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In 2015, the United States Environmental Protection Agency (EPA) discovered that German automaker Volkswagen A.G. (VW) used software to cheat air emissions testing in about 590,000 "clean diesel" vehicles under the Volkswagen, Audi, and Porsche nameplates in the United States. All told, VW included the software defeat switch in about 11 million diesel cars worldwide. Some assessed that up to 1,000 employees in the organization had known about the fraud and kept silent for over a decade. 

Once the beacon of the German auto industry, enjoying a reputation for reliable products, innovative engineering, and sustainability, VW risked losing the trust of its customers, and billions of dollars in fines. On September 18, 2015, the EPA officially filed a notice of violation, referring the matter to the U.S. Department of Justice for further enforcement actions, including possible criminal prosecution. European enforcement agencies quickly followed suit as the news of the scandal shook the VW group and the entire European auto industry. 

On Wednesday September 23, 2015, in an attempt to control the fallout, VW CEO Martin Winterkorn resigned, stating, "I am shocked by the events of the past few days. Above all, I am stunned that misconduct on such a scale was possible in the Volkswagen Group." Nonetheless, the company sought to minimize the damage by claiming that the fraud was the product of rogue engineers. New CEO Matthias Mueller denied that the fraud pointed to an ethical problem within VW, explaining, “It was a technical problem. We made a fault, we had a ... not the right interpretation of the American law. And we had some targets for our technical engineers, and they solved this problem and reached targets with some software solutions which haven't been compatible to the American law.”

Some analysts saw a more systemic explanation, stemming from Volkswagen's history and governance. Others blamed the company's culture and strategy. While still others saw the fraud as the result of differences between European and U.S. environmental standards and goals. Most agreed that unraveling the causes of Volkswagen's actions would add to understanding how a prominent corporation could concoct such an elaborate fraud and might serve to help others avoid a similar fate. 


Published: 2018-12-31

Suggested Citation: Vero Bourg-Meyer, Jaan Elias, and David Bach, "Volkswagen: Engineering a Disaster," Yale SOM Case #18-018, December 31, 2018

Keywords: Auto industry, nonmarket strategy, environmental regulation, globalization, air pollution, climate change