Answered! How Did Decision Making Contribute to Volkswagen's Emissions Cheating Scandal?…

How Did Decision Making Contribute to Volkswagen’s Emissions Cheating Scandal?

Apply the knowledge of Management presented in this chapter to the following case. Applying this knowledge should enable you to have a better understanding of how Volkswagen’s decision making contributed to their emissions cheating scandal.

Read the case below and answer the questions on the right.

The top three global automobile manufacturers in 2015 were Toyota (10.23 million units), Volkswagen (10.14 million units), and General Motors (9.92 million units).¹⁸⁹ Interestingly, all three have been involved in recent automotive scandals involving 2.6 million cars (GM’s ignition switch defect), 8.1 million cars (Toyota’s unintended acceleration), and 11.0 million cars (Volkswagen’s diesel emissions cheating).¹⁹⁰

Preliminary investigations suggest that a purposeful effort to deceive was the root cause of the Volkswagen scandal. Let’s explore the case in more detail to determine the role of decision making, beginning with the details of the cheating.

The Process of Cheating

“Volkswagen installed emissions software on more than a half-million diesel cars in the U.S. . . . that allows them to sense the unique parameters of an emission drive cycle set by the Environmental Protection Agency.” These “so-called ‘defeat devices’ detect steering, throttle, and other inputs used in the test to switch between two distinct operating modes.”

“In the test mode, the cars are fully compliant with all federal emissions levels. But when driving normally, the computer switches to a separate model—significantly changing the fuel pressure, injection timing, exhaust-gas recirculation, and in models with AdBlue, the amount of urea fluid [cat pee] sprayed into the exhaust. While this mode likely delivers higher mileage and power, it also permits heavier nitrogen-oxide emissions (NOx)—a smog-forming pollutant linked to lung cancer—that are up to 40 times higher than the federal limit.”¹⁹¹

It appears that Volkswagen used defeat devices because it could not satisfy the tough U.S. emission standards while trying to grow market share in the U.S. According to the Wall Street Journal, the origins of the “cheat” go back to 2012, when “EPA officials and California regulators were in touch with European counterparts about high emissions in diesel vehicles. California regulators tested Volkswagen cars and continually found them to pollute more on the road than in the lab.” Volkswagen was informed about these irregularities at the time and executives concluded that they were the result of “technical glitches.”

Three years later, then CEO Winterkorn “acknowledged ‘misconduct’ on Volkswagen’s part while pledging ‘Everything will be put on the table at this time, as quickly, thoroughly and transparently as possible.’”¹⁹²

The Role of Vision, Strategy, and Goals

Volkswagen has pursued a goal of being the largest automobile manufacturer by 2018, selling 800,000 vehicles in the U.S. alone. To achieve this goal, VW made a strategic decision to dominate the diesel market. Diesels were a niche market in the U.S. in the mid 2000s, but they represented more than 50 percent of new car registrations in the European Union. The company thought diesel was the way to grow revenue because “They were cheaper than hybrids and packed more muscle under the hood yet still often got more than 40 miles to the gallon.”¹⁹³

To grow the diesel market, VW needed to invent a way to deal with the sooty exhaust produced by diesel engines. The company knew it had to meet tougher emission standards in the U.S. than in Europe.

The company hired Wolfgang Bernhard to solve this problem, and his team came up with a solution that appeared very promising. Bernhard found a system created by Daimler called BlueTec. “It sprayed urea [cat pee] into the exhaust stream to neutralize harmful nitrogen oxides. . . . To make it work, cars need to be fitted with an extra pump and a tank of what is essentially cat pee.” Unfortunately, Bernhard had a falling out with CEO Winterkorn and was fired. Wolfgang Hatz took over and quickly dropped BlueTec because of the classic case of “not-invented here” according to Bloomberg Businessweek. He replaced BlueTec with a system that was supposed to trap harmful emissions in the tailpipe. We now know that Hatz’s decisions were ineffective at satisfying U.S. emission standards.¹⁹⁴

Given the scandal, Volkswagen has changed is overall goal to achieve “qualitative growth” over sheer volume. Current CEO Matthias Müller said that “many people outside of Volkswagen, but also some of us, did not understand that our Strategy 2018 is about much more than production numbers. A lot of things were subordinated to the desire to be ‘Faster, Higher, Larger,’ especially return on sales.”¹⁹⁵

Some VW employees agreed with Müller’s conclusions. They believe that the “cheat” occurred because former CEO Martin Winterkorn established goals that were too difficult to achieve. German newspaper Bild am Sonntag reported that “several engineers said that they had overinflated tyres and mixed motor oil with diesel to make the company’s cars use less fuel in tests, a deception that began in 2013 and carried on until the spring of this year [2015].”¹⁹⁶

Other Contributors to the Problem

VW is seeking employees’ input to determine the causes of the “cheat.” A memo was sent by Herbert Diess, head of VW’s brand division, to all employees, asking them to come forward with any information related to the emissions scandal. According to the memo, “Employees have until Nov 30 [2015] to provide ‘complete and truthful’ information about events as part of the internal investigation. . . . Those who come forward before the deadline ‘have nothing to fear from the company in the way of repercussions on the job such as being fired or held liable for damages.’”¹⁹⁷ This only applies to people covered by collective bargaining contracts.

For all others, VW is reserving “the right to transfer employees or change their responsibilities if they incriminate themselves. The company also warned that it has no influence over a decision by German prosecutors to seek criminal charges against any employees who confess to being part of the deception.”¹⁹⁸

The organizational culture and structure are also seen as contributing to the problem. CEO Müller believes that decision making is too centralized at the top, where a triumvirate of forces—“heirs to original Beetle designer Ferdinand Porsche, the German state of Lower Saxony, where most of Volkswagen’s German factories are located, and labor representatives that control half the seats on the company’s supervisory board”—have too much power. He also perceives that “the top-down power structure under Mr. Winterkorn had begun to slow down the business, most noticeably in the U. S. . . . Müller pressed for far-reaching decentralization of the company and the greatest possible autonomy for the brands.”¹⁹⁹

What’s Been Happening Since the Scandal Came to Light?

VW has hired Deloitte to conduct an investigation into the causes of the “cheat.” It’s a large investigation that involves over 450 experts. As of December 2015 the experts had conducted “87 interviews, told 2,000 employees not to destroy documents and emails, seized 1,500 devices such as smartphones and laptops, and secured enough data to fill 50 million books.”²⁰⁰

Volkswagen executives think that the problem was caused by a chain of errors that dates back to the promotion of diesel vehicles in the U.S. in 2005. CEO Müller “has said a company investigation so far points to a small circle of employees as being involved in the scheme.” VW’s former U.S. chief, Michael Horn, similarly concluded, “This was a couple of software engineers who put this in for whatever reasons.”²⁰¹Horn resigned in 2016 as he came under increased fire for the scandal.²⁰² Other experts doubt that senior managers were unaware of what was going on because they tend to be engineers who understand the complexity of meeting global emission standards.²⁰³

A fix has been found for diesel engines used in Europe. Repairs started in 2016.²⁰⁴ In contrast, VW’s proposed fix in the U.S. has been deemed “unacceptable because they lacked detail and inadequately addressed concerns about vehicle performance, emissions, and safety.”²⁰⁵

Volkswagen has set aside $6.5 billion to deal with costs associated with the scandal but this may not be enough. The lawsuits are starting to pile up. The U.S. Justice Department filed a lawsuit in 2016 that could cost the company $45 billion. The U.S. Federal Trade Commission also filed a lawsuit in March 2016 accusing VW of “deceiving U.S. consumers into buying emission-spewing diesel vehicles, seeking more than $15 billion in damages in what could be the largest false-advertising case in U.S. history,” according to the Wall Street Journal. Making matters worse, the South Korean Ministry of Environment filed a complaint in 2016 against the company. According to the Wall Street Journal, VW “had submitted a proposal to recall and fix some 125,000 of its vehicles in South Korea on Jan 6 [2016]. But the ministry said the proposal failed to explain why the problem occurred and how it would be fixed.”²⁰⁶

189 “Leading Motor Vehicle Manufacturers Worldwide in 2014 and 2015, Based on Global Sales (in million units),” Statista 2016, http://www.statista.com/statistics/275520/ranking-of-car-manufacturers-based-on-global-sales/, accessed March 29, 2016.

190 N. Bomey, “Deception at Heart of VW Emissions Scandal,” USA Today, September 23, 2015, p. B4.

191 C. Atiyeh, “Everything You Need to Know About the VW Diesel Emissions Scandal,” Car and Driver,January 7, 2016, http://blog.caranddriver.com/everything-you-need-to-know-about-the-vw-diesel-emissions-scandal/, accessed January 19, 2016.

192  W. Boston, M. Spector, and A. Harder, “VW Scandal Threatens to Upend CEO,” The Wall Street Journal,September 23, 2015, pp. A1, A2.

193 D. Lawrence, B. Elgin, and V. Silver, “Fraudvergnügen, How Could Volkswagen’s Top Engineers Not Have Known?,” Bloomberg Businessweek, October 26-November 1, 2015, pp. 50-55.

194 D. Lawrence, B. Elgin, and V. Silver, “Fraudvergnügen, How Could Volkswagen’s Top Engineers Not Have Known?,” Bloomberg Businessweek, October 26-November 1, 2015, pp. 50-55.

195 C. Atiyeh, “VW CEO: We Won’t Be World’s No. 1 Automaker by 2018, Every Single Model under Review,” Car and Driver, October 29, 2015, http://blog.caranddriver.com/vw-ceo-we-wont-be-worlds-no-1-automaker-by-2018-every-single-model-under-review/, accessed March 30, 2016.

196 See E. Curwen, “VW Engineers Blame Targets for Scandal,” The Times, November 9, 2015, p. 46.

197 W. Boston, “VW Seeks Whistleblowers,” The Wall Street Journal, November 11, 2015, p. B3.

198 W. Boston, “VW Still a Work in Process,” The Wall Street Journal, February 24, 2016, p. B7.

199 W. Boston, “VW Still a Work in Process,” The Wall Street Journal, February 24, 2016, p. B7.

200 M. Thompson, “Volkswagen Suspends 9 Managers Over Diesel Scandal,” CNN Money, December 10, 2015, http://money.cnn.com/2015/12/10/news/companies/volkswagen-scandal-investigation/index.html, accessed March 30, 2016.

201 D. Lawrence, B. Elgin, and V. Silver, “Fraudvergnügen, How Could Volkswagen’s Top Engineers Not Have Known?,” Bloomberg Businessweek, October 26-November 1, 2015, pp. 50-55.

202 S. J. Ewing, “Michael Horn Resigns as Volkswagen of America President and CEO,” Autoblog, March 9, 2016, http://www.autoblog.com/2016/03/09/michael-horn-resigns-volkswagen-america-official/, accessed March 30, 2016.

203 D. Lawrence, B. Elgin, and V. Silver, “Fraudvergnügen, How Could Volkswagen’s Top Engineers Not Have Known?,” Bloomberg Businessweek, October 26-November 1, 2015, pp. 50-55.

204 G. Ruddick, “VW Gets Go-Ahead to Repair Diesel Cars Affected by Emissions Scandal,” The Guardian,December 16, 2015, http://www.theguardian.com/business/2015/dec/16/vw-gets-go-ahead-to-repair-diesel-cars-affected-by-emissions-scandal, accessed, January 19, 2016.

205 C. Fleming, “California Regulators Reject VW Repair Plan for Diesel Vehicles Linked to Scandal, Los Angeles Times, January 12, 2016, http://www.latimes.com/business/autos/la-fi-hy-carb-rejects-vw-diesel-plan-20160112-story.html, accessed March 30, 2016.

206 See W. Boston, A Viswanatha, and S. Sloat, “VW Shares Fall in Wake of U.S. Claims,” The Wall Street Journal, January 6, 2016, p. B3; W. Boston, “VW Appoints Manager for North America,” The Wall Street Journal, January 20, 2016, p. B4; and N. Bomey, “Feds Seek $15B for VW Diesel Claims, USA Today, March 30, 2016, p. B1.

1.Based on the ethical decision tree, on which question did the organization go wrong?

Is the proposed action legal?

Does the proposed action maximize shareholder value?

Is the proposed action ethical?

Would it be unethical not to take the action?

Is the proposed action rational?

2.If Volkswagen’s current CEO, Matthias Müller, wants to focus on speed and results in cleaning up the scandal that has plagued the organization, he should utilize a(n) ___________ decision making style.

directive

analytical

conceptual

behavioral

proactive

3. California regulators tested Volkswagen cars and continually found them to pollute more on the road than in the lab. Volkswagen was informed about these irregularities at the time and executives concluded that they were the result of “technical glitches.” Which decision-making heuristic can this be attributed to?

overconfidence bias

availability bias

sunk-cost bias

anchoring bias

framing bias

4. Which of the following causes of the cheat are probably true?

The decision making was conscious.

The decision making was intuitive.

Evidence-based decision making was utilized.

Goal displacement occurred.

The decision making included predictive modeling.