Mint Explainer: Why do car makers cheat?

It was just another in a long list of fraud scandals that have rocked the global automobile industry — including nearly every major carmaker — over the past few decades.

In the 1990s, General Motors had to pay $45 million as part of a settlement with US government regulators to install ‘defeat devices’ in Cadillacs. A defeat device is any vehicle hardware, software, or design that interferes with or disables emissions controls under real-world driving conditions, even if the vehicle passes formal emissions testing. Regulators found that the cars’ computers were programmed to enrich the vehicle’s fuel mixture when the climate control system was on, increasing carbon monoxide emissions by up to three times the legal limit.

A few years later, GM’s arch-rival Ford spent $7.8 million on fines and fixes after a defect was found in 60,000 Econoline vans. The devices were designed to improve the van’s fuel economy at highway speeds, but also increased nitrogen oxide emissions beyond the limits of the law. These were precursors to the huge Dieselgate scandal of 2015, in which more than 10 million Volkswagen cars worldwide were found to be using software that allowed emissions data to be rigged. This sparked a major blowback from regulators around the world, hurting the global automotive industry and marking the beginning of the end for diesel as a fuel.

Honda, Hyundai and Toyota have all had similar scandals involving misfiring devices, inflated mileage claims and faulty accelerator pedals that have cost millions of dollars.

India has also seen its share of scams. Around the same time that Volkswagen’s Dieselgate scandal rocked the world, General Motors found itself on the backfoot when a whistleblower told authorities that it had been selling non-compliant models to customers specially tuned for emissions testing. Was sending the vehicles gone. A government inquiry termed it a corporate fraud and blamed the company’s top management. while the fine was minor 11 crores, GM had to recall 1.14 lakh units of its bestselling van Tavera. The loss of reputation was far worse than the fine and the American company could not recover from the blow and exited the Indian market a few years later.

As all these cases show, car manufacturers suffer a lot when they are caught cheating. Why, then, do they continue to do so?

There are two major reasons for that. One, because they can – and like everyone else who cheats, think they’ll never get caught. Historically, automobile emissions and safety policies have relied on self-certification. The government and companies would sit in a room and negotiate a set of rules, after which manufacturers would certify themselves as compliant.

Testing for compliance doesn’t happen on the factory floor where cars are built or on the road where they are driven. Instead, periodically a batch of test mules is sent to government laboratories. This opens up the possibility for companies to build cars specifically for testing to comply with the regulations, as was the case with GM in India.

This regulatory loophole facilitates corporate greed and an insatiable appetite for higher profits. To conform to any kind of strict regulations, both R&D and manufacturing cost money. Bluffing regulators is a straightforward cost-saving method. Furthermore, new regulations almost always lead to higher cost of vehicles. By cheating, a car manufacturer can increase its profits and undercut competitors on price.

Thankfully, regulators have woken up and are increasingly adopting ‘real driving emissions’ (RDE) testing in which vehicles are checked for compliance in real-world conditions. India partially went into this type of testing in April.

The other big reason car manufacturers are cheating is also fairly straightforward. Some rules are too rigid for them to follow. This may sound like an excuse but in some cases, applying overly stringent rules can be counterproductive.

A research paper authored by Kellogg University professor Sunil Chopra and PhD candidate Keiza Hu argues that fierce competition combined with standards that are tough and expensive increases the potential for malpractices among car makers. It suggests that temporarily relaxing the proposed norms or giving industry more time to comply reduces the likelihood of a misdemeanor by 11%.

Part of the problem here is regulatory oversight. Many cases of fraud, including one in India, would not have come to light if it were not for whistleblowers. This shows that despite having stringent norms, regulators are often not effective or efficient enough to ensure compliance.

This issue resonates in the current crisis around the FAME-2 electric vehicle subsidy. Following allegations that some electric two-wheeler companies did not localize their products enough to qualify for subsidies, the government suspended subsidies for about a dozen of them. It is now on the verge of punishing some.

The companies have argued that the conditions on localization were unrealistic in the first place and became impossible to meet after the pandemic disrupted global supply chains. Whether this is fraud or not is subjective – after all, the companies passed on the subsidy to their customers. But it also highlights the inability of regulatory bodies to ensure compliance. Without the allegations in the clutches of anonymous email, this too would have fallen through the cracks.