The big idea: Martin Winterkorn, who took over as Volkswagen’s chief executive in 2007, hatched an ambitious plan to transform the company into the world’s largest automaker. His goal was to sell more than 10 million cars a year, dethroning Toyota from its leading position.
Germany faced down the 2008 global financial crisis partially by exporting products it manufactured; automobiles made up one-fifth of those exports. Volkswagen’s desire to be the largest automaker in the world dovetailed with the country’s economic necessity to export more cars. The U.S. market was a critical component to success. The company would need to triple its U.S. sales to meet its goal. Increasing sales meant that VW engineers had to design high-performance vehicles with optimal fuel efficiency and low emissions to meet increasingly stringent regulations. How would they do it?
The scenario: Rather than compete in the hybrid market, VW turned to diesel cars, which held just 5 percent of the U.S. auto market in 2007. Diesel promised high fuel efficiency without sacrificing power. But diesel cars generate significantly more nitrogen oxide, a pollutant, than do gas-powered cars, making it difficult for them to clear U.S. emissions standards without sacrificing fuel efficiency. VW engineers faced a huge challenge.
Volkswagen’s success so far had come through the autocratic leadership of Winterkorn and his mentor, Ferdinand Piëch, who kept VW highly centralized and under tight control. Its corporate culture seemed to be one of command and control, with leadership setting aggressive goals and senior executives involved in even minor decisions. Former employees described a workplace in which subordinates were afraid to admit failure or contradict their superiors. Piëch boasted that he created superior performance by “terrifying his engineers.” Executives and engineers reported concerns that they would be fired if they displeased him. Winterkorn, for his part, didn’t like bad news either. “Before anyone reports to him, they make sure they have good news,” said one industry analyst.
The resolution: After Winterkorn took charge, he booted the idea of using a technology from competitor Daimler, whose BlueTec innovation used a substance called “urea” — essentially cat urine — to neutralize nitrogen oxide. VW engineers were on their own.
VW engineers installed a “defeat device” in the automaker’s cars. In the millions of lines of software code that control much of a modern car’s operations, they inserted a set of instructions that would affect emissions controls whenever the vehicle was using only two of its four wheels (as it would when being tested for emissions in a lab). The defeat device limited emissions in the lab (therefore hindering performance), but once out on the road and unhindered by the defeat device, emissions returned to levels far above federal regulations and performance didn’t suffer.
When researchers curious about why diesel technologies appeared cleaner in the United States than in Europe discovered the defeat devices, the fallout was brutal. Regulators across the world opened investigations. Volkswagen halted sales of its 2015 models. Winterkorn resigned. Senior managers were suspended or put on leave. VW stock plunged.
The lesson: Three key factors — severe pressure to succeed, opportunities or loopholes that enable cheating, and employees’ ability to rationalize ethical violations — can lead to a slippery slope in which employees engage in undesirable behavior.
Lynch is a business professor at the University of Virginia Darden School of Business.