Volkswagen Case: Manipulation of Gases

Volkswagen case: manipulation of gases

In a growing globalized economy, Foreign Direct Investments (FDI) by transnational corporations are considered a dominant force in economic development. In other words, as domestic companies aspire to become a multinational, they invest in new countries. The car industry went through a major restructuration on a global scale, representing today one of the most globalized industries. Besides the fact that automakers have many opportunities, the process of globalization presents limits. The regulations and polices addressed to FDI include incentives and import barriers. Simultaneously making difficult the achievement of goals and implying significant costs. A clear example is the Volkswagen Company (VW), which is globalized to a large scale and has implemented FDI from the beginning. VW entered the Chinese market before the boom and has expanded out to India, as the Indian market is expected to grow promptly. Today, the company operates in over twenty countries. During its expansion, VW had to comply with local vehicle regulations –requirements that vehicles must satisfy to be sold in a particular country– such as maximum emission standards. In some cases, emission standards may limit a car’s performance and the gas mileage; however, the trade-off is essential for both human safety and the environment.

In September 2015, the US Environmental Protection Agency (EPA) made public that the American Volkswagen Group violated the Clean Air Act (CAA) by installing illegal software able to cheat during emission tests in models dated 2009-2015 with diesel engines (11m cars). Ever since, VW became the target of investigations in many countries with up to 18 billion dollars in penalties under the US-CAA and the company’s market capitalization dropped by 40%. Moreover, the environment suffered the consequences as an enormous amount of nitrogen oxide was released into the atmosphere. It is to avoid this, that the EPA demands all vehicles sold in the US to comply with the emission standards and constraints “defeat devices”. Thus, violations of such standards and excess emissions can result in civil penalties (CAA, Section205a). In the case of Europe, “defeat devices" are prohibited by Article 5 of the Emission Regulation No 715/2007: “The use of defeat devices […] shall be prohibited”. While in India, the polices are less strict than the ones in the US or in Europe because they are still at level similar to Euro 4, whereas the world has moved to Euro 6, but they still have emission norms that were violated by VW.

Once the scandal spread worldwide, local governments took action by investigating VW and verifying if the company really violated the law by installing illegal software. For example, in South Korea - the eight largest diesel-car market- authorities begun pollution controls and effectively found the defeat devices; the Environment Minister ordered the company to recall the defeat models and the manager director of Audi VW Korea was placed under investigation. Moreover, other countries followed the same trend and ordered Volkswagen the recall of vehicles.  In January 2017 the Company agreed to plead guilty to the scandal and to pay 4.3 billion in penalties.