Volkswagen’s unceasing nightmare is a lesson in honesty

Readers will recall the scandal surrounding faked emissions tests conducted by the car-making giant, Volkswagen, in recent years. In case you have forgotten, the controversy surrounded the manufacturer’s attempts to depress the emissions readings on regulatory testing of its vehicles in order to artificially meet the standards on CO2 that were introduced by the European Union.

In order to do this, a so-called ‘defeat device’ was installed, which was capable of alerting the engine to the fact that it was being tested, prompting it to subtly adjust its performance in such a way as to reduce the emissions produced by the engine during the test. A neat get-around, except that the cover was eventually blown, and subsequently a financial and PR nightmare of unthinkable scale befell the veteran manufacturer.

To date, VW has incurred around £25bn in legal costs and fines, endured years of headlines relating to its ‘cheating’, and scores of actions from among the customers of around 11 million unit sales of its vehicles.

I write about the issue today because a new case has been brought in a novel way, and may set a precedent that would keep the problem on VW’s desk for years to come. The case is novel because it consists of the Federal Association of Consumers (VZBV) in Germany acting on behalf of a group of drivers to sue VW, among the first of its kind to be brought in Germany. It follows the introduction of a new draft law in 2018 which allows consumer rights organisations to carry the legal costs and act on behalf of consumers.

Traditionally, a class action might be brought by a law firm that is willing to act collectively on behalf of a group of people willing to pay into the pot (unless the law firm is working pro bono), but this new development means the people suing VW can do so without the worry of the financial burden of losing.

An interesting twist in this tale though, is that VZBV is a parent of several smaller associations including building owners, workers, and the German cycling federation, and it is state-funded. If the action succeeds, VZBV will be emboldened to act aggressively on behalf of its members in any number of future cases.

Naturally, a development like this puts large corporations on the back foot, and many could find themselves snarled up in lawsuits on a semi-permanent basis. Arguably, for business-savvy and manufacturing-dependent Germany, this could come to be seen as a counterintuitive law. I am all in favour of consumer rights, but they need to be balanced with measures that prevent the business community becoming overburdened.

If VW finds itself in court continuously for the next five or even 10 years, spending billions to try to pay down the problem and resolve it once and for all, this will in the long run be damaging. The £25bn it has already spent is money that could otherwise have been spent on R&D, training and development for the workforce, hiring more staff and so on.

Still, there is a lesson here, because few would seek to absolve VW of trying to trick the regulator and by extension millions of its own customers.

That lesson is to just play ball with the authorities. It may have reduced VW’s manufacturing costs to fudge the emissions standards in the production cycle of 2014/15, but the long term effect has been to kiss goodbye to a considerable fortune of company profits.