The following entry is a record in the “Catalogue of Catastrophe” – a list of failed or troubled projects from around the world.

Organization: Volkswagen Group (VW)
Project type : Vehicle emissions system
Project name : Unknown
Date : September 2015
Cost :
Potential costs in the region of $18B

Synopsis :
Arguably one of the most expensive scandals in modern corporate history, the revelation that Volkswagen cheated government emission testing has shaken people’s confidence in a once solid brand. A business story on the scale of Enron or the BP spill in the Gulf of Mexico, the story is both an embarrassment for the company and a financial disaster for the shareholders. In addition to fines of up to $18 billion at least $25 billion has been lost due to a dive in stock price.

Reports in the media indicate that in real world driving conditions some Volkswagen diesel cars emit up to 40 times the national standard for nitrogen oxide (NO). NO emissions are a significant pollutant with links to both asthma and lung illnesses. As owners of the Volkswagen, Audi, Seat, Skoda, Bentley, Bugatti, Lamborghini and Porsche brands (plus Ducati bikes and truck makers Scania and Man) more than 11 million vehicles are affected.

Volkswagen Diesel

Volkswagen Deisel engine (source wiki commons)

In many projects the failure is because of mistakes or poor management. In this particular case the problem was man-made and intentional. Volkswagen engineers intentionally designed and installed a so called “defeat device” (a piece of software rather than a physical device) into the engine’s control computer. The defeat device was programmed to detect when the car was undergoing emissions testing. When official testing conditions were detected (steering wheel not be used, vehicle on a test rig, etc) the system would retune the engine to minimize emissions (in doing so it sacrificed fuel economy, but did adhere to the testing limits for clean-air standards). In real world driving conditions the system would revert to its normal mode in which fuel efficiency was optimized at the expense of emissions (i.e. the defeat device turned off part of the emissions control system during normal driving conditions).

Reports indicate that the technology needed to comply with the government regulations was available, but someone in the project that designed the affected engine decided that the cost of the necessary components was too high. To ensure profit margins were protected the defeat device was installed so that the more costly emissions cleaning components did not need to be installed. Competitive pressures, cost control and profit margin are always considerations in real life projects, but Volkswagen’s approach to those challenges was to cheat. Rather than finding a creative (and legal) solution they took a short cut that will ultimately cost far more than the savings they made.

After an independent lab tested the vehicles under real world driving conditions, Volkswagen management was forced to admit the lie. Although they have taken responsibility, the effects on the brand in the wake of them acknowledging to have had prior knowledge to the facts remain to be seen. Trust and confidence in loyal customers has been shaken and the goodwill they enjoyed is now questioned and looked at through a magnifying glass. The reasons as to why Volkswagen did or did not act earlier to avert a possible scandal may pretty much be irrelevant as knowledge of the disaster is now in the public domain.

Note: Volkswagen has apologized to its customers and the public and has ordered an external investigation into the matter pledging full cooperation in uncovering of the facts.

See also:

  1. The bean counter’s blind spot

Contributing factors as reported in the press:

Prioritizing cost and profit margin over quality and government regulations, Failure to disclose information openly, Withholding relevant information, Lack of quality controls (testing the diesel vehicles on actual roads), Failure to live up to customer expectations (The brand is now in disrepute). False advertising

Reference links:

  1. Volkswagen: The scandal explained
  2. Could Volkswagen scandal be diesel’s death knell?
  3. Report: Bosch Warned VW About Diesel Emissions Cheating in 2007
  4. VW emissions explained: This is how Volkswagen is alleged to have cheated
  5. Volkswagen hires BP oil spill lawyers to defend emissions cases