Back in the DaimlerChrysler AG days, few things struck more dread in the hearts of powerful German executives than the threat of good ol’ American litigation.
It can be expensive, unpredictable and potentially damaging to the brands decades in the making. To that list can now be added American regulators, chiefly the Environmental Protection Agency and its stewardship of the Clean Air Act.
Volkswagen AG, vying to be the world’s most prolific seller of cars, is now in a heap of trouble. The automaker stands accused of rigging the software in (at least) 482,000 diesel cars to activate anti-pollutions control systems only during emissions testing.
When switched off during normal driving conditions, officials say the noxious emissions exceeded U.S. allowable standards by as much by 10 to 40 times. Not good at all, that, for the Wolfsburg-based automaker’s “Clean Diesel” promise or its halting effort to turn around the aimless VW-brand business in the United States.
The cost: already immense. The news erased nearly $17 billion of VW’s market capitalization Monday; prodded European and German regulators into action; elicited a rare apology from VW’s CEO, Martin Winterkorn; signaled that other makers of diesel engines, concentrated most heavily in the European-based manufacturers, also could be scrutinized.
In theory, VW could be fined as much as $18 billion — up to $37,500 for each vehicle found to have exceeded allowable emissions standards. Fines of that magnitude, however unlikely, would be tantamount to an existential threat, underscoring just how much power regulators wield in the world’s richest auto market.
They’re willing to use it, as regulators in the Obama era repeatedly make clear. The biggest sin is not a product failure or a bad bit of computer code or a spate of recalls. It’s deliberate deception that could be construed as endangering public safety, proving once again the adage that the cover-up often is worse than the crime.
Just days after General Motors Co. assents to criminal charges in its fatal ignition-switch scandal and agrees to pay a $900 million fine to atone, partially, for 124 deaths and 270 injuries, VW is outed for denying, then admitting, clean-air transgressions that could cost billions in fines, lost sales and damaged brands.
In the span of five years, each of the world’s three largest automakers — GM, VW and Toyota Motor Corp. — has been bloodied by the feds in high-stakes cases. The lessons in each case hinge on the simple fact that the punishment and the costs would have been demonstrably lessened by openly admitting the depth of the problem and moving quickly to fix it.
GM’s settlement last week with federal authorities makes the point. Deferred charges of wire fraud and failing to disclose a dangerous safety defect to the National Highway Traffic Safety Administration focus on how GM handled — or didn’t — the engineering fiasco, not the engineering failure itself.
And GM, despite the harrowing death toll, likely lessened its punishment by moving quickly to fire 15 people most closely associated with the mess, commissioning an independent internal investigation, and cooperating with federal authorities instead of stonewalling (as Toyota did).
Point well-learned? Not yet. The global auto industry, despite the change of the past six years, still exudes a hubris bordering on arrogance. The only thing worse than making mistakes is publicly copping to them, with the full knowledge that competitors are privately snickering and looking for ways to exploit the opportunity.
This time is no different. VW’s diesel-engine technology is a cornerstone of its value proposition and its strategy to rebuild its business in the United States. Add a likely Justice Department investigation and congressional hearings to the EPA’s prosecution, and VW is facing a threat every bit as serious as those experienced by GM and Toyota.
These things are starting to follow a familiar script. Once the transgression is revealed, the media pounces and Wall Street reacts. Next comes Justice and the implication of criminal wrongdoing, followed by members of Congress rhetorically slapping around a CEO unschooled in the political arts of Capitol Hill.
It all comes down to one question: how much will the offending corporation pay to expiate its sin? The answer — to critics, anyway — is never enough, which leads to a likely consequence of such corporate misfeasance and the regulatory reaction to it:
Criminalizing corporate misbehavior. When Preet Bharara, U.S. attorney in the Southern District of New York, last week announced the government’s settlement with GM, he pointedly said there currently does not exist a specific law enabling criminal charges against a company for a product defect attributed to fatalities.
VW will pay, as GM and Toyota did. The question is whether the political urge on The Hill to criminalize corporate conduct gains meaningful traction. If it does, business can thank the global Big Three.
Daniel Howes’ column runs Tuesdays, Thursdays and Fridays and can be found at http://detroitnews.com/staff/27151.
Catch him 3 and 10 p.m. Thursdays on Michigan Radio’s “Stateside,” 91.7 FM.