Monday 26 September 2016

Volkswagen emissions scandal shatters the illusion of trust in big business

Published 01/10/2015 | 02:30

An activist of the environmental protection organization 'Greenpeace' holds a protest poster in front of a factory gate of the German car manufacturer Volkswagen in Wolfsburg, Germany, Friday, Sept. 25, 2015. (AP Photo/Michael Sohn)
An activist of the environmental protection organization 'Greenpeace' holds a protest poster in front of a factory gate of the German car manufacturer Volkswagen in Wolfsburg, Germany, Friday, Sept. 25, 2015. (AP Photo/Michael Sohn)

My car is in for the NCT next week. If it fails because it is giving off too many CO2 emissions, I could always remonstrate with the tester about the Volkswagen emissions scandal.

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I could protest to him - at the side of a hill in Donegal - that millions of cars made by the largest car manufacturer in the world weren't just breaching limits but were rigged to cheat the test. So why doesn't he go after them?

And the breach wasn't with greenhouse gases slowly heating up the planet as my modest vehicle might do, but with harmful nitrogen oxide which, over time, can shorten peoples' lives.

I am not sure I'd get very far with that approach. This is because the NCT man is implementing a testing regime set by the Government, which in turn is directed by the EU. He is just following orders. Tests for consumers, such as the NCT, are not geared in the consumers' favour. The test is designed to try and catch you out.

Compare that with the European tests for manufacturers seeking to make mile per gallon claims on new models.

Carmakers commission their own tests and regulators let them remove wing mirrors, or tape up cracks around the doors to help them burn less fuel.

On the notorious VW emissions issue, EU officials were warned about fail devices several years ago and did nothing.

It is the scale of the cheating that makes the Volkswagen scandal so extraordinary. It is virtually unique in its ability to undermine the social contract between corporations, their customers, citizens, regulators and governments.

It is so vast and so appalling that it raises the question: "If VW is capable of doing that, what are other corporations capable of."

What other dirty enormous secrets are out there? The company's statement on corporate responsibility now looks hilarious and worth a read.

"Acting responsibly has always been part of our corporate culture. We understand social responsibility as being the ability to harmonise our business activities with the long-term goals of society", it says.

It has a 37-page document called "Responsibility knows no bounds".

Anglo Irish Bank had a lot of similar guff in its 2007 annual report when it said: "The way we conduct our business is guided and underpinned by a set of core values and principles which ensure the bank operates in the best interests of all stakeholders - ie, shareholders, customers, staff, suppliers, government, regulatory bodies and the community."

One obvious response is that we cannot tarnish global capitalism because of the behaviour of a few companies or renegades within them. But the VW emissions scandal is so appalling that any semblance of trust between consumers and large corporations becomes very hard to retain.

This is not the first major international corporate scam and certainly won't be the last. VW was actually fined for using devices to manipulate emissions tests back in 1974.

So what is different about this scandal? Take the financial crisis. Motivated by greed, banks systematically under-priced risk. After the crash there were the bank foreign exchange trading scandals in London and New York which saw nine banks pay out $9bn to investors in the US over claims they rigged foreign exchange markets.

The Libor scandal in which traders rigged the inter-bank interest rate saw Barclays fined £290m, RBS pay £390m, Lloyds fined £105m and Deutsche Bank hit with a $2.5bn fine.

In Ireland, after the crash, we have seen banks which were bailed out by their customers, investigated for not providing those same customers with the lowest interest rate option on their mortgages.

Trust in banking is now pretty much dead. I don't believe people fundamentally trust their banks any more than they did five years ago. The difference is that they now trust regulators to do their job more effectively in controlling banks.

Yet even these scandals were different to VW. In some cases banks made mistakes and then failed to deal with those mistakes. The VW scandal was a systematic long running cheat of a core activity of the company.

However, like the banking crisis, there has been a failure in regulation. Information about motor emission fail devices had been floating around Brussels and London for several years.

It is worth noting that in the wake of the scandal, countries with large indigenous motor industries are taking a more relaxed approach than those with none. For example in Italy (big motor industry) spot checks will be carried out on 1,000 cars.

In Switzerland (no big motor industry) a task force has been set up to investigate and the Swiss temporarily banned the sale of VW diesel engine models.

In France (big motor industry) random checks on 100 diesel cars were announced aimed at "ensuring the absence of fraud". Germany is sending a "fact-finding mission" to Volkswagen while in Canada (no big motor industry) agencies are investigating 100,000 VW and Audi diesel cars.

The nature of the VW scam cuts to the very heart of corporate culture. It makes a mockery of the aims that citizens, through their governments and regulation want to achieve. Environment minister Alan Kelly recently announced a smoky coal ban across the country, while Ireland had to get special dispensation on methane gas emissions from the EU because of the number of belching and farting cows we have.

Yet the rigging of emissions in 11m VW vehicles caused nearly one million tonnes of extra pollution per year, equal to the UK's combined emissions for all power stations and agriculture, according to one analysis. It is highly unlikely that VW was the only car maker in the world to do this.

As a global corporation VW is enormous. It has the world's biggest corporate R&D budget, totalling €11bn in 2014. This is more than Apple and Google combined.

When its test results were queried by the California EPA, VW dismissed it as a technical glitch and only confessed to the fail devices when the Federal EPA threatened to pull licencing for all 2016 VW diesel cars.

Authorities in the US and in the UK are looking increasingly at prosecutions over fines when it comes to corporate wrong-doing. A Libor interest rate manipulator, former Citigroup broker Tom Hayes, was recently sent to prison for 14 years in London.

The response is often to implement greater regulation, which costs corporations more money and they pass it on to consumers. Fines cost money which can be recouped over time through customers. Even prosecution is not an effective deterrent when you look at the American experience.

The problem is more systemic. Perhaps it emanates within companies blinkered by the desire for short term gain. Perhaps it emanates in industries where competition is most aggressive and tricks adopted by one company must be replicated by others.

I think it occurs where there isn't enough competition and a small group of huge industry players gain too much financial muscle and political clout. It makes them believe they can do anything.

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