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Solved by verified expert:Topic: Ethical Decision MakingRead Case: Dieselgate – Heavy Fumes Exhausting the Volkswagen Group”Read Chapter 8 – I attached a summary so that you can use it to Quote from the text book. Question: Identify and Critical evaluate the case study issue (s) from the perspective of Business, Government, and Socially, Individually; Critically evaluate and discuss how the issues are inter-related. Additionally, comment on the ethical issues present in the case study and assess their implication on decision making by Volkswagen leadership.Paper Requirement (See Attached Assignment Details)5 Sources other than the case study5 pages minimum, 6 pages maxPower Point 5 – 7 slides (See Attached Assignment Details)Please watch for grammatical, syntax errors. Professor is strict.
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For the exclusive use of S. Campbell, 2019.
HK1089
MARCUS SCHUETZ
DIESELGATE – HEAVY FUMES EXHAUSTING
THE VOLKSWAGEN GROUP
It has been a run. Since the Volkswagen Group set its target to become the world’s largest auto
manufacturer, the industry has seen an unprecedented blitz. At the end of 2015, the German
automaker was about to reach its goal two years ahead of schedule. A significant proportion of
this growth was the US market. Just at the moment when the company seemed invincible to the
public and many shareholders, the United States Environmental Protection Agency (USEPA)
revealed that Volkswagen had installed software in its most successful TDI diesel engines to
rig the test stand in order to pass emission standards. Across brands, about 11 million of its
diesel vehicles worldwide were discovered to have the cheating device installed, emitting while
on the road as much as 40 times the level of nitrogen oxide and dioxide (NOx) permitted in the
USA. The company also admitted to have understated carbon dioxide (CO2) emission figures
in Europe. This was the biggest automotive-emissions scandal the world had ever seen,
shattering the brand worldwide, and developing into a threat to the formerly pristine image of
products “Made in Germany.” The Group claimed that the scandal was the result of a chain of
errors dating back to 2005. Only days after the news broke, CEO Martin Winterkorn stepped
down. Succeeding him, Matthias Mueller, former CEO of the successful Porsche brand, and a
Volkswagen Group veteran, took charge. Mueller knew not just the entire Group’s products but
also the corporate culture. How would he lead the company out of its severest crisis while the
scandal was still escalating?
Background
European vs US Vehicle Emission Standards
In line with growing attention to global warming and local air pollution in urban areas, there
had been increasing concern about exhaust emissions from motor vehicles. As reported by the
environmental organization International Council on Clean Transportation (ICCT) , there were
many ways to cheat on emission tests [see Exhibit 1], and cars built by many auto
manufacturers had higher emissions out on the road than during official lab tests. In regards to
CO2, while the gap between real-world and official emissions was normally expected to be
Dr. Claudia H. L. Woo prepared this case under the supervision of Dr. Marcus Schuetz for class discussion. This case is based
entirely on public sources. This case is not intended to show effective or ineffective handling of decision or business processes.
© 2016 by The Asia Case Research Centre, The University of Hong Kong. No part of this publication may be reproduced or
transmitted in any form or by any means—electronic, mechanical, photocopying, recording, or otherwise (including the internet)—
without the permission of The University of Hong Kong.
Ref. 16/572C
1
This document is authorized for use only by Sade Campbell in MBAA605 – Summer 2019-1 taught by DANIEL CUTTER, Mercy College from May 2019 to Nov 2019.
For the exclusive use of S. Campbell, 2019.
16/572C
Dieselgate: Heavy Fumes Exhausting The Volkswagen Group
around 10%, it was found that the gap had been widening from approximately 8% in 2001 to
40% in 2014, in line with the tightening of emissions-reduction targets for car fleets.1
Standards of vehicle emissions, safety, fuel economy and regulatory processes varied in
different regions, such as the European Union (EU) and United States (US) market. The
European vehicle-emission standard “Euro 1” was first introduced in the early ’90s to set
different emission limits for gasoline and diesel vehicles. The standards were emended over the
years, especially tightening diesel-engine emission limits. The Euro 6 standard came into force
in September 2014.2 In the USA, Tier 1 emission standards were also first adopted in the
early ’90s, with emission limits varying according to vehicle weight instead of the kind of fuel
used. The Tier II standard was phased in during 2004 and a new sub-ranking introduced within
the standard, ranging from BIN 1 to 10 for light-duty vehicles, with 1 representing the cleanest
(vehicles with zero emissions) and 10 the dirtiest. The Tier III program would begin in 2017.
NOx emissions, which contributed to acid rain and ozone, were more tightly controlled than
CO2 in the USA, beginning with the introduction of the US Clean Air Act of 1970, whereas in
Europe, CO2, regarded as the pollution behind the greenhouse effect and climate change, was
subjected to more stringent control. 3
The EU focused more on pre-production certification testing rather than post-production and
in-use fuel consumption and emission controls. 4 Some of the US vehicle emission standards
set by the USEPA, such as in-use surveillance testing, mandatory emission warranties, recalls
and defect reporting, were not found in the European regulatory structure. In general, the EU
and US vehicle emissions standards were not directly comparable, given their different
approval processes and testing procedures. However, some observers had found that the
European Emission standards issued by the United Nations Economic Commission for Europe
(UNECE) had been lagging behind the USA, where the compliance level of emissions-control
technology was more stringent. 5 [See Exhibit 2.] This lag was believed to be due to the
difficulty of reaching consensus among individual countries in the EU on standards-setting.
Nevertheless, each member state was free to enact stricter measures than those issued by
UNECE.6
Given the different standards of different regions, a car that was lawful in one country might
be illegal to sell in another unless the producer was willing to make major investments in
redesigning the car in order to comply with the law. For example, the Britain-made Ford
ECOnetic diesel engine was not sold in the USA, as it did not comply with the US emissions
standards. Ford dropped the idea of making a redesigned version for the US market, as it did
not believe consumer demand would justify the additional investment of US$350 million.7
1
2
International Council on Clean Transportation (September 2015) “From Laboratory to Road”,
http://www.theicct.org/sites/default/files/publications/ICCT_LaboratoryToRoad_2015_Report_English.pdf
(accessed 20 January 2016).
Automobile Association Developments Limited (1 October 2015) “Euro Emissions Standards”,
https://www.theaa.com/motoring_advice/fuels-and-environment/euro-emissions-standards.html (accessed 10
January 2016).
3
See also Fisher, D. (2 October 2015) “VW’s Diesel Was A Creation Of EU Regulators”, Forbes,
http://www.forbes.com/sites/danielfisher/2015/10/02/eu-emissions-regulations-made-the-vw-diesel-u-s-regsbrought-it-down/#634aaeda5f2f (accessed 12 January 2016).
4
He, Hui (30 May 2014) “Bought a tiger, got a Hello Kitty? How to Fix Vehicle Fuel Economy Fraud in China”, The
International Council on Clean Transportation, http://www.theicct.org/blogs/staff/bought-tiger-got-hello-kitty-how-fixvehicle-fuel-economy-fraud-china (accessed 16 January 2016).
5 Canis, B. and Lattanzio, R. (18 February 2014) “U.S. and EU Motor Vehicle Standards: Issues for Transatlantic Trade
Negotiations”, Congressional Research Service, P2, https://www.hsdl.org/?view&did=751039 (accessed 8 January 2016).
6 Ibid.
Source: Stock Performance of Volkswagen and Some of Its Top Suppliers After the Scandal Broke
7
Kiley, D. (3 September 2008) “The 65MPG Ford the U.S. Cant Have”, Bloomberg Business,
http://www.bloomberg.com/bw/stories/2008-09-03/the-65-mpg-ford-the-u-dot-s-dot-cant-have (accessed 10
January 2016).
2
This document is authorized for use only by Sade Campbell in MBAA605 – Summer 2019-1 taught by DANIEL CUTTER, Mercy College from May 2019 to Nov 2019.
For the exclusive use of S. Campbell, 2019.
16/572C
Dieselgate: Heavy Fumes Exhausting The Volkswagen Group
Diesel vs Gasoline Vehicles in Europe and the US Market
Diesel vehicles were more popular in Europe than in the USA; diesel cars made up about half
of the European market and only 3% in the USA.8 One of the reasons was that there were heavy
taxes on gasoline in the EU, imposed by national governments in an attempt to lower carbon
emissions. Diesel fuels enjoyed lower tax rates in many European countries.
In the USA, gasoline was relatively cheaper, and diesel engines were perceived by American
consumers as dirty. A number of studies had indicated diesel cars produced higher level of NOx
and particulate matter than gasoline cars, and this could trigger a number of health problems.9
The more stringent NOx emissions standard in the USA was another reason for the diesel
penetration rate. Also, the disastrous failure of General Motors in marketing its Oldsmobile
diesel vehicles in the late 1970s and ’80s had also helped ruin the prospects of diesel engines
in the USA.10
As diesel-filtering technology became more sophisticated in the last decade, the US perception
had begun to changed, with more car producers, such as Volkswagen, BMW, Mercedes and
Chevrolet, beginning to bring new diesel models into the US market. The diesel cars had been
promoted by the car industry as better than gasoline cars for the environment, as the former
consumed less fuel in travelling the same distance and thus emitted less carbon.11
Overall, as diesels had been popular in the European market, given government subsidies, the
transition to alternative-powered vehicles like hybrids and electric cars in the region was slow
compared to the Japanese and US markets. Japanese automakers, particularly Toyota, which
was the world’s largest car producer, chose the gasoline hybrid route, while US manufacturers
such as General Motors and Tesla had invested in plug-in hybrids and pure electrics.12 Although
Americans bought over three times as many hybrids and electric vehicles as diesels, dieselvehicle sales had risen for eight consecutive years since 2007 [See Exhibit 3].13
The Volkswagen Group
Brief History of the Volkswagen Group
Volkswagen (VW), meaning “People’s Car” in German, was founded in the early 1930s. It was
part of Nazi leader Adolf Hitler’s vision to make it affordable for German families to own a
car. Its first new factory was built in 1938 in Wolfsburg, a town in Lower Saxony, Germany.
The name Volkswagen was not used until after World War II. The original German name was
“Kraft durch Freude Wagen,”which means, “strength through joy car.” Its first car, with a
beetle-like shape, was largely designed by Austrian-born German engineer Ferdinand Porsche,
who owned a sports car company, Porsche. The original Volkswagen plant was located beside
a canal, which allowed transport of goods to the east, and because of this became a strategic
8
Lussenhop, J. (23 September 2015) “Why Do American Car Buyers Why Away from Diesel?”, BBC News,
http://www.bbc.com/news/world-us-canada-34329596 (accessed 10 January 2016).
9
Official website of United States Environmental Protection Agency:
https://www3.epa.gov/airquality/nitrogenoxides/health.html (accessed 1 March 2016).
Sass, R. (18 May 2008), “G.M.;s Dreadful Engines Gave Diesels a Bad Name”, New York Times,
http://www.nytimes.com/2008/05/18/automobiles/collectibles/18RUST.html?_r=0 (accessed 12 January 2016).
11 Anderson, R. (16 September 2015), “Diesel Cars: What All the Fuss About?”, BBC News,
http://www.bbc.com/news/business-34257424 (accessed 5 January 2016).
12 Bailey, D. (30 September 2015) “Could the Volkswagen Scandal Power an Electric Car Breakthrough?”, The Guardian,
http://www.theguardian.com/commentisfree/2015/sep/30/volkswagen-scandal-electric-car-diesel (accessed 28
January 2016).
13
Clothier, M. (24 September 2015) “Volkswagen Cheating Scandal Seen Hastening Clean Diesel’s Demise”, Bloomberg
Business, http://www.bloomberg.com/news/articles/2015-09-24/volkswagen-cheating-scandal-seen-hastening-clean-diesel-sdemise (accessed 26 January 2016).
10
3
This document is authorized for use only by Sade Campbell in MBAA605 – Summer 2019-1 taught by DANIEL CUTTER, Mercy College from May 2019 to Nov 2019.
For the exclusive use of S. Campbell, 2019.
16/572C
Dieselgate: Heavy Fumes Exhausting The Volkswagen Group
supply base for military materiel during the war. As components of the Nazi V2 rocket were
also produced on the premises, the plant was entirely destroyed by Allied bombing in 1945. It
was under the command of the British officer, Major Hirst, that the company started building
Beetles again, first supplying British forces, and then expanding. The first Beetles shipped to
the USA were brought home by returning US soldiers. VW bought Auto Union, owners of
historic Audi brand, in the 1960s and turned it into VW’s luxury brand. The automaker also
started making a new generation of cars, such as Passat, Golf and Polo, in the early 1970s. By
1975, VW Group (or VW AG14) was formed as a holding company to cater to its growing
business.
Ferdinand Porsche’s grandson Ferdinand Piëch became the Chairman and Chief Executive
Officer (CEO) of VW Group in 1993. He retained the position of CEO until 2002. Piëch, an
outstanding engineer, was known for his aggressive approach to growing VW on the world
stage. In his memoir Auto Biographie, he wrote that VW was only three months away from
insolvency when he stepped in as the CEO. By modernizing the company’s manufacturing
process and acquiring new brands, he laid the foundation for the Group’s global presence.15
One of the technologies Piëch promoted was turbocharged direct injection (TDI), which was
VW’s trademark technology for diesel engines. The technology was claimed to significantly
improve diesel’s practicality for passenger cars.16 Piëch had also doubled the number of brands
in the VW Group by bringing in luxury brands such as Bentley, Lamborghini, Bugatti and
Porsche. Under his leadership, he set the goal for VW to become the world’s top automaker by
sales and outplay its long-time rivals, General Motors and Toyota. He was known for his
toughness and willingness to demote or dismiss underperforming employees.17 Piëch had also
been criticized for nepotism when he secured the nomination of his wife, a former kindergarten
teacher, onto the Group’s supervisory board.18
Strategy 2018 and Development of Clean Diesel Technology
Martin Winterkorn, also an engineer, who became CEO of VW in 2007, adopted an aggressive,
demanding leadership style, and would not accept failure. 19 He was often seen as Piëch’s
executive hand. One of Winterkorn’s initiatives was the introduction of the MQB (modular
transverse toolkit) platform, which allowed different models of its various automobile brands
to be built from a large proportion of shared components, thereby in principle reducing
development costs, driving up profit and increasing design flexibility in the rest of the car.20
Winterkorn formulated an aggressive plan for the Group, Strategy 2018 (coined “Mach 18”),
aiming to make VW not only the highest-selling automaker in the world, but more profitable
than before. He envisioned VW producing 10 million vehicles worldwide annually by 2018
and achieving pre-tax profit margins of 8% or higher, compared with 6% on sales of 6.2 million
14
AG is the shortened form of the German word Aktiengesellschaft, meaning corporation involving share ownership and
tradable on a stock market.
15
Boston, W. and Buell, T. (26 April 2015) “Volkswagen Chairman Ferdinand Piëch Resigns”, The Wall Street Journal,
http://www.wsj.com/articles/volkswagen-chairman-ferdinand-piech-resigns-1429978992 (accessed 19 January 2016),
16
Ewing, J. and Bowley, G. (13 December 2015) “The Engineering of Volkswagen’s Aggressive Ambition”, New York Times,
http://www.nytimes.com/2015/12/14/business/the-engineering-of-volkswagens-aggressive-ambition.html (accessed 23
January 2016).
17
Ewing, J. and Bowley, G. (13 December 2015) “The Engineering of Volkswagen’s Aggressive Ambition”, New York Times,
http://www.nytimes.com/2015/12/14/business/the-engineering-of-volkswagens-aggressive-ambition.html (accessed 23
January 2016),
18
Crossland, D. (23 March 2012) “VW Chief Keeps Control in Family More out of Wisdom than Nepotism”, The National
Business, http://www.thenational.ae/business/industry-insights/economics/vw-chief-keeps-control-in-family-more-out-ofwisdom-than-nepotism (accessed 29 January 2016).
19
Pritchard, C. (12 October 2015) “Volkswagen AG (ADR) Corporate Culture under Former CEO Martin Winterkorn, Business
Finance News, http://www.businessfinancenews.com/24917-volkswagen-ag-adr-corporate-culture-under-former-ceo-martinwinterkorn/ (accessed 25 January 2016).
20
Schmitt, B. (7 August 2011) “The Revolution of The Car Industry: Kit Cars”, The Truth About Cars,
http://www.thetruthaboutcars.com/2011/08/the-revolution-of-the-car-industry-kit-cars/ (accessed 27 January 2016).
4
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For the exclusive use of S. Campbell, 2019.
16/572C
Dieselgate: Heavy Fumes Exhausting The Volkswagen Group
vehicles in 2007. 21 He was even more ambitious in the US market, targeting one million unit
sales annually by 2018, triple the 2008 volume. Compared to other top automakers, VW had a
strong position in the European market and the fast-growing Chinese market, but not in the
North American market [see Exhibit 4]. The company believed that by increasing investment
and local production in the USA, the world’s second largest automotive market, it could boost
VW’s growth and profitability, and this would be critical in achieving the 2018 goal.22
In 2008, VW found itself a unique position in the market with its clean-diesel technology, which
it claimed could meet US emission standards. It claimed that this breakthrough technology was
able to reduce emissions and trap and destroy residual NOx pollutants without sacrificing
vehicle performance. 23 Instead of installing the costly and clunky treatment system used by
others in the industry, VW diesel engines could fit in small, affordable cars. This technology
had since then enabled VW to account for majority of the US demand for diesel cars [see
Exhibits 3 & 5].
In 2013, VW achieved over 430,000 total unit sales in the US, the then-highest volume for VW
USA since 1973.24 Despite being far from the one million units targeted in the 2018 strategy,
VW aimed high to reach as close as possible to that goal by aggressively increasing production
and launching new models. On the other hand, through continual expansion and boosting global
production, VW exceeded global production of 10 million vehicles for the first time in 2014,
well ahead of the 2018 global goal.25 [See Exhibit 6.]
Governance of the VW Group Prior to the “Dieselgate Scandal”
Over the decades, VW and Porsche continued to collaborate on car production, despite the
wrangling relationship between the two companies, or rather the Piëch and Porsche families,
who attempted to take control of each other’s companies.26 In 2012, VW Group finally took
over Porsche’s car-making operation and in return agreed that its family investment company,
Porsche Automobil Holding SE (Porsche SE), would own a 50.7% voting stake in the VW
Group, which retained management control of all of car brands. Indeed, Piëch and his cousin,
Wolfgang Porsche, were the Group’s main shareholders, holding 50.7% of voting stake through
the family investment company.
Ever since the end of the Second World War, VW had been partly owned by the German
government or state of Lower Saxony. Under the controversial Volkswagen Law, 27 the state
21
Muller, J. (17 April 2013) “How Volkswagen Will Rule the World”, Forbes,
http://www.forbes.com/sites/joannmuller/2013/04/17/volkswagens-missio …
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