiles eliminate high amounts of toxic gases that can cause respiratory harm to the general population. The society would also expect that the company should operate in a legal manner so that they are motivated to provide the required support in terms of a favorable environment for business or labor force. The failure to conduct business fairly implies that people become disappointed, and the relationship with VW can be deteriorated (Thompson & Kottasova, 2015). If the company cannot provide vehicles that are in compliance with the set standards of performance, there will be rejection of their products, and the firm is likely to be abandoned by most people who would like to buy personal cars for individual objectives. The practice of energy management inefficiency has a direct impact on the society as the emission of harmful gases can result into increased cost of health care services in case of development of respiratory diseases.

How the Issues Relate to Each Other

There is a correlation between the business and government issues since policies are created by the government as means of creating a safe and regulated environment for business activities. The laws ratified by the authorities ensure that a business does not engage in unfair competition while addressing the needs of its target customers. The business and social issues are related as well as a company must promote a positive relationship with the society in order to operate effectively in environment (Siano, Vollero, Conte & Amabile, 2017). If a business does not interact with the neighboring communities and customers, it is less likely to be profitable because of unwillingness of customers to acquire its products. There is also a relation between the social issues and governance since the society is characterized by an encounter with various implications such as the existence of defective products which are not regulated and have a health impact on users. Either the state or the national government can formulate codes of conduct that determine the manner in which customers should relate. When there is a compliance with the government regulations pertaining to the practice of a business, most business activities can be conducted in a fair and considerate manner so that there is minimum negative harm on the public or the environment.

Possible Future Implications

The future implications in relation to the case study are as follows. The failure to address the relevant governance policies during the scandal is that the government of Germany may impose fines against VW and it may also execute other restrictions which put its activities under control. The scandal implies that VW may conduct and internal assessment to establish the laws pertaining to the provision of vehicles that do not emit high amounts of toxic materials to ensure compliance with them in the future (Rhodes, 2016). There is also an implication that VW will examine its business strategies in relation to ethical practice to identify ethical codes of conduct which need to be observed and promoted. Any ethical practices that must be introduced will be integrated into the new business strategy. In the context of the social impact, the implication is that VW must enact policies that promote the minimum negative impact on the environment in the future and appoint monitoring groups to create awareness in case those policies are violated.

Ethical Issues and their Implications on Decision Making

Ethics in business practices recommend that a vehicle manufacturer such as VW is to comply with standards of practice as set by law or governments in relation to the maximum amount of NOx to be produced as means of ensuring environmental protection and the welfare of the public in general (Preston, 2015). The implication is that VW was held responsible for its role in violating the maximum amount of NOx which is emitted by its vehicles in Germany, in the UK and in the United States.

Ethical business conduct also suggests that companies such as VW should provide true information about the amount of emission to the regulatory agencies. The implication is that failure of the former Chief Executive Officer (CEO), Martin Winterkorn to conceal the fact that the company was involved in the use of the ‘defeat device’ means that he was supposed to be held accountable for the sale of vehicles that produce more than 40-percent emissions above the recommended percentage.

Ethical business practice recommends that a business should not focus on promoting high revenue generation and competitiveness through the unfair means (Jung, Chilton & Valero, 2017). In order to comply with ethical requirements in business conduct, VW needed to distribute vehicles that have emission amounts within the permitted levels to the consumers without the use of the ‘defeat device’ that enabled its automobiles to by-pass the emission tests in order to achieve high sales in an unfair manner.

Conclusion

Volkswagen had been a major producer of various brands or vehicles that were distributed to customers in Europe as well as in other parts of the world. There was a lack of awareness of its involvement in the use of the ‘defeat device’ which enabled it to manufacture and sell vehicles that would emit high amount of NOx gases. Due to the illegal violation of the set limit of the minimum NOx emissions, it was affected by business, governance, and social implications which affected its ability to continue producing and distributing cars. VW has been forced to regain public trust in the production of vehicles by creating awareness about its resolution not to repeat a similar act as the case of the ‘defeat device’.

References

Blackwelder, B., Coleman, K., Colunga-Santoyo, S., Harrison, J. S., & Wozniak, D. (2016). The Volkswagen scandal. Retrieved from https://scholarship.richmond.edu/cgi/viewcontent.cgi?article=1016&context=robins-case-network

Jung, K., Chilton, K., & Valero, J. N. (2017). Uncovering stakeholders in public–private relations on social media: A case study of the 2015 Volkswagen scandal. Quality & Quantity, 51(3), 1113-1131.

Preston, B. (2015). Volkswagen scandal tarnishes hard-won US reputation as green company. The Guardian, 25. Retrieved from https://www.theguardian.com/business/2015/sep/25/volkswagen-scandal-us-reputation-emissions

Rhodes, C. (2016). Democratic business ethics: Volkswagen’s emission scandal and the disruption of corporate sovereignty. Organization Studies, 37(10), 1501-1518.

Schuetz, M., (2018). Dieselgate - heavy fumes exhausting the Volkswagen Group. Asia Case Research Center, the University of Hong Kong.

Siano, A., Vollero, A., Conte, F., & Amabile, S. (2017). “More than words”: Expanding the taxonomy of greenwashing after the Volkswagen scandal. Journal of Business Research, 71, 27-37.

Thompson, M., & Kottasova, I. (2015). Volkswagen scandal widens. CNNMoney. Retrieved from http://money.cnn.com/2015/09/22/news/vw-recall-diesel/index.html