Volkswagen emissions scandal the topic of a SOM panel

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Professors David Bach (far left), David Cameron, and Paul Bracken talked about the Volkswagen scandal at a panel at the School of Management. (Photo by Román Castellanos-Monfil)

The implications of the Volkswagen emissions scandal on environmental regulation, corporate risk, and consumers was the focus of a panel on Oct. 12.

The panel, titled “Volkswagen’s $87 Billion Crisis: The Larger Consequences of the Emissions Cheating Scandal,” was moderated by the Business and Politics Club and included SOM professors Paul Bracken and David Bach, and political science professor David Cameron.

In late September, Volkswagen admitted to the United States Environmental Protection Agency (EPA) that it had used illegal software to cheat emissions testing in over 11 million cars.  Analysts estimate that the scandal will cost the company over $87 billion, more than the BP Deepwater Horizon disaster.

“This is going to be one of the classic cases of all time,” said Cameron. “It’s an amazing story.”

The scandal stems from Volkswagen’s desire to sell diesel engine cars in the United States and the differences between U.S. and European emission standards. According to Bach, diesel produces less CO2 but more particles, particularly nitrogen monoxide and nitrogen dioxide. The EPA prioritizes limits on particles while European regulations tend to focus on CO2 levels.

“An interesting issue here is that, as a global company, you now have to deal with different regulation in different parts of the world,” said Bach. “Volkswagen thought that U.S. regulations were too strict. That’s a view that they can have; they can advocate for that view. Of course, what they shouldn’t be doing is develop a defeat device.”

Bracken said he believes the scandal won’t cause the German government to break up Volkswagen, due to it being a “symbol of the German economic miracle of the last 10 years,” but he does believe it will try to change the ownership structure of the company. However, he said, the main lesson to take away from the situation is not poor risk management, but the absence of risk management.

“I would argue what we have here is not risk management or uncertainty, but thoughtlessness,” Bracken said. “How in God’s earth did they think it was a good idea to cheat with this software? But they do it anyway, and it happens time and time again. What it suggests to me is a need for more emphasis of integrating risk management into your corporate strategy.”

Cameron said he was not surprised that Volkswagen cheated, citing the recall of the Jetta TDI in 2006 for failing to meet the EPA’s tier-2 emissions standards. The recall caused Volkswagen to search for a new diesel engine, but Cameron is not convinced that diesel engines can be clean, efficient, and “peppy.”

“I think the question is really out there whether there is such a diesel engine. There are ways to bring emissions down but they’re very expensive and they involve not just software but a lot of additional hardware … I’m not sure VW diesel will survive in the long run,” Cameron said.

When asked about the next steps Volkswagen should take, Bracken said they should create an executive panel with trusted, outside experts to assess the situation and look for opportunities, not just problems. Bach suggested offering free upgrades to gasoline-fueled cars as a “way to send a powerful signal” and fix some of the reputational damage. Cameron agreed that establishing a buy-back program in the United States would be a good idea but said he also thinks Volkswagen should become more in tune with what the U.S. consumer wants in a car.

“And other than that, hire good lawyers,” Cameron concluded.

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