Case study – Crisis Communication– Volkswagen emission scandal

Chiara Valentini, Aarhus University, Denmark

Background

Volkswagen is a German car manufacturer established in 1946 in Wolfsburg, Lower Saxony, Germany. It owns twelve brands from seven European countries: Volkswagen Passenger Cars, Audi, SEAT, ŠKODA, Bentley, Bugatti, Lamborghini, Porsche, Ducati, Volkswagen Commercial Vehicles, Scania and MAN (Volkswagen 2016).For many years Volkswagen enjoyed a very strong reputation with high brand loyalty across the globe. Volkswagen cars have been praised for their top performance and sustainabletechnology. According to the Reputation Institute’s 2015 survey on consumers’ opinions from fifteen countries, Volkswagen (VW) was considered the most liked and trusted corporate brand and among the world’s most social responsible companies (Fombrun 2015). Forbes ranked VW as the second-largest automaker in the world in 2015 (Murphy 2015).

Having a strong market position and reputation did not save VW from experiencing one of the biggest crises that the company had to face ever. The crisis exploded in September 2015, when the US Environmental Protection Agency (EPA), a federal agency in charge of research, monitoring, standard-setting and enforcement activitiesin relation to health and environmental matters (EPA 2015), issued a notice of violation of the clean air act to Volkswagen Group after it was found that the car manufacturer had intentionally altered the testing on its vehicles so to meet the US air standards. Specifically VW was accused of making the vehicles’ turbocharged direct injection diesel engines to activate certain emissions controls only during laboratory emissions testingso to improve the results, whereas when similar tests were performed in road conditionsVW vehicles released forty percent of mono-nitrogen oxides (NOs)more than the legal limits.

When confronted with the EPA’s evidence, VW admitted that its cars were fitted with the defeat device. Specifically five models were found to have a defeat engine, the VW Jetta, Beetle and Golf, and Audi A3 produced from 2009 to 2015 and the Passat model from 2014-2015 (Rushe, 2015). Few days after the scandal became public, VW suspended sales of cars containing the company’s four-cylinder turbo direct injection (TDI) engine.By the end of the year, VW had to recall 8.5 million cars in Europe, including 2.4 million in Germany and 1.2 million in the UK, and 500,000 in the US as a result of the emissions scandal (Hotten 2015).The company had also to cover the costs of fixing the affected vehicles, those related to compensations to damaged consumers and any profit loss as result of reputational damage.

Stakeholders

Five main stakeholders were directly and indirectly affected or had the power to affect VW:

  • VW customers –VW customerswere the victims of this crisis since they owned vehicles thathada defeat devicethat produced up to forty times higher emissions than promised.VW customers were the largest and most heterogeneous group of stakeholders that VW had to take care of. It was estimated that about 11 millionVW cars worldwide had the defeat engine and required adjustments to meet environmental standards: 500,000 of these cars were sold to US consumers and another 800,000 to European ones.
  • VW investors and shareholders – The second most important stakeholder group for VW were investors and shareholders. These stakeholders were also affected by the scandal, since the company lost credibility and market trust with consequent loss of share value and profit due to reparation and violation costs. In September 2015 it was not yet clear how much money VG had to pay to US authorities for the infringement of law. This could be up to $37,500 (t €34,650) for each vehicle that breached standards and up to $2,950 (€2,650) per defeat device, for a total cost of $18 billion (about €16 billion)(Hotten 2015). In October 2015 the VG posted its first quarterly loss for 15 years of €2.5 billion ($2.783 billion) and this loss did not include the possible fine by the US EPA. In Janaury 2016, a number of large VW shareholders were ready to sue the company in a German court, seeking compensation for the drop in its shares due to its emissions test cheating scandal (Wissenbach 2016).
  • US Environmental Protection Agency (EPA) –This regulatory stakeholderhas the power to affect directly the company’s performance through the enforcement of specific laws. In this case, EPA’s research and monitoring activities showed incongruences on test results on VW diesel vehicles. Similar results were found by an independent group of researchers at the West Virginia University. The case was followed closely by EPA and after almost a year of investigation, the agency filed charges against the German carmaker. Specifically the US EPA accused VW of using a defeat device in cars to evade clean air standards and thus threat public health (Rushe 2015). EPA demanded VW recall all the cars, remove the defeat device and improve the cars’ NOx emissions, which creates smog and was linked to increased asthma attacks and other respiratory illnesses (Rushe 2015).
  • German authorities –Federal authorities, such as the state of Low Saxony, a region in the south of Germany, and national authorities began investigations on the emission situation on the internal market in terms of sold vehicles with defeat engines produced bythe VW brand but also by others. As political stakeholders they have the power to influence the company’s activities, especially if they perceived that this would have had negative effects on German industry. Worried that the VW emissions fixing scandal would have put at risk the reputation of the country’s automotive industry, the German economy minister urged VW to clear up the allegations with firm and concrete corrective actions (Rushe & Farrell 2015).
  • European institutions –As VW is a German carmaker and that 800,000European consumers owned VW defect vehicles, different EU institutions decided to take specific actions.The European Investment Bank (EIB) has granted loans worth around €4.6 billion ($5.2 billion) to VW since 1990 for the development of engines with lower emissions and manufacturing sites in South America (Automotive News Europe 2015). After the scandal emerged the EIBinitiated a thorough investigation to examinewhether VW used any EU loans to cheat on emissions tests andwhether it could demand money back (Kollewe 2015). In January 2016, the European Commission tried to pressure VW to pay compensation to European drivers who bought cars with emissions test-cheating software. The European Commission had, however, no formal powers to force pay-outs. VW promised to remove the device, but had no plans to pay compensation, claiming that it had done nothing illegal under EU law(Rankin 2016). A few days later, the European Commisionannounced plans for new rules to test car emissions following the VW scandal, with new laws that would give it more control across the EU (BBC 2016).

Company’s Crisis Responses – Strategies and Tactics

The VW scandal can be considered apreventable crisis. Specifically it is an organizational misdeed type of crisis based on management misconduct (Coombs 2014). The company has a high level of responsibility due to the fraudulent manipulation of emission data. The most affected stakeholders were customers followed by its investors and shareholders. The most dangerous stakeholders were the political ones as these had the power to affect future corporate activities. In these situations, literature suggests applying a rebuild crisis response strategy by combining apologies with corrective actions (ibid). Rebuild strategies attempt to improve an organization’s reputation by offering material and/or symbolic forms of aid to the victim, in the form of compensation or apologies.

After the US EPA accused VW of selling diesel cars that gave false emissions data, the companyordered an external investigation. Initially VW applied a denial strategyanddisputed the test results, citing various technical issues. It then recognized the problem but tried to minimize the severity. Finally, it admitted its responsibility and officially apologized.“I am personally deeply sorry that we have broken the trust of our customers and the public.We will cooperate fully with the responsible agencies, with transparency and urgency, to clearly, openlyand completely establish all of the facts of this case”, said Martin WinterkornVolkswagen’s CEO(Rushe 2015).

The company’s first action following the apologywas the resignation of its chief executive, MartinWinterkorn. Moreover, the VW brand Audi suspended two engineers with the accusation of deliberately manipulating emission-control devices (Guardian 26 November 2015).

In terms of corrective actions, the company offered discounts, gift cards and other incentives to aggrieved customers in the US, and recalled a large amount of cars to fix them. Because VW could not remove the illegal software from VW diesel cars with 2.0 engines, VW offered US owners $500 ( €450) on a prepaid visa card and $500 (€450) in dealership credits. The same treatment, however, was not offered to European car owners, despite the request by the European Commission. A VW spokesperson stated that the US customers were compensated because the VW cars sold in the US were “technically different” than the European ones. They had to pass stricter tests, and the company had not yet found a fix for the cars (Rankin 2016).

VW did not use any specific communication tactics to improve its image.On social media the company remained silent for sometime before answering stakeholders’ comments with apologetic statements. At theDecember press conference, VW announcedits futurecorporate strategy relying on five top priorities; these were:

-Helping its customers through communication and effective technical solutions

-Uncovering what happened and learning from the findings

-Creating a new structure by launching a more entrepreneurial and decentralized group structure

-Developing a new corporate mind set

-Creating a new corporate destination by re-evaluating what VW does and re-defining its target (Volkswagen 2015)

Results

VW crisis demonstrated the huge economic costs that companies face from failing to anticipate the material and reputational consequences of their actions. The investigations on vehicles emissions started several years ago and the discrepancies among the test results conducted by different authorities were known to VW. Yet, the company did not do anything until more evidence was collected and revealed. Thus, the company was reactive in handling this preventable crisis.

Furthermore, the actions undertaken to restore its reputation and stakeholder confidence seem rather conservative. VW applied crisis response strategies after the crisis became public, being transparent and admitting the alleged claims. Yet, the company did not engage in any specific action to mitigate stakeholders’ anger apart from apologizing and promising to fix the problem. VW Facebook and Twitter accounts received high levels of negative sentiment from car owners towards a brand that had cheated them. In preventable crises, research shows that stakeholders are more likely to become angry and may even enjoy seeing the organization suffer. In the VW case, investors and shareholders reaction to the scandal and their willingness to seek compensation through legal means indicates that this group of stakeholders was not satisfied with the company’s apologies and senior management resignations. Similarly, the fact that EPA sued VW and that the European institutions were still investigating the company somemonths after the scandal show that VW has also not satisfied the requests of these stakeholder groups. In the case of the European Union the lack of a proactive approach in the management of European political stakeholders could cost the company a lot in the future if the EU passes stricter environmental policies.

When this analysis was conducted the crisis was still current. It was not yet possible to assess if the compensation to US customers and fixing of customers’ vehicles were sufficient corrective actions for VW to regain market trust and stakeholder confidence.

References

Automotive News Europe 2015, ‘VW may have to repay EU loans, bank chief says’,Automotive News Europe12 October. Available from February 2016]

BBC 2016,‘EU plans new rules for emission tests following VW scandal’,BBC Business27 January. Available from February 2016]

Coombs, T W 2014,Ongoing crisis communication: Planning, managing, and responding (4th ed.),Sage, Thousand Oaks.

EPA 2015, About EPA, Our mission and what we do, 29 September. Available from February 2016]

Ewing, J2016,‘Volkswagen may buy back diesel cars it can’t fix’,The New York Times International Business28 January. Available from: January 2016]

Fombrun, C2015,‘About Volkswagen, reputation, and socialresponsibility’,Reputation Institute7 October. Available 2016 from: [31 January 2016]

Guardian, The 2015,‘VW's Audi suspends two engineers in emissions-rigging inquiry’,The Guardian, 26 November. Available from February 2016]

Hotten, R2015,‘Volkswagen: The scandal explained’,Business Report, BBC News10 December. Available from: [31 January 2016]

Kollewe, J2015,‘Volkswagen emissions scandal – timeline’,The Guardian10 December 10. Available January 31, 2016 from:

Murphy, A 2015,‘2015 global 2000: The world’s biggest auto companies’, Forbes.com 6 May. Available from: [31 January 2016]

Rankin, J2016,‘VW rejects call to compensate European drivers over emissions scandal’,The Guardian21 January. Available from February 2016]

Rushe, D 2015,‘VW software scandal: chief apologises for breaking public trust’,The Guardian20 September. Available from: 2016]

Rushe, D & Farrell S 2015,‘German minister tells Volkswagen to clear up emissions scandal’,The Guardian21 September. Available from February 2016]

Volkswagen 2016,The Group, Volkswagen Group Homepage.Available from: [January 31, 2016]

Wissenbach, I 2016, ‘Volkswagen faces shareholder claims over emissions scandal’,Reuters18 Janaury. Available from February 2016]

Volkswagen Group2015, ‘Volkswagen Group – Moving ahead. Investigation, customer solutions, realignment’,Press Conference Presentation 10December. Available from February 2016]