Abstract

On January 4, 2016, the United States Department of Justice filed a civil case on behalf of the United States Environment Protection Agency (EPA) against Volkswagen AG (VW) for violating the Clean Air Act (CAA). The complaint alleged that VW had installed illegal defeat devices in about 600,000 of its diesel vehicles in the US which impaired EPA’s emission test system and the vehicles caused emissions that exceeded EPA’s standards, resulting in air pollution. The scandal dragged VW into the worst crisis it had faced in its 78-year history. It not only brought down VW’s stock price drastically but also raised the possibility of the automobile major having to pay out billions of dollars as fines and penalties. The scandal cast a shadow on the reputation of the company, known for selling some of the world’s most luxurious and best selling brands. VW saw a massive drop in sales post the scandal. Known for its engineering marvels and some of the best engines, VW suddenly saw customers expressing doubts on its core competence. The brand value of its cars and the company itself suffered. In order to become the world’s largest car maker, VW, wanted to take on Toyota in the largest automobile market in the world, the US. With this in mind, the company developed the ‘EA 189’, a powerful fuel-efficient diesel engine. However, VW’s engineers found that it was quite difficult to develop a diesel engine that met the stringent US emission standards. VW’s own cost restrictions and target timing only compounded its difficulties. In order to get past the problem, VW was alleged to have developed sophisticated software which became activated during emission tests and ensured that the vehicle met the US emission norms. However, during normal driving conditions, the effectiveness of the emission control devices was greatly reduced, and the cars emitted oxides of nitrogen (NOx) at levels up to 40 times the EPA compliance level. NOx pollution contributed to harmful ground-level ozone and fine particulate matter. These pollutants were linked with asthma and other serious respiratory illnesses and premature death due to respiratory-related or cardiovascular-related effects. The defeat device which exploited the external system helped VW increase sales and capture half of the US markets. Interestingly, the incident came to light from an unexpected source — a researcher who was testing emissions in vehicles under ordinary conditions. The scandal caused an uproar, leaving the VW management and executives in shock and denial. It brought to light the corporate governance and whistleblower policy at VW along with exposing the loopholes in the systems and processes at the company.

Learning Objectives

The case is structured to achieve the following Learning Objectives:

• Bring out the dark side of capitalism where the executives try to achieve their goal of creating wealth with little concern for the environment or society
• Understand the reasons for the failure of corporate governance systems at Volkswagen
• Analyze the role of ethics in a growing competitive business environment
• Debate the reasons for the failure of external systems in recognizing problems and their effects on environmental and health
• Debate the ramifications of the scandal on regulations in different parts of the world, especially for Europe and for Germany in particular.

Keywords

Radical Openness, defeat device, scandal, environmental effect, health effects, Environment Protection Agency, Consequentialist Theories, Dieselgate Scandal, Corporate Governance, Whistleblower Protections, Financial impact, Volkawagen, Psychological Egoism, Clean Air Act.