Volkswagen Scam & Recovery

Introduction
The Volkswagen emissions reporting scandal is proving to be one of the most financially costly
corporate fraud cases in modern automotive history but those who initially began to write off the
company’s future prospects are now changing their tune. While the financial impact has been
quite severe to say the least, the company has solidly bounced back from the losses and the
automobile manufacturer is continuing to see sales and revenue growth under its revamped
strategy. The end of the story has yet to be written, but it is arguably clear that Volkswagen has
emerged from the brink of complete disaster to move forward into a favorable future.
The dollar amount of the financial carnage from the emissions fraud began to substantially take
shape in January 2017 when Volkswagen agreed to a guilty plea deal in a US federal district
court. The guilty plea resulted in $2.8bn in criminal penalties and $1.5bn in civil penalties in the
USA alone (Ewing, 2017). In addition to court-designated criminal and civil penalties in the
USA, the company also announced that it was going to spend over $18bn in recalls, retrofits and
other efforts to attempt and rectify the damage caused by the organized corporate fraud (Ewing,
2017). This latter figure represents the company’s financial set asides, some of which were
designated to settle the large number of civil cases in the USA.
In addition to the criminal and civil penalties in the USA, the company has also faced a variety
of legal and governmental actions from around the globe, from Europe to Asia to South America
(Ewing, 2017). Therefore, the actual global price tag of the corporate fraud remains to be seen
and it may take years before that actual financial toll is known. With such a significant financial
impact to Volkswagen, a number of analysts and auto industry observers initially surmised that
such an event would cause irreversible harm to the company resulting in steep, permanent
declines in auto sales and severe, irreversible damage to the brand’s reputation. It is easy to
imagine that such damage would be impossible to overcome. As it turns out, however, this could
not be further from the truth. In fact, for auto sales numbers reported for June 2017, a mere six
months after the criminal and civil penalty plea deal, Volkswagen saw brand sales climb 15 per
cent as compared to the same month in the previous year. For the entire year of 2017,
Volkswagen saw total sales up 5 per cent over the previous year, while many other auto
manufacturers were flat or down (Vellequette, 2017).
The ability of Volkswagen to post these numbers so soon after the very public scandal certainly
bears examination. This case study examines the Volkswagen response to the legal, financial and
public relations nightmare and discusses the surprisingly solid, positive sales results to this point.
While the entire financial recovery process is yet to unfold, it is clear that the company is making
substantial strides towards its future goals.
The scandal
The Volkswagen diesel emissions scandal first came to public light in September 2015 when a
notice of violation from the US Environmental Protection Agency was delivered to the company.
With that notice of violation, the EPA alleged that Volkswagen sold over 480,000 Volkswagen
and Audi diesel vehicles with an emissions compliance defeat device installed to bypass
environmental regulation in the USA. The defeat device, as alleged by the EPA, allowed up to 40
times more nitrogen oxides than allowed by federal emissions requirements (Atiyeh, 2017).
Essentially, the device allowed for better performance but higher emissions except when an
emissions test was detected by the installed software program. When an emissions test was
detected, the software would direct the engine to revert instead to a low-emission performance.
Ultimately, this cheat allowed Volkswagen to pass federal emissions requirements, while, in day-
to-day use, the cars were not compliant with federal regulations. The manipulated low emissions
levels during testing enabled Volkswagen to not only sell diesel vehicles in the USA, but also to
receive significant governmental subsidies set aside for low emissions vehicles. When the
affected Volkswagen vehicles were tested, the software kicked in and the company was able to
record lower emission levels and, as a result, receive substantial green car subsidies and tax
exemptions in the USA. Similar tax breaks and subsidies were also affected in Canada and
Europe (Atiyeh, 2017).
While the emissions violations became public in 2015, the process of discovery had been
evolving for two years. It was much earlier, in the spring of 2013, that a group of graduate
students from West Virginia University began testing a Volkswagen Jetta diesel station wagon to
measure the emission of nitrogen oxides in real-world driving conditions (Thompson et al.,
2014). The basis of the study was to examine whether the EPA process for the testing of
automotive emissions was accurate. The study proposed that, as most EPA testing is done in
laboratory conditions, investigating real-world data could either confirm or deny the results of
the EPA tests. As a result of these initial investigations, the recorded data actually revealed that
the Jetta, in real-world driving conditions, emitted 15 to 35 times the amount of nitrogen oxides
than were allowable by EPA standards (Thompson et al., 2014). The researchers also tested a
Volkswagen Passatt diesel in the same manner that tested 8 to 15 times the amount allowed
(Thompson et al., 2014). These results were in striking comparison to Volkswagen Jetta and
Passatt results as conducted by the EPA where EPA standards are measured by running the cars
on rollers in the laboratory. This academically based investigation, funded by a $70,000 grant,
began to reveal a long and twisted story of corporate fraud and deceit. These initial findings were
provided to the California Air Resources Board and to the Environmental Protection Agency in
May 2014 and more intensive scrutiny and testing began both in the USA and in Europe
(Thompson et al., 2014). One year after the initial findings were given to federal and state
governmental authorities, additional and more widespread testing confirmed that the corporate
fraud impacted a very large number of vehicles. As it turns out, the initial 480,000 vehicles were
just the tip of the iceberg as they only reflected sales in the USA. Volkswagen later admitted that
over 11
million diesel vehicles worldwide were actually involved in the falsified emissions scandal. The
affected vehicles were manufactured over a six-year period, from 2009 to 2015, and according to
several news reports, Volkswagen executives orchestrated the plan at a management meeting in
November 2006 as a way to get around any federal emissions requirements for diesel vehicles
(Ewing, 2017). While we may never know the full details of the corporate scandal and cover-up,
it has been reported that at least 30 people in the management level at Volkswagen knew about
the deceit for years. Notwithstanding these published accusations, Volkswagen has continually
denied the claims that the knowledge of the emissions cheat was as widespread throughout the
company. Therefore, the extent of executive involvement remains a debated issue that may never
be resolved.

The recovery process

It is quite remarkable that less than one year after the scandal was made public, Volkswagen
again emerged as the world’s number one automotive company, beating out Toyota and General
Motors to retake the crown. Despite a rocky 2015 and a difficult beginning in 2016, sales
throughout Volkswagen group began to rebound in the latter half of 2016. For the full year 2016,
Volkswagen Group had sold a total 10,312,400 cars and trucks, a 3.8 per cent increase from
2015’s figure of 9,930,500. In fact, each one of the company’s brands (with the exception of
their MAN Trucks line) posted year-over-year sales increases with the core, Volkswagen, car
brand being up 2.8 per cent year-over-year and the group’s mainstream luxury brand, Audi,
increasing its sales 3.8 per year-over-year. In June of 2015, when the Notice of Violation was
filed with the US Environmental Protection Agency, few could foresee that such significant
rebound would be coming in the first full year following the scandal. When examining
Volkswagen’s dramatic recovery, it is clear to notice four distinct elements that helped to bring
about this rapid turnaround. To push through the public relations nightmare and regain sales
traction, Volkswagen embarked on a four-step process: Replace, Restructure, Redevelop and
Rebrand. To try and achieve an unprecedented turnaround, the company sought to replace the
leadership, restructure the organization, redevelop the strategy and rebrand the product. These
four strategic elements formed the basis of a newly focused company and continue to push the
company forward and further away from the scandal. This four-step process of recovery provides
an excellent case study for other firms who may find themselves in the midst of turmoil and
crisis.
Rebrand (the product)
With new leadership, corporate restructuring and the evolution of the company strategy,
Volkswagen is attempting to move quickly away from the “diesel-gate” scandal and redefine the
company in drastically different terms. This redefinition seems to be a major priority of Mu¨ller
since he took the helm of the company. The sooner the company can settle financial and legal
liabilities stemming from the fraud and create a new image built on electric vehicles,
connectivity and mobility, the quicker the company will be able to distance itself from the whole
affair. This approach is apparently working as many customers have returned to the fold and
sales numbers are continuing to rise.
As Volkswagen is moving quickly to put its diesel past behind, it is interesting to note that
Volkswagen is now calling for the end to governmental subsidies for diesel vehicles. Mu¨ller, in
a recent interview with German newspaper, Handelsblatt, said, “We should question the logic
and purpose of diesel subsidies. The money can be invested more sensibly to promote more
environmentally friendly technologies” (Posky, 2017). An end to diesel subsidies and tax breaks
would greatly help Volkswagen’s new strategy, which is geared more toward electrification. It is
an extremely interesting proposition since the company had been one of the largest players in the
diesel passenger vehicle market for many years. With the new rebranding as an electric vehicle
manufacturer, Volkswagen certainly has the size and scope to take on industry leader Tesla.
Some analysts have called Volkswagen the potential “Tesla killer” (Mourdoukoutas, 2018).
Perhaps there is no better way to move beyond the entire diesel scandal than to build a new
reputation as the leader in electric vehicle manufacturing. By putting their new strategic
emphasis on the three prongs of electrification, connectivity and mobility, the company is
grasping on to the hottest trends in the industry and creating a new brand in the process. It is a
safe bet to assume that in less than ten years, Volkswagen group will be known as the leader in
electric, connected mobility and the whole idea of diesel-gate will become just a blip in the
company’s corporate history.