September 24, 2015
For every great rise, there’s a devastating fall. Take, for instance, the films of Martin Scorsese. Invariably, the narrative arcs of his films go something like this: bad guy comes from humble beginnings; acquires fame, money and power; starts to get overconfident and makes a fatal mistake, or series of mistakes; the law finds out about the bad guy’s illicit activities and makes him pay for his crimes. And that’s just the best-case scenario. While some say that Scorsese’s films glamorize the criminal lifestyle, nothing can be further from the truth—in fact, the dominant message in his films is this: crime may pay for a little while, but no one gets away with it forever. While no one would compare recently deposed Volkswagen CEO Martin Winterkorn to Henry Hill or Jordan Belfort, the parallels between VW’s current situation and a Scorsese film are shocking. The company is being roundly condemned (and rightfully so) for its gross negligence in the emission cheating scandal that continues to reverberate throughout the auto industry. About the only difference is that Volkswagen execs haven’t killed anyone, at least not directly. But when you consider that the automaker’s diesel vehicles produced close to 40 times the amount of toxic nitrogen oxides allowed by the Environmental Protection Agency, the argument can certainly be made that VW cars kill by degrees. If the various investigations currently being launched into Volkswagen can prove that the company deliberately manipulated emissions tests, thereby putting the public health into danger, it’s only a matter of time before a few VW employees join Hill and Belfort as tenants of the Iron Bar Hotel. Other analogies can be drawn between the Volkswagen scandal and events outside the automotive world. For decades, Big Tobacco denied a link between cigarettes and cancer until the industry was forced to admit that they’d been repressing studies that proved the harmfulness of its products. For this reason, some have referred to this current phase Volkswagen is undergoing as a “tobacco moment” not only for VW but for the industry as a whole as well. To say the problem is strictly limited to Volkswagen is naïve, as it’s abundantly clear that the industry will soon need to come to grips with poor emission standards in diesel vehicles and take decisive action to rectify the problem. Critics like Wharton School business professor Thomas Donaldson have referred to the Volkswagen situation a “corporate Watergate,” a reference that begins to approximate the over-the-top nature of the company’s cover-up. Many have expressed surprise that a scandal such as this could happen at Volkswagen, which has long enjoyed a reputation as a tightly controlled, almost autocratic organization in which no move gets made without the express permission of leadership. Of course, the Nixon White House also had a similar reputation and we all know how that turned out. To borrow an expression coined during the Watergate era, it’s not the crime but the cover-up that will do Volkswagen in because people generally don’t appreciate being deceived. Going forward, it’ll be incumbent upon Volkswagen leadership to come completely clean and explain in great detail how they were able to cheat the emission tests, rather than continue to claim that they were ignorant of how those defeat devices got in their vehicles in the first place. If Winterkorn wasn’t “aware of any wrongdoing,” as he claims, it raises the question of why he chose to resign. The assumption that Winterkorn had no knowledge of the emission fixes strains credulity, says former Daimler exec and industry consultant Jeffrey A. Thinnes. “For something of this magnitude, one would expect that the C.E.O. would know, and if he doesn’t know, then he’s willfully ignorant,” he said to The New York Times. Due largely to guilt by association, other automakers are being scrutinized more carefully than usual. A German publication claimed that the BMW X3 SUV exceeded EU-mandated emission levels, a claim the automaker denies. However, those denials weren’t enough to prevent BMW stock from dipping on Thursday, and we should expect other automakers to face similar reprisal from the car buying public until it gets its act together. It should also be noted that this isn’t the first time that the EPA has sanctioned automakers who played fast and loose with the rules regulating air pollution. Over the past year alone, the EPA settled 14 separate cases with companies who violated emissions rules. Before Volkswagen, the biggest emissions scandal was in 1995 when the EPA and the Justice Department found General Motors guilty of installing defeat devices in close to a half-million vehicles. Of course, the $45 million GM ultimately paid in fines and damages will seem like a drop in the bucket compared to what Volkswagen will have to fork out. Some have speculated that the harmful effects of the scandal may spread beyond Germany and infect the entire Eurozone (along with Pacific Rim nations like South Korea). Legitimate concern over an economic crisis spurred the EU to encourage each of its member states to conduct independent investigations into Volkswagen. As you might expect, criticism of the company has been especially vociferous in the country where Volkswagen is headquartered, Germany, where one of out every seven citizens are employed either directly or indirectly by the auto industry. German media has called for sweeping changes to Volkswagen’s traditional power structure, while local prosecutors have raised the possibility of bringing criminal charges against VW employees. And that’s to say nothing, of course, of millions of customers who feel ripped off by Volkswagen and want restitution. In short, Volkswagen and the auto industry at large will need to have a come to Jesus moment where they seriously re-evaluate how they do business. They will likely conclude that it’s in their best interest to police themselves before government agencies do it for them. This may mean that automakers need to suspend their diesel vehicle expansion plans or offer special rebates to entice customers back to dealerships. While drivers used to appreciate the outstanding fuel economy and performance of diesel vehicles—as well as the feel-good vibes of driving a supposedly low-emission vehicle—the lack of trust associated with the diesel brand means that Volkswagen needs to go back to the drawing board and come up with a new path to take its business or risk being driven off the automobile map for years to come. Image Credit: The Wall Street Journal