What the Mitsubishi Scandal Has in Common With VW’s

Volkswagen AG Reported To Be In Talks Over Pollution Punishment Funds
New automobiles, manufactured by Volkswagen AG, sit on railway transporters in Munich, Germany, on Wednesday, March 17, 2016. Volkswagen is in talks with U.S. authorities to establish a national remediation fund and a separate one for California as punishment for pollution from its cars after the automaker cheated on diesel-emissions tests, said people familiar with the matter. Photographer: Krisztian Bocsi/Bloomberg via Getty Images
Photograph by Krisztian Bocsi—Bloomberg via Getty Images

If everybody is cheating in their own distinctly different ways, does that make it a systemic problem, or just a very rich collection of individual ones?

At first sight, the Mitsubishi Motors (MMTOF) scandal, in which the company falsified fuel economy data for at least four of its most popular models for a minimum of two years, appears to have a lot in common with the Volkswagen (VLKAY) diesel scandal (which you can read about in depth here), at least in its origins.

Both arose from their companies’ desire to present their cars as something better than they were, to make them stand out in a ferociously competitive marketplace. Both appear to have been the responses of development teams to intense top-down pressure from management: Mitsubishi revised up its fuel economy targets for the models in question five times in the space of a two-year development period. And both happened at companies with poor prior histories of corporate governance, where employees could easily have had the perception that a bit of rule-bending would be tolerated as long as the results were OK.

The narrative arc is also likely to have more than a little in common: disclosure is slow (Mitsubishi’s manipulations took 20 years to come to light, VW’s a mere nine), and triggered, it seems, only by external pressure: for VW from the Environmental Protection Agency, for Mitsubishi (scarcely less painfully), from its commercial partner, Nissan, which will want a pound and a half of flesh for the damage to its corporate reputation. There’s also the risk of a slow drip of negative news out of an external investigation by lawyers appointed Tuesday by the company—albeit Mitsubishi’s inquiry looks like it’s progressing a lot more smoothly because it doesn’t involve the U.S. judiciary. Its lawyers will report back in three months, whereas VW was last week forced to delay giving any interim report on the investigation by law firm Jones Day under pressure from the Department of Justice.

There are obvious differences too, though that will be no comfort to Mitsubishi. VW was much better capitalized, and is in a much better position to withstand the financial hit. By contrast, President Tetsuro Aikawa is already admitting that the scandal poses “an existential threat” to Mitsubishi—partly because its sister companies in the Mitsubishi empire are under too much pressure from outside shareholders to ride to its rescue the way they did in 2001, when news emerged that it had covered up customers’ complaints for two decades.

Then there’s also the geographical scope. For now, it appears that the four cars at the heart of the scandal are sold overwhelmingly in Japan, where regulators can be expected to balance the desire to punish Mitsubishi against concerns about the impact on local jobs. The judicial backlash in the U.S. against VW faces no such restraints, and has been seemingly egged on at every turn by state attorneys, private litigators, and politicians. Ominously, Mitsubishi said Tuesday that “sufficient investigation has not been made into MMC vehicles other than the mini-cars described above; we plan to submit a separate report after looking into those models.”

The nightmare scenario would be to find out that Mitsubishi also misled U.S. officials and customers about other cars, although that seems unlikely: the problem arose because Mitsubishi extrapolated its domestic submissions from a U.S.-style testing cycle that involved less stopping and starting than the domestically approved one.

Like VW, Mitsubishi was able to hide the shortcuts it took from a type approval authority with little statutory power or inclination to verify the data submitted by carmakers: self-regulation may have survived much longer in the auto sector than in the banking sector, but it has led to comparable outcomes in behavior; most notably in the aggressive exploitation of loopholes in regulation.

This lesson appears—finally—to be being learned in Germany, which last week said that nearly half of the diesel vehicles it examined in the wake of the VW scandal operated exhaust management systems that shut down as soon as temperatures drop below the reference level. That is allowed under European rules since if they continued to run it would damage the engine. The only trouble is, the reference level is over 60 degrees—meaning that cars in chilly northern Europe routinely belch out more emissions than allowed almost all year.

The scale of that problem is huge: German carmakers alone—including GM’s European arm Opel—will “voluntarily” recall 630,000 cars for fixes as a result of the Transport Ministry’s probe. Similar actions are likely in France, where police raids at Renault and Peugeot have shown which way the wind is blowing.

The worst consequence of all this cheating is, of course, the thousands of deaths every year in Europe due to impaired air quality. But one of other pernicious side effects of all this cheating is the way it penalizes those companies that really have succeeded in making their cars cheaper and cleaner to run. The market will immediately reward those who can do this honestly, but it needs regulators, governments and courts to clear all the smoke blown by the industry’s dirtier elements first.


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