The Auto Industry’s Ethics Problem

Automobile sales have been surging in the United States lately, driving up consumer spending and boosting the national economy. If you are one of the Americans who need a new car, which model will you choose?

A European model? Perhaps not. Volkswagen, the German manufacturer that is now the largest auto maker in the world, recently admitted to a mind boggling fraud. While promoting millions of vehicles as environmentally Clean Diesel devices, VW intentionally built the cars with technology that tricked pollution testing equipment into giving the engines passing grades.

In other words, they promoted the cars to environmentally conscious consumers as green vehicles. But the autos actually spewed illegal toxic fumes into the atmosphere, and were rigged to cheat on the engine tests that are periodically required in the United States.

Well, then, will you select an Asian model instead? Once again, perhaps not. Toyota, the largest of the Asian automobile manufacturers, was recently forced to recall millions of vehicles because of devastating car accidents involving unintentional acceleration. In a wide variety of situations, drivers found themselves behind the wheel, trying desperately to stop automobiles that were accelerating out of control.

What about other Asian models? Hyundai / Kia, the largest Korean manufacturer, wouldn’t offer you much of an alternative. Just last year, the American government fined them for brazenly lying about the fuel mileage of their automobile models. Unlike Volkswagen, the firm didn’t instruct their engineers to develop clever technologies to trick regulatory testing devices into certifying the performance claims of their vehicles. Instead, they simply lied about their performance.

Then how about selecting an American model? Yet again, perhaps not. General Motors, the largest manufacturer of America’s Big Three, is still managing the fall-out of its ignition switch scandal. For many years, its engineers knowingly allowed one hundred customers to die because of a mechanical defect that it illegally hid from the government and the public.

So what is going here? Why is the entire automobile industry led by manufacturers that behave in this way? Perhaps the root cause of the problem is the nature of the firms’ sales distribution networks. By relying on networks of independent dealers to sell their products, the firms are insulated from their own customers and thus fail to be influenced by their concerns.

Such insulation problems are not unique to the automobile industry. Steve Ballmer, the long time chief executive of Microsoft, has spoken about the company’s decision to design, produce, and sell Surface tablets directly to the public without contracting with its Original Equipment Manufacturers (OEMs) and distribution partners. According to an interviewer of Ballmer:

“As expected, Microsoft’s OEMs, some of whom said publicly they felt blind-sided by Microsoft’s decision to make its own devices, were none too happy about the move. But Ballmer insisted Microsoft had no choice.

‘I was concerned that we had areas of vulnerability in competing with Apple and without any (first-party) capability, that we were not transacting that well just through our OEM partners.”… our OEMs were having a hard time investing in competing with the higher end brand. The (Microsoft retail) stores … hadn’t taken off … that was also an issue … our OEMs do great work, but there are places their brands and investments don’t travel.’”

Nevertheless, Microsoft’s products don’t kill their customers, as do the products of automobile manufacturers. And Microsoft has not been accused of lying about the performance of its products to the government and the public. So what unique feature of the automobile industry’s sales distribution strategy is promoting such ethical lapses?

Although it’s impossible to pinpoint a single causal feature, one contributing factor might be the manner in which sales prices are established with individual buyers. After all, how many customers are truly prepared to engage in complex haggling with auto dealers — i.e. with professionally trained negotiators — to agree on prices?

Most customers know that they are not equipped to do so. And as a result, many feel uncomfortable about the process of purchasing an automobile.

Does this culture of “haggling vigorously with your own customers for every penny of every sale” itself promote unethical behavior? The only way for a manufacturer to know for sure would be to experiment with haggle-free policies, and to observe whether such practices align their cultures with the interests of their own customers.

Until a manufacturer decides to try that approach, good luck! And let’s be careful out there.