A question of trust

German engineering’s enviable global reputation for excellence took a major knock when the Volkswagen vehicle emissions scandal unfolded. The automaker admitted that the engines in 11 million automobiles it had sold around the world were not the well-designed, environmentally-friendly and economical units that they had claimed. A “defeat device” in the engine management system detected when the exhaust emissions were being monitored and switched the engine’s performance to what it was supposed to be. Once the monitor was removed the engine management system reverted to the settings which gave the vehicle the advertised performance. There is an irony here of course. The reality is that it was a very clever piece of German engineering that allowed the world’s leading car maker to cheat its customers and fool regulators. But the fact that Volkswagen, along with at least a few other manufacturers, was prepared to betray its customers has resulted in a deadly smash to its reputation. The consequences will be long-lasting, at least with people who once imagined that a Volkswagen was a highly-efficient and desirable automobile. Shareholders, it seems, are less sensitive. VW’s share price rose this week when the company said that it thought it had over-estimated the number of its vehicles that were not fitted with the defeat device that did not comply with CO2 emission levels and return the claimed fuel consumption.  It was not the 800,000 vehicles a year, as VW had originally warned, but only 36,000. But is there really any good reason why the average Joe Public should believe what the German automaker is now saying?  Over and above the catastrophic public relations with which VW has handled the whole scandal, with denials followed by admissions and by the firing of top executives, VW has been found out at a time when many other once trusted sectors, not least banks and bankers, have been unmasked as cheats and liars as well as serially incompetent. There is an interesting link to the cheating in both the financial and automotive sectors. This is that it took place under the very noses of regulators who were supposed to be ensuring that fraud did not take place.  The downfall of the banks was the concept of “light touch” regulation. The banks insisted, and governments agreed with them, that bankers themselves could be trusted to comply with all the prudential rules and legal obligations such as those relating to money laundering. Likewise, automakers have been allowed by their regulators to police themselves, to check and confirm their own vehicle emissions and performance in laboratory rather than on-the-road conditions and submit them to the regulator for signing off. In both industries, that regulatory trust has been betrayed outrageously. Yet, unfortunately, the response in terms of tougher regulation has not been tough enough. Western banks have persuaded governments to water down prudential regulations because they would impose too heavy a financial burden on them and their shareholders. European automotive regulators have been hardly less supine. Carmakers have been told that the date for conforming to emission limits, which they should all by now have already met, will be pushed back at least five years. This seems a scandal in itself. If VW’s reputation is covered in mud, why has the mud not also hit EU regulators who let this scandal occur on their watch?