Mint Explainer: Why do carmakers cheat?

This was another in a long list of cheating scandals that have rocked the global automobile industry – including almost every major carmaker – in the past few decades.

Back in the 1990s, General Motors had to shell out $45 million as part of a settlement with US government regulators for installing ‘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 the cars' computers had been programmed to enrich the vehicle's fuel mixture when the climate-control system was turned on, increasing carbon monoxide emissions to as much as three times the legal limit.

A few years later GM’s arch rival Ford spent $7.8 million on fines and fixes after defeat devices were found in 60,000 of its Econoline vans. The devices were designed to improve the van's fuel economy at highway speeds but also increased nitrogen oxide emissions well beyond the law's limits. These were a precursor 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 fudged. This sparked a major blowback from regulators around the world, damaged the global automotive industry, and marked 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 defective accelerator pedals, costing them millions of dollars in settlements.

India has seen its share of scandals, too. Around the same time that Volkswagen’s dieselgate scandal rocked the world, General Motors found itself on the backfoot when a whistleblower told authorities it was sending specifically tuned vehicles for emissions testing while selling non-compliant models to customers. A government probe termed it corporate fraud and indicted the top management of the company. While the penalty was a measly ₹11 crore, 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 never recovered from the blow, exiting the Indian market a few years later.

As all these cases show, carmakers suffer significant damage when caught cheating. Why, then, do they continue to do so?

There are two main reasons for this. One, because they can – and like everybody who cheats, think they will never be caught. Historically, policies on automobile emissions and safety have relied on self-certification. Government and companies would huddle in a room and negotiate a set of regulations, following which manufacturers would then certify themselves as compliant.

Testing for compliance does not take place on the factory floor where the cars are manufactured or the road where they are driven. Instead, a batch of test mules are sent to government labs from time to time. This leaves open the possibility of companies specifically making cars for testing to comply with the regulations, as was the case with GM in India.

This regulatory loophole facilitates corporate greed and an insatiable hunger for more profit. Conforming to stricter regulations of any kind costs money, both in R&D and manufacturing. Bluffing regulators is a straightforward cost-saving method. Moreover, new regulations almost invariably lead to higher costs of vehicles. By cheating, a carmaker can increase its profits and undercut competitors on price.

Thankfully, regulators have wised up and are increasingly adopting ‘real driving emission’ (RDE) tests in which vehicles are checked for compliance in real-world conditions. India partially moved to this type of testing in April.

The other big reason why carmakers are prone to cheating is also quite straightforward. Some regulations are simply too harsh for them to comply with. This may sound like an excuse but in some cases, imposing overly stringent regulations can be counterproductive.

A research paper authored by Kelogg University professor Sunil Chopra and PhD candidate Keija Hu argues that fierce competition combined with standards that are tough and expensive to meet increases the odds of misconduct among carmakers. It goes on to suggest that temporarily relaxing proposed norms or giving the industry more time to comply decreases the probability of misdemeanours by up to 11%.

Part of the problem here is also lax regulatory oversight. Many cases of cheating, including the one in India, would not have been exposed if not for a whistleblower. This shows that even when strict norms are in place, regulators are often not effective or competent enough to ensure compliance.

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

Companies have argued that the stipulations on localisation were unrealistic in the first place and became impossible to meet after the pandemic disrupted global supply chains. Whether this amounts to cheating or not is subjective — after all, companies did pass on the subsidies to their customers. But this, too, highlights the incompetence of regulatory bodies to ensure compliance. Without the allegations in a clutch of anonymous emails, this one would have fallen through the cracks as well.