24 Jun 2016

Big car brands: slow train crash

The VW emissions testing scandal hasn’t gone away. Nine months after being caught programming its diesel engines to bring emissions in laboratory testing under legal limits VW is still in the news.

The VW emissions testing scandal hasn’t gone away. Nine months after being caught programming its diesel engines to bring emissions in laboratory testing under legal limits (while emitting up to 40 times above them in the real world) VW is still in the news. Its share of the car market, value of its shares and trust in its brand have dropped.

The costs of possible legal action worldwide by VW car owners, its car dealers, regulators, Governments and even its shareholders “cannot be estimated”, according to VW. Others have variously estimated the total potential costs at £25bn to £100bn all up depending on the final outcome. That’s three times the bill for the BP oil spill bill, and at the upper end of the estimates, nearly twice the market value of VW group.

Now VW has been attacked by active shareholders such as Christopher Hohn of TCI Fund Management who describes VW’s senior pay and bonuses as “corporate excess on an epic scale. Management has been rewarded for failure.” Effectively, they’re being paid to cheat.

VW was the first casualty, but many car companies have been caught cheating, one way or another. Worldwide the industry is being investigated on multiple fronts, and countries and organisations are girding up for a prolonged battle.

Mitsubishi, Nissan, General Motors (Opel), Mercedes Benz are already in line of fire. Mitsubishi admitted lying about the fuel economy of its cars for 25 years. Germany’s Federal Motor Transport Authority has accused FIAT Chrysler of cheating. FIAT says the German authority isn’t competent to test its cars and will only submit to Italian authorities. Brussels is involved. The Chinese Government is doing its own tests.

VW has agreed to buy back affected cars in the US, but has not yet extended that offer to car owners in the UK and other countries.

The UK consumer champion Which? is challenging many more car companies on the very large discrepancy between its members’ on the road performance experience and the claims they make. It is campaigning for VW to buy back affected cars in the UK as it is doing in the US.

Historians trace the roots of branding back a long way, but effectively, branding began in the early 1800s with the rise of mass production. Brands distinguished makers from their competition, but from the beginning the brand was a symbol of quality. In the case of food and drink, consistent quality meant you could trust them not to poison you. Consistent quality products commanded higher prices than dodgy alternatives. China is growing up quickly, but is still a bit like the early 1800 where anything went. Not long ago Chinese baby food killed many babies because it had been adulterated with fillers which enabled the manufacturer to sell cheaply and make a profit. Little wonder the Chinese love brands and pay a premium for the reliability and quality of Western brands.

Branding is the makers’ promise that the BMW or Guinness you buy will be what you expected. As Ronseal famously puts it, it does exactly what it says on the can.

But trust is hard to rebuild when it’s been lost. When someone’s caught cheating, you wonder what else they may be lying about.

It’s hard to see a happy ending for VW and the other companies caught cheating customers.

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