Volkswagen’s Greenwashing Backfires: The Road to Redemption

Abstract

In September 2015, the German automaker Volkswagen rocked the automotive industry with a scandal of dramatic proportions. Regardless of aggressive marketing and advertising campaigns touting environmental friendliness, Volkswagen had outfitted its diesel vehicles with software that allowed the engine to recognize when it was being emissions-tested and perform with lower power, then switch into high gear when on the road. As a result, these diesel vehicles were emitting nitrogen oxide pollutants in quantities as much as 40 times the legal limit. Nearly 11 million diesel VW vehicles worldwide were deliberately equipped with the “defeat device.” The direct monetary costs of the scandal came to USD 30 billion in fines for environmental damage and fraud paid to U.S. and EU regulators, in addition to compensation to almost 11 million disgruntled customers. The moral lesson is very clear: Brands that make unsubstantiated claims about being eco-friendly just to lure customers and capture market share—a practice known as greenwashing—will be publicly embarrassed and financially hurt. Can Volkswagen now redeem itself and regain customers’ trust?

Case

Learning Outcomes

After discussion of this case, students will be able to:

  • describe the dilemma of greenwashing;
  • highlight the significance of abiding by legal and ethical guidelines in an increasingly global and competitive market;
  • explain how corporate scandals can ruin brand image and customer loyalty;
  • demonstrate comprehension of the importance of corporate social responsibility;
  • develop recommendations to overcome corporate scandals and regain customers’ trust.

Greenwashing

Corporate social responsibility is imperative in today’s world, as consumers are paying more attention to irresponsible business practices. Multinational corporations publicly vow adamantly to do the right thing. Visiting the homepage of Fortune 500 companies will bring up clichés, such as “a desire to payback,” “to invest in communities,” “to be a global citizen,” “to be socially responsible,” “to engage in fair trade,” “to curb climate change,” or “to save the planet.” Regardless of the wording, the message is the same: we may be a multi-billion-dollar company, but we care about more than our stock price. During the last two decades, environmentally friendly products, energy conservation, and sustainability have become vital topics in modern marketing. However, terms such as “green,” “sustainable,” “eco-friendly,” and “organic” are being abused by corporations to attract the sophisticated consumer, giving rise to the “greenwashing” phenomenon. This popular term was coined by environmentalist Jay Westerveld 1 in 1986 to criticize hotels that encouraged guests to reuse towels for environmental reasons but made little or no effort to recycle waste or reduce their environmental footprints (Watson, 2016). Greenwashing essentially refers to situations in which there is a significant gap between the expressed and genuine commitments to sustainability. For instance, environmentalists often accuse oil companies of using sweeping vague or misleading environmental claims in order to tout their ecological friendliness when, in fact, their overall investments in renewable energy are small compared with the monetary amounts that support their fossil fuel divisions.

In a world in which greenwashing is becoming more prevalent, it is imperative that each corporation establishes credibility in the eyes of the consumer. Corporate credibility refers to the degree to which consumers believe that a company is willing and able to deliver on its promises to satisfy consumer needs and wants. Being sustainable or green can be a powerful competitive advantage, as consumers are increasingly choosing green products and services and are willing to pay a premium for them.

German automaker, Volkswagen, is one of many companies guilty of greenwashing—claiming more about their environmental efforts than is factual. Ironically, the term “green” originally came into popularity through steady use by the Green Party, which was founded in Germany in the late 1970s. The word’s use was in the context of preserving old abandoned buildings (instead of building new ones) with the goal to curb deforestation (Motavalli, 2011). Possible reasons for companies to engage in greenwashing include mounting pressure from different stakeholders and the potential benefits that can be gained in terms of profits, image, and reputation.

Volkswagen AG

The history of Volkswagen dates back to 1937, when a company called Deutsche Arbeitsfront was founded by the Nazi government to manufacture affordable vehicles for the average consumer. Two years later, during WWII, production switched to military equipment. After the war, the factory was appropriated by the British army, and the Volkswagen 2 brand was created. One automobile model produced at the factory was the Volkswagen Beetle. For the next 10 years, the Beetle model became increasingly popular on a global scale. With time, through a number of acquisitions, the company gradually became the biggest automaker in Europe. Today, the Wolfsburg (Germany)-based empire encompasses 12 prominent brands: Audi, Bentley, Bugatti, Lamborghini, Porsche, Ducati, Seat, Skoda, Scania, Man, VW Commercial Vehicles, and Volkswagen.

In 2019, The Volkswagen Group generated EUR 252.6 billion in sales and EUR 19.3 billion in profits, delivered 11 million vehicles worldwide, and employed 667,000 people (VW Annual Report, 2019). Volkswagen is also the 40th most valuable brand in the world, with brand equity of almost USD 13 billion (Interbrand, 2019).

VW Dieselgate

Volkswagen entered the U.S. market in 1955, but it was not until almost half a century later that the German automaker found its niche in the U.S. diesel engine (which uses diesel fuel) category. Cars with diesel engines accounted for one-half of the new cars sold in Europe, triggered by lax EU regulations. Diesel vehicles were cheaper than hybrids, yet still garnered more than 40 miles to the gallon. Compared with Germany, the U.S. market was a different game, with more strict environmental standards. In 2008, the attention given to combating climate change and conserving energy led the U.S. Environmental Protection Agency (EPA) to tighten emission standards for vehicles (EPA, 2020). Thus, the trick came down to how to engineer a mechanism to strip a diesel engine’s soot exhaust of its pollutants to meet the more stringent U.S. regulations. Competitors such as GM, Honda, Hyundai, Mazda, and Nissan found the EPA’s diesel emission standards a significant challenge and stayed out of that market. Meanwhile, Volkswagen doubled down on portraying itself as an environmental steward, with “green” cars on the frontline of a clean energy revolution. In 2014, for instance, VW spent USD 77 million advertising its diesel cars, proclaiming their “greenness” and promoting diesel as a low-emissions alternative to gasoline 3 (Gelles, 2015). Examples of commercials boasting the company’s greenness are shown in Videos 1 and 2.

Video 1. Audi Clean Diesel Commercial (2010)

Video 2. Volkswagen Clean Diesel Commercial (2015)

In early 2014, researchers from the International Council on Clean Transportation (ICCT) conducted tests on diesel models of the Volkswagen Passat and Jetta to verify that the “clean diesel” technology these cars were touting was in fact clean. The ICCT also solicited help from researchers at the West Virginia University (WVU) Center for Alternative Fuels, Engines, and Emissions. Meanwhile, the California Air Resources Board (CARB) was conducting its own tests on VW diesel cars. The ICCT-WVU researchers road-tested their vehicles under real driving conditions, whereas the CARB tests were performed in a lab. The results were baffling. VW vehicles tested in the lab conformed to the EPA standards, whereas the same models tested on the open road exceeded U.S. emissions standards by almost 40 times. When questioned with the seemingly inexplicable test results, Volkswagen initially adamantly denied any wrongdoing. In December 2014, Volkswagen issued a voluntary recall of about 500,000 vehicles in the United States, claiming a software glitch as the reason for the emissions discrepancy. The ICCT and the CARB continued testing the repaired vehicles but found no or little improvement when the cars were tested on the road. It was not until September 2015 that Volkswagen, unable to explain the tests, implied that some diesel models might have been designed to provide inaccurate emissions test results that comply with the legal limit. On September 18, 2015, the EPA officially notified Volkswagen that its “clean diesel” vehicles were found to be in violation of the Clean Air Act. On September 23, 2015, CEO Martin Winterkorn released a statement maintaining that the diesel scheme was the brainchild of low-level engineers, not senior management. Nevertheless, he accepted responsibility for the crisis and resigned his position. Chairman of Porsche AG Matthias Müller succeeded him and vowed transparency in getting to the bottom of what really happened (Ewing, 2015).

What followed was a Greek tragedy-level scandal. Volkswagen shocked the world and admitted that it had deliberately equipped its models of Turbocharged Direct Injection (TDI) diesel engines with a “defeat device” that was intended to trick elements of a vehicle’s emission control system during emissions testing (Hotten, 2015). The VW diesel cars were essentially programmed to sense when emissions were being tested and to turn on equipment that reduced the emissions. Then when driven on the road, the cars had better fuel economy and performance but produced as much as 40 times the legal amount of nitrogen oxide. 4

Initial reports suggested that approximately 500,000 Volkswagen diesel cars in the United States were equipped with the device. As the scandal continued to develop, the number of vehicles affected had ballooned to almost 11 million vehicles across multiple VW brands worldwide. Table 1 provides a breakdown of VW vehicles fitted with “defeat devices.” Some reporters have termed the scandal “Dieselgate,” alluding to the Watergate scandal that forced President Richard Nixon to resign in 1974 (Parloff, 2018). Even the German Chancellor, Angela Merkel, stepped in and described the VW predicament as “difficult,” and pressed the automaker to demonstrate “complete transparency” and explain its actions fully (Thompson & Liakos, 2018).

Table 1. VW Vehicles With Deceptive Emissions Software (October 2015)

Brand

Number of vehicles (worldwide) in millions

Audi

2.1

Seat

0.7

Skoda

1.2

Volkswagen

5.0

VW Commercial Vehicles

1.8

Source: Statista (2015).

On November 2, 2015, the EPA issued a second notice of violation to VW that included Audi diesel vehicles. As U.S. regulators accused the company of cheating on environmental standards, the Department of Justice filed a complaint on behalf of the EPA against VW for deliberate violations of the Clean Air Act, citing a sophisticated and orchestrated scheme to cheat diesel emissions tests. The 2016 complaint contended that Volkswagen had intentionally concealed the fact that the automaker was polluting 40 times above the legal limits. The affected vehicles included nearly 500,000 vehicles from model year 2009 through 2015 Volkswagen TDI diesel cars of Jettas, Passats, Golfs, and Beetles, as well as the TDI Audi A3.

In 2018, a U.S. federal grand jury indicted Winterkorn, and a few other VW employees, on criminal fraud charges, asserting the former CEO knew of the diesel shenanigans, perhaps as early as 2007 (Leggett, 2018). Then in 2019, German authorities brought charges against the former VW boss and two of his aides. However, standards for diesels in Europe are still not as strict as in the United States, and testing and enforcement are not as rigorous, so the charges differed between the two countries. Most European countries do not permit class action lawsuits of the kind that forced Volkswagen to compensate the owners of 500,000 diesel vehicles in the United States. Under German law, however, top executives must come forward and disclose information to shareholders that might affect stock prices (such as significant financial risks) as soon as the executives become aware of them. The company’s stock price tanked by nearly 40% when VW was exposed for its greenwashing tactics and corporate hypocrisy. As of 2019, prosecutors in Germany are still trying to hold VW executives accountable, and if the prosecution is successful, this would involve jail time and fines (Riley & Thompson, 2019).

In brief, the world’s largest carmaker 5 was determined to be a “diesel dupe” (another term by which the scandal is known in the media) for rigging emission tests to make its diesel vehicles seem to emit less pollution than what they actually spewed. Since the scandal broke in September 2015, VW has picked up the tab of more than USD 30 billion in fines, legal fees, recalls, and buybacks. However, a clear-cut end to VW’s Dieselgate is not in sight. Ongoing investigations on both sides of the Atlantic are fueling charges and indictments against the VW, making it difficult for the giant automaker to move past the diesel scandal.

How Did Greenwashing Hurt VW?

The scandal hit the brand at its core—its authenticity—and negatively impacted the company’s image, sales, and bottom line. When VW admitted in September 2015 to cheating on U.S. air pollution tests for years, shares tanked, and the company lost 30% of its market value overnight (La Monica, 2015). This led to Moody’s downgrading the automaker’s rating one notch. 6

Data 1. Volkswagen AG Stock Price

The diesel scandal had a noticeable effect on Volkswagen AG’s customers’ loyalty and trust, leading to a crucial drop in sales and profits. In the United States, the company ceased selling the affected 2015 models, did not introduce its 2016 diesels, and extended its warranty to 6 years/72,000 miles bumper-to-bumper coverage on all other models. However, Volkswagen kept selling 2015 and 2016 diesels in Europe. The company also faced backlash from the millions of vehicle owners, and it was forced to recall or even buyback most of those vehicles. The fines in the United States alone were USD 14.7 billion for violating emission standards for almost one-half million diesel cars (DOJ, 2016). The fines, lawsuits, recalls, and buybacks for VW vehicles overall amounted to USD 30 billion worldwide (Eisenstein, 2017). Table 2 shows how VW revenues and profits plummeted in the aftermath of the scandal. Revenues in 2016 dropped by USD 32 billion, and profits dropped by USD 16 billion, according to Fortune 500.

Table 2. Rank, Revenues, and Profits for Volkswagen (2015–2019)

Year

Ranka

Revenues (USD billion)

Revenue % change

Profits (USD billion)

Profit % change

Assets (USD billion)

2019

9

278.3

7

14.3

9.3

523.7

2018

7

260.1

8.2

13.1

120.8

506.9

2017

6

240.3

1.5

5.9

-

432.1

2016

7

236.6

−11.9

−1.5

−110.4

414.8

2015

8

268.5

2.7

14.5

20.7

424.9

aRank refers to location on Fortune 500 list.

Source: Fortune 500 (2019)

Diesel vehicles account for more than half of all vehicles sold in Europe, mainly because of EU policies that have made diesel fuels cheaper than gasoline and because of less strict emissions standards for diesels than in the United States. Revelations that Volkswagen cars were not as environmentally friendly or green as its “clean diesel” advertising had pledged were more damaging to the company’s reputation in Europe than in any other part in the world. The United States, as the second-largest car market after China, is theoretically critical to Volkswagen prosperity. However, U.S. unit sales are 6% of Volkswagen global sales, compared to 40% in Europe. Thus, the havoc in Europe is a far greater threat to Volkswagen’s future growth and profitability than in the United States.

Rebuilding a Green Reputation

When Müller became the new CEO of Volkswagen AG in September 2015, he brought the unblemished reputation and proven track record that he had gained at Porsche. Suddenly he was in charge of re-establishing Volkswagen’s reputation for environmental friendliness and restoring the confidence of various stakeholder. On the first day of the job, he said,

My most urgent task is to win back trust for the Volkswagen Group—by leaving no stone unturned and with maximum transparency, as well as drawing the right conclusions from the current situation. Under my leadership, Volkswagen will do everything it can to develop and implement the most stringent compliance and governance standards in our industry. If we manage to achieve that, then the Volkswagen Group with its innovative strength, its strong brands, and above all its competent and highly motivated team has the opportunity to emerge from this crisis stronger than before. (VW News, 2015)

Four years later, Müller seems to have delivered on his promise. Revenues, profits, stock price, and market capitalization have rebounded and surpassed the scandal plunge. In 2019, Volkswagen AG held a 4% market share in the USD 3 trillion global auto industry (Gonzales, 2020).

Meanwhile, Volkswagen has striven to put the fiasco behind it and restore its green reputation. In 2016, VW vowed to boost its electric vehicle production by 50% during the next decade, with electric engines in one-half of all Porsche sports cars by then. The German automaker is aiming to have VWs with fewer emissions (for real this time!) and sell 1 million electric cars annually by 2025. In 2018, Volkswagen announced a USD 50 billion investment in electrification (Kottasová, 2018). The company is also planning to manufacture a fully electric SUV for the Chinese market starting in 2021, which is expected to compete directly with the Tesla Model X (Taylor, 2019). And starting in 2022, Volkswagen will also build the ID.4 compact crossover in Tennessee, where it already assembles a number of VW conventional models. VW has invested USD 800 million to expand its U.S. facility for the ID.4 electric vehicle production. The U.S. subsidiary has started taking orders for the concept car, which has a price tag of approximately USD 35,000. The ID.4 electric vehicle is anticipated to satisfy value-conscious consumers with aspirations of owning an electric vehicle. (Riches-Wong, 2020).

Although there is still some trust remaining with some consumers, VW will need to ensure that their trust is well deserved this time.

Discussion Questions

  • Who are the various stakeholders affected by the VW “Dieselgate”?
  • What are some legal and ethical issues associated with the VW scandal?
  • Discuss why simply issuing an apology is not enough when handling a public relations crisis of the magnitude of “Dieselgate.”
  • When faced with such an ethical crisis, how should companies like Volkswagen respond?
  • Can Volkswagen earn back customers’ trust? How do you propose that the company does this?

Notes

1. A brief biography of Jay Westerveld can be found at https://en.wikipedia.org/wiki/Jay_Westerveld

2. Volkswagen in German means “People’s Car” or “Folks’ Wagon.”

3. Gasoline is called petrol in Europe.

4. A pollutant that can contribute to respiratory problems including asthma, bronchitis, and emphysema.

5. In 2019, Volkswagen AG was the number one automaker in the world with 10.97 million deliveries. Toyota was a close second with 10.72 million deliveries.

6. Moody’s is an American financial services company that specializes in credit rating.

Further Reading

Maamoun, A. (2013). Corporate social responsibility and the developing world: Commitment or duplicity? Business Studies Journal, 5(2), 726. https://www.abacademies.org/articles/bsjvol522013.pdf

References

Department of Justice. (DOJ) (2016, June 28). Volkswagen to spend up to $14.7 billion to settle allegations of cheating emissions tests and deceiving customers on 2.0 liter diesel vehicles. https://www.justice.gov/opa/pr/volkswagen-spend-147-billion-settle-allegations-cheating-emissions-tests-and-deceiving
Eisenstein, P. (2017, April 21). Volkswagen slapped with largest ever fine for automakers. NBC News. https://www.nbcnews.com/business/autos/judge-approves-largest-fine-u-s-history-volkswagen-n749406
Environmental Protection Agency. (EPA) (2020). History of reducing air pollution from transportation in the United States. https://www.epa.gov/transportation-air-pollution-and-climate-change/accomplishments-and-success-air-pollution-transportation
Ewing, J. (2015, September 22). Volkswagen says 11 million cars worldwide are affected in diesel deception. The New York Times. https://www.nytimes.com/2015/09/23/business/international/volkswagen-diesel-car-scandal.html
Gelles, D. (2015, October 17). Social responsibility That rubs right off. The New York Times. https://www.nytimes.com/2015/10/18/business/energy-environment/social-responsibility-that-rubs-right-off.html
Gonzales, E. (2020, February 23). IBIS World: Global Car and Automobile Manufacturing. https://www.ibisworld.com/global/market-research-reports/global-car-automobile-manufacturing-industry
Hotten, R. (2015, December 10). Volkswagen: The scandal explained. BBC.com. https://www.bbc.com/news/business-34324772
Interbrand. (2019). Best Global Brands 2019 Rankings. https://www.interbrand.com/best-brands/best-global-brands/2019/ranking/volkswagen
Kottasová, I. (2018, November 16). Volkswagen to spend USD 50 billion on electric car ‘offensive’. CNN.com. https://www.cnn.com/2018/11/16/business/volkswagen-electric-cars/index.html
La Monica, P. (2015, September 25). Volkswagen has plunged 50%. Will it ever recover? Money.com. https://money.cnn.com/2015/09/24/investing/volkswagen-vw-emissions-scandal-stock
Leggett, T. (May 5, 2018). How VW tried to cover up the emissions scandal. Retrieved from https://www.bbc.com/news/business-44005844
Motavalli, J. (2011, February 12). A history of greenwashing: How dirty towels impacted the Green Movement. AOL. https://www.aol.com/2011/02/12/the-history-of-greenwashing-how-dirty-towels-impacted-the-green
Parloff, R. (2018, February 6). How VW paid $25 billion for ‘Dieselgate’ — and got off easy. Fortune. https://fortune.com/2018/02/06/volkswagen-vw-emissions-scandal-penalties
Riches-Wong, E. (2020, March 4). 2022 Volkswagen ID.4 coming to America as VW invests billions in electric cars. JD Power. https://www.jdpower.com/cars/shopping-guides/2022-volkswagen-id-4-coming-to-america-as-vw-invests-billions-in-electric-cars
Riley, C. , & Thompson, M. (2019, September 24). Volkswagen’s CEO and chairman charged in Germany over diesel emissions scandal. CNN.com. https://www.cnn.com/2019/09/24/business/volkswagen-ceo-herbert-diess-indicted/index.html
Statista. (2015). Number of Volkswagen diesel vehicles equipped with emissions-manipulating software as of October 2, 2015, by country. https://www.statista.com/statistics/468979/vw-vehicles-fitted-with-emissions-manipulating-software-by-country/
Taylor, E. (2019, April 14). VW to take on Tesla X in China from 2021 with electric SUV. Reuters. https://www.reuters.com/article/us-volkswagen-china/vw-to-take-on-tesla-x-in-china-from-2021-with-electric-suv-idUSKCN1RQ0C4
Thompson, M. , & Liakos, C. (2015, September 23). Volkswagen CEO quits over ‘grave crisis’. CNN.com. https://money.cnn.com/2015/09/23/news/companies/volkswagen-emissions-crisis/?sr=cnnitw
Volkswagen Group. (2019). Annual Report. https://annualreport2019.volkswagenag.com/
Volkswagen News. (2015, September 25). Matthias Müller appointed CEO of the Volkswagen Group. https://www.volkswagenag.com/en/news/2015/9/CEO.html#
Watson, B. (2016, August 20). The troubling evolution of corporate greenwashing. The Guardian. https://www.theguardian.com/sustainable-business/2016/aug/20/greenwashing-environmentalism-lies-companies

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