Cheating is not part of rivalry

AT WORLD-domination level, the top spot is hard to get, hard to keep, but worth the effort. If you don’t push the boundaries, you won’t get there, surely? Second place is whatever, who cares? There is only one number one. There have to be rules of play. You can’t cheat. In sport, cheating became so pervasive that half the rules were there to define it, find it, check for it and prevent it — testing is compulsory, results are conditional.

In business, particularly in manufacturing, the rules aren’t as much driven by tackling fair play among the players; they’re there to protect consumers, to monitor resource impact, to protect the planet — noble purposes indeed.

Volkswagen (VW) had its sights set on being the biggest car manufacturer in the world after always playing second fiddle to Toyota and General Motors. At about 10-million vehicles last year, VW was finally on track. The prestige, the economics, the national pride. German Chancellor Angela Merkel’s “Wir schaffen das” had started echoing in the corridors. Was this a victory to be had at any cost? Was it worth taking short cuts? Was it worth deceiving the US in its own backyard? Hell, yes, it thought.

VW has a prestigious collection of brands: Audi, Bentley, Lamborghini, Porsche. Probably the best collection in one house.

“Vorsprung durch Technik”, the Audi challenge … the Quattro — legend on and off the road when I was growing up. Bentley — the epitome of luxury, quality and finish. But more: the Continental GT does 0-100km/h in 4.3 seconds and gets to 160km/h in well under 10 seconds, from standstill. The twin turbo W12 produces 590PS with maximum torque of 720Nm from just 1,800rpm. Even if you don’t understand that, it’s impressive! And they bought it from Vickers, out of the stable of Rolls-Royce — don’t tell me that no patriotic purpose came into play there. And then there’s Porsche.

Along comes this emission compliance thing. VW chose the NOx trap technology over the more conventional catalytic reduction method used in the US. That probably got the US thinking. NOx technology was cheaper but it used more petrol and affected acceleration. Not what the high-performance VW stable needed in its quest for world domination through performance.

So it cheated. It installed software to operate emission controls only when vehicles were being tested, which was deliberate deceit. Once they’d passed the tests, they switched off the performance inhibitors and drove off at full throttle — a bit like those pre-test blood transfusions some previously legendary cyclists were rumoured to have done.

Was it just a couple of middle management engineers who saw a gap to exploit? I doubt it. Why would they, in isolation, do this? How many people had to be involved just to co-ordinate the software override strategy without a glitch? Engineers’ rewards are in getting it right rather than getting away with it?

Techies don’t get their jollies from the share price; maybe just beating the system was enough for them. It is highly unlikely that management wasn’t at least aware of the sleight of hand. Sometimes it’s just easier to look away than to face the truth. Easier, but wrong.

CEO Martin Winterkorn had to resign. Personally implicated or not, he presided over these irregularities. Being the CEO cuts both ways; you get rewarded for the good but fall on your sword for the bad. That’s how it works. No suspension on full pay in Germany. VW’s brand sales fell 4% in Russia and Brazil; its market share is at the lowest since March.

But this didn’t just happen anywhere. It happened in a German company, where the world standards of engineering are supposedly set. Of all the leading industrial economies of the world, Germany has always held itself above this kind of stuff, without compromise.

So, Berlin has become involved. Discretion has been taken away — all cars have to be recalled, with no exceptions. If there is going to be a mess, then at least it’s going to be cleaned up thoroughly, German style — a sort of reputational backfill to the whole ordeal.

Of course there will be contamination and suspicion. Uncertainty is one of the biggest drivers of risk premium, so the cost of capital, debt and equity is going up for all car manufacturers. This is hardly good news for a capital-intensive industry that is such a major contributor to employment and gross domestic product. Times have been good for the motor industry in Europe, aided by a weaker euro and practically free money, courtesy of the quantitative easing programmes of the European Central Bank. Corporate bonds were the financing instrument of choice and they’ll get pricier now.

The motor industry isn’t alone in the cheating game. In fact, it is way behind the financial sector, which leads the “caught out, pay the fine” league tables. The financial sector was more obvious with its market rigging — perhaps because the direct rewards of cheating are more personal, measurable and immediate. Have the authorities got the payoff profiles right? Or is it still worth giving away a penalty to save a try?

Competition is fierce and marginal

The motor industry isn’t alone in the cheating game. In fact, it is way behind the financial sector Guilt is a much harsher settlement currency; it steals your peace of mind, that most elusive of states

wins can mean the difference between success and failure. The truth is obviously the only way to play, but the immediateterm investor focus doesn’t help.

Walmart shares plummeted when the executive announced it was going to have to invest in people ($1.5bn) and systems ($1.1bn) in order to be competitive in the future. Of course you have to invest in people and, if, as a retailer, you’re not at least ready (let alone ahead of the game) on e-commerce, you’re nowhere, or you soon will be. Harvesting without planting is a fool’s paradise, we all know that. In SA, we’re a little behind in the planting, a little ahead in the harvesting, aren’t we?

Not unexpectedly, when the competition falters, the competition pounces. Toyota was quick to point out the advances in its hydrogen-powered engines, and quick to point out the increased thermal efficiency to be expected from the new hybrid Prius. Fair enough.

In time, cheating always gets found out. But that’s not the reason not to do it. Being found out is one thing, but that happens long after you know you did wrong. Living with yourself is forever and knowing that you didn’t win, even if the scoreboard said you did — that’s the part that doesn’t go away. No fine can absolve that. Guilt is a much harsher settlement currency; it steals your peace of mind, that most elusive of states.

There are natural-born cheaters, of course. There are also ruthless “victories” in business, extractions of economic blood regardless of casualty, sought by psychopaths masquerading as private equity partners. They are not cheats, but they too will get their comeuppance. Money is not the only end game. Cheaters are always losers; it’s in their DNA.