This paper examines the Volkswagen Emission scandal that took place in September 2015.
The Volkswagen Group had through the years been using defeat devices to make sure that its automobile units were accepted into markets that had stringent environment emission regulations such as the United States. The scandal had a devastating impact on the brand's reputation, and there are numerous lessons that one can learn from it since its negative impact is still felt to this day, and the organisation has not fully recovered. The company had an overarching goal of becoming the world's leading automaker by the end of this year, and this goal remains a mirage since immediately after the news of its unethical behaviour, VW lost a third of its international customers. The top management of VW played a crucial role in aiding the occurrence of the scandal, and although charges have been brought against several former officials, the negative publicity will remain for years to come.
Introduction
The occurrence of corporate scandals generates immense public scrutiny on the operations of an organisation and invokes conversations about imminent change while raising questions on the legitimacy and authenticity of the enterprise as an agent of public goodwill (Patra 2016). The resulting aftermath of the increasing scrutiny and concerns about an enterprises operation following a corporate scandal is the tainting of its reputation which in turn leads to a decline in market position, stock position as well as customer share. Since September 2015, Volkswagen Company has been involved in a reputation-damaging cheating scandal, after it emerged that the company had been fitting "defeat devices" in its international market car products (Mansouri 2016). The installation of the defeat devices made it possible for the company's management to deceive the testing equipment by various international emission testing entities that it was meeting the set emission metrics.
The corporation which had before the emergence of the crisis, been scaling its manufacturing operations with the intention of becoming the world's largest automobile manufacturer by 2018, lost one-third of its market capitalisation in the ensuing reaction from the public (Mansouri 2016). Volkswagen although quickly taking action to address the crisis by issuing an apology, ordering a voluntary recall of sold units and the resignation of the CEO alongside other top directors, the damage had already taken place and it will take years for the company to grow its market share again and regain the lost public trust and goodwill (Mansouri 2016). The enterprise is already facing a string of lawsuits from disgruntled customers and institutions which feel it acted negligently, making the future of the once fast-growing company, look grim. The purpose of this paper is to examine the impact of the emission scandal on Volkswagen (VW) Corporation and what its administration can do to make sure it rebuilds its tainted image.
Analysis
The following section of the paper examines the causes of the scandal, the management's guilt and the reputational impact of the scandal on the corporation.
Causes of the scandal
The Volkswagen scandal is traceable to 2005 when Wolfgang Bernhard in an undertaken to reaffirm the organisations competitiveness in the U.S market, sought to have the company develop diesel engines which he thought could rival other automakers such as Toyota and build a market niche (Patra 2016). The penetration of the enterprise in the United States market was a challenge, taking into consideration that it had some of the strictest environmental regulations, which made it necessary for all automobile manufacturers to continuously refine their diesel engine standards to conform to the set emission metrics. The company introduced the diesel engine 189, which could meet the high emission standards set and increase the Volkswagen cars fuel efficiency. The development of EA 189 became the differentiator that would see the customers in the new market embrace VW products. For instance, the clean diesel sales of the organisation in the United States rose from 43,869 in 2009 to a high of 98,500 in 2014, with the company's management focusing a steady rise in the coming years which could reflect the increasing acknowledgement of its vehicles by customers.
The marketing slogan for the company through the period starting 2007 to 2015 when the scandal broke was "clean diesel", which made its clients believe that through each purchase they made, they were contributing to a safe environment by using vehicles with minor emissions (Barth, Eckert, Gatzert and Scholz 2017). In 2012-2013, the Deutsche Umwelthilfe (DUH) raised concerns that there were irregularities between the models that automakers were using for the emission testing and those that were going to the markets (Barth et al., 2017). The Environmental Protection Agency (EPA) following recommendations made by the DUH, carried out tests on the VW models on the American roads and realized that there were irregularities between the test models and the ones the customers were using. The findings led to investigations, which saw Volkswagen's administration admit that it was using defeat performance to beat the testing devices and improve the general perception of the public about its products (Mansouri 2016). The result of the admission of manipulation saw various countries start investigations and customers file lawsuits seeking compensation for damages and negligence of the company.
VW's management culpability
Before the occurrence of the scandal, several engineers working with the corporation had raised questions on the ethics of using the defeat devices during testing and launching different models in the market. The management had instead of addressing these questions taken action to stifle such sentiments through blatant ignorance and negligence (Patra 2016). In the wake of the scandal, the company's top administration and more so, the CEO and his board had given misleading reports on the number of automobile units that were already in the market and which had similar defects.
The CEO and his board had from the onset and after carrying out trials on engines such as EA 189, realized that they did not meet the set emission standards in various markets in Europe, South Africa and in the United States but still went ahead to use deception to make sure they did not improve their vehicle quality (Mansouri 2016). The result of the management's dishonesty and unethical behavior was the scandal which saw authorities across Europe, instigate criminal proceedings against several top officials of the enterprise such as the CEO. The board of the company had negligently undertaken to misrepresent itself before its clients and the regulatory authorities by offering products that were substandard and contravening the emission standard provisions (Mansouri 2016). The actions of the CEO and his team to manufacture and market products that they knew were of poor quality, amounts to fraud.
Impact of scandal on VW's reputation
The occurrence of the scandal has had a devastating effect on the corporation, with the most noticeable impact been the decline its share price and equity. Immediately after the news that the EPA and authorities in Germany and London were instigating investigations into the operations of the organization and its management, its shares started plummeting as investors were making panic sales and crossing-over to other brands that they felt were secure (Patra 2016). The news of VW's deception and fraud through the use of the defeat device led to the emergence of uproar from customers and other concerned citizens who were keen on making sure that the actions of Volkswagen did not go unpunished and all those accountable were brought to justice (Patra 2016). The negative publicity resulting from the media buzz and instigation of investigations saw its sales volume globally reduce since no client was willing to aid in the increment of greenhouse gas emissions which are a leading cause of global warming.
The customers loyal to the brand felt that the management had betrayed their confidence, and the only way they could air their frustration and disappointment was through the filing of lawsuits, switching to the company's rivals and filing for the voluntary recall of their vehicles (Piazza and Jourdan 2018). The lawsuits filed by customers across the globe would put a strain on Volkswagen's finances, its public image, as well as further, disenfranchise its clients who felt betrayed already. According to Barth et al., (2017) the increase in VW's sales volume in the United States was the result of its aggressive marketing of its automobile units as fuel efficient, and with the emergence of the news that it had been lying, policymakers and analysts expect its market in the country to reduce, eroding gains made in several years.
The scandal changed the external perception that clients held about VW, and this is unlikely to change anytime soon since some of the customers although engagement from the company in the future will feel that it is still dishonest in its dealings (Irwin 2018). The customers who were driven to pay the premium price for the brand's automobiles will no longer be willing to make such purchases since they do not believe its vehicles represent the money asked. The impact of this will be reflected in the inability of its stock to fetch a high price and attract investors across the board that will be willing to help fund its future operations (Irwin 2018). The government and regulatory agencies which are a crucial pillar to the success of automakers will also be keener in comparison to the past when some laxities would have been allowed, to make sure that the company is no longer misrepresenting its products (Irwin 2018). Volkswagen will become the target of regulatory investigations which will be out to make sure such an incidence never occurs in the past.
Following the scandal, the management had to initiate a voluntary recall from clients around the globe, an undertaking that is disruptive to its supply chain and most importantly, expensive (Bachmann Ehrlich and Ruzic 2017). The organization is bound to lose more clients during the recall since differences will emerge between their expectations and those of the brand shipping suppliers, further soiling the corporation's already tainted image. The loss of trust and goodwill of the customers' pose a significant challenge since the company will have to invest enormously in public relations campaign and marketing (Burke Dowling and Wei 2018). The new administration of VW will be tasked with addressing the misgivings of the previous team and regain the trust of the clients and dissuade public interest from further tarnishing its image. All these are initiatives that require significant resource investment and are likely to continue for an extended period.
Conclusion
The above analysis sought to establish the cause of the Volkswagen emission scandal that took place in 2015, the role of the management in the incident and the reputational damage the scandal had on its operations going forward. The administration of Volkswagen had undertaken to misrepresent its automobile units to the regulatory authorities and customers, and even ignored the concerns raised by its staff on the morality of the undertaking. The breaking of the scandal saw a huge public outcry, the filing of lawsuits against the corporation and its top officials, with the board seeking to recall products that were in the market which is an expensive undertaking. The share price of the brand declined, sales volume tumbled, and the organization became embroiled in a legal tussle with the same customers it had been seeking to serve using its fuel-efficient vehicles. The regulatory authorities have increased their scrutiny on VW's products, and it is likely that the company will take several years or a decade to recover from the scandal.
Recommendations
The new management team at Volkswagen can implement several suggestions to help address the tainted public image and reputations after the scandal and these includes;
Rebranding
Over the last six decades, the brand has been able to grow through leaps and bounds to become a notable automaker with a significant market share. The failure of the brand is attributable to poor management practices and the lack of efficiency in its operations, taking into consideration there are several business units such as Porsche, and Lamborghini among others, making it necessary for the management to consider having a smaller company that is more efficient (Barth et al., 2017). The rebranding will allow the administration to speed up its efficiency programs and help regain the lost customer confidence, which is crucial for its continued growth and expansion in the hypercompetitive automobile industry. According to Barth et al., (2017) rebranding will allow for a change in the external and internal aspects of the brand such as its research and development unit, how the market is done and its overall customer relations approach.
Joining an independent emission verification enterprise
The brand although already have an in-house team that evaluates its products, it is imperative that it now more than ever before, works with independent and trusted inspection agencies to examine its overall automobile unit's emission (Wang and Wanjek, 2018). The move is crucial in helping gain the trust of the regulatory agencies and customers who feel cheated by the company. There are various brands that Volkswagen can partner with such as the Fair Labor Association and the Free Trade Commission, to make sure that all its manufactured vehicle units are carefully examined before launch and release to the markets (Wang and Wanjek, 2018). The Free Labor Association has recently released a sustainable compliance methodology that VW can use to determine whether its cars meet the latest emission standards set by agencies such as EPA.
Posting a bond
The posting of a bond which entails the submission of a binding commitment of a specified amount to governing bodies in an industry such as European Commissions Automotive Industry will help reassure the clients that the new management is keen on making sure such an incident never reoccurs. According to Irwin, (2018) the bond that VW will post will act as a commitment to credibility to the regulatory agencies, and the customers, helping it regain lost goodwill and slowly gain its market share in the international market.
References
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Barth, F., Eckert, C., Gatzert, N. and Scholz, H., 2017. Spillover Effects from the Volkswagen Emissions Scandal: A Comprehensive Analysis of Stock, Corporate Bond, and Credit Default Swap Markets.
Barth, M., Bauer, A., Hughes, E., King, A. and Koerner, H., 2017. Volkswagen Public Relations Plan.
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Irwin, M., 2018. Case Study: Volkswagen's Diesel Emissions Control Scandal. Journal of Strategic Innovation and Sustainability Vol, 13(1), p.53.
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Piazza, A. and Jourdan, J., 2018. When the Dust Settles: The Consequences of Scandals for Organizational Competition. Academy of Management Journal, 61(1), pp.165-190.
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