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Throw The Book At VW

detail of a Volkswagen logo on a car's front grille
photo by Lukasz Jernas

I often find myself speaking in defense of large companies when regulators overreach in pursuit of scapegoats and punitive fines. But Volkswagen, the latest target, deserves all the punishment U.S. authorities care to dish out.

Washington may have been ham-handed in its treatment of foreign companies like BP and Toyota, whose transgressions were the result of chains of inadvertent mistakes that led to serious accidents. But there is every reason to throw the book at Volkswagen, and there will be no sympathy in this column for the German automaker if that happens.

Standing on its own, Volkswagen deserves the maximum penalty, even at an exposure of $18 billion, as reported in some accounts of its behavior. Volkswagen’s “clean diesel” cars did not violate U.S. emission standards because of some miscalculation or manufacturing defect. In fact, some of those cars may not violate emissions standards at all, at least in most places. A software patch could likely fix the problem - or at least, that problem.

But VW’s misstep was not to build faulty cars, or even dirty cars. It was that the company cheated. And from all appearances, the cheating was substantial, systematic, intentional and done for purely commercial advantage - and because VW thought it would get away with it.

Kevin Tynan, Bloomberg Intelligence’s auto-industry analyst, said, “What is so damning is that this was something actively pursued. This isn’t an oversight.” He went on to add that one or more people at VW decided that gaming the system was a better use of time and resources than developing cars that met regulatory emissions requirements.

The scheme has now blown up, spectacularly. Volkswagen announced today that as many as 11 million cars worldwide may employ the subterfuge that was initially reported just to affect a half-million here in the United States. The company also said it is setting aside 6.5 billion euros (about $7.3 billion) to cover costs associated with repairs. I doubt that sum will come anywhere close, when all is said and done.

That VW executives thought they could get away with such cheating makes some sense when you consider it was uncovered mainly by accident. Discrepancies on European tests of the diesel models of VW’s Passat and Jetta, as well as the diesel version of BMW’s X5, led a small clean-air group to run tests in the United States. As John German, the U.S. co-lead of the International Council on Clean Transportation, told Bloomberg, the group had expected the vehicles to pass; they simply wanted to show European regulators that clean diesel was possible.

Volkswagen’s “clean diesel” cars may not be as clean as advertised, but they are smart. The cars were reportedly designed with sensors and software that could detect when they were hooked up to an emissions testing device. When such a device was detected, the pollution-control systems were switched on at their maximum settings, and the cars ran clean. But when the testers disconnected their hardware, the cars turned off or turned down those pollution control systems. The result was better performance for drivers, but dirtier air for everyone - and an improvement in VW’s fleet-average pollution and fuel economy statistics.

So who did VW hurt? Literally everyone, via the dirty air. But also specifically drivers who thought they were buying cutting edge “clean diesel” technology that delivered high performance, when they were actually getting lower-performance clean technology on the testing rack and old-fashioned dirty diesel otherwise.

VW also hurt its competitors, who are investing billions in other clean-transport technology, such as hybrids and electric vehicles. VW lags in those areas, choosing instead to focus on diesel, where it is a leader in sales, performance and, as it turns out, deception.

These are reasons enough to come down hard on Volkswagen, but there is a compelling political dynamic as well. VW is one of the European Union’s premier industrial enterprises. EU regulators have made a habit in recent years of going after large American companies from Silicon Valley that have a competitive advantage based on our technological leadership.

For example, Apple just underwent an antitrust review of its expansion in the highly competitive music streaming business. In August, the investigation apparently ended without any adverse findings, though reportedly the EU will continue to monitor the market for music streaming services.

Google was not so lucky. The search giant is under regulatory assault across the continent for its advertising sales practices, as well as its search rankings that allegedly favor its own products. Imagine - a company promoting the stuff it makes and sells over its competitors’ offerings! For such temerity, Google may face fines up to 10 percent of its most recent annual revenue. Google continues to deny the antitrust charges. This case is in addition to a French court’s declaration that a European citizen’s “right to be forgotten” must be honored by companies like Google and enforced on their servers, even those servers far from European shores.

Facebook, too, has run into trouble with European regulators. The Hamburg Data Protection Authority recently took issue with Facebook’s real name policy, which requires users to go by their real, legal names on the website or risk unilaterally having their account name changed by the company. German regulators claim that this policy violates German privacy law, and demanded that Facebook stop enforcing the rule within the country. Belgium’s Privacy Protection Commission has also taken on the social media giant, encouraging Belgian Internet users to install privacy software and publishing a report critical of changes to the company’s privacy policy that took effect in January.

Meanwhile, a French court is hearing charges that could put at least two Uber executives in jail, for the crime of bringing unauthorized car services to French people who want them.

All of this alleged American corporate misconduct pales in comparison to what VW has already acknowledged that it did. Europe could use a stern reminder that enforcing good business conduct is a two-way street. There is not the slightest reason for American regulators to cut VW a break, and all sorts of reasons to do otherwise.

Maybe when all is said and done, Europeans will pay a little more attention to what their own companies are doing to the physical and financial health of their citizenry, and a little less to trying to hamstring American firms whose major fault is success.

Larry M. Elkin is the founder and president of Palisades Hudson, and is based out of Palisades Hudson’s Fort Lauderdale, Florida headquarters. He wrote several of the chapters in the firm’s book, Looking Ahead: Life, Family, Wealth and Business After 55. His contributions include Chapter 1, “Looking Ahead When Youth Is Behind Us” and Chapter 4, “The Family Business."

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