Why VW bought back cars with missing parts
Published on: 10 March 2024
In 2016, someone wrote a post on Reddit about their car.
The person’s VW Golf car’s headlamps and bumpers were removed.
Other parts of the car were also taken off.
Then, he drove the car to VW and gave it to them.
In return, VW gave him a cheque that he could deposit in his bank.
This post became viral.
Others started taking parts off their VW brand cars before returning them.
He explained that the VW terms and conditions mentioned that the car had to be in driving condition to be eligible for a buyback.
That’s it.
It did not say anything about missing headlamps, bumpers, panels, etc.
Thousands of people started stripping parts of their cars and returning them to VW – and walking away with a cheque!
They sold the parts they took off their cars separately and made more money.
The cars went on to be stored in giant fields. Lakhs of cars were kept in this manner in different locations in the USA.
VW spent over $10 billion just buying back cars from USA-based customers.
Why did VW buy back cars at such a massive expense? Why was the buyback offered at all?
We have to go back a bit to understand.
In the mid-2000s, Toyota ruled the USA markets. Their hybrid cars were a big success.
VW wanted to challenge them – so they pitched their diesel cars as a better alternative.
Diesel cars are extremely fuel efficient. VW claimed their diesel engines produced far less harmful emissions than others.
In 2008, VW came up with a ‘clean diesel’ marketing campaign to aggressively pit their diesel cars against hybrid cars.
Towards 2009 and 2010, they launched their diesel-engined cars to the American public.
All was great – for some time.
In 2013, a few university students were given a project – to find out how less or more polluting diesel cars actually were.
These students used a few VW diesel cars in different kinds of tests.
They discovered that the cars were giving out harmful emissions – much above the legal limit.
This surprised them because the car models had been approved by the US authorities already.
In 2014, a government body started an investigation into the matter.
What they found was unexpected – and illegal.
VW cars are very technologically advanced. These cars were great. No doubt.
Pollution check is often done when the car is standing in one place.
VW had put in a cheating device in their diesel cars.
This device would detect if the car was moving or stationary – and change engine settings accordingly. It would reduce power. Diesel emissions also reduced with that.
So when it was tested, it showed the car was within pollution limits.
But when it was moving it produced harmful emissions much above the legal limit.
VW had sold lakhs of these cars in the US.
It was ordered to either repair or buy back the cars from its customers at a fair price. Other fines were also imposed. Some VW executives were arrested and court trials started.
And that is how VW ended up spending billions of dollars buying back about 3.5 lakh cars in the USA.
Investigations showed many executives were at fault.
But people all over the world are still wondering – how could a company so big commit a mistake so trivial?
How could they think they would cheat like this and nobody would catch them?
Short-term thinking.
The human brain struggles to see the longer-term picture.
The Human Brain
Human beings are animals. Just like animals, we used to live in jungles.
Cities, roads, countries, etc. are all relatively modern inventions.
Our technology might have advanced – but biologically, we are still pretty much the same as thousands of years ago.
Back then, the risks affecting our lives were different. The rewards were also different.
Everything was short-term. Our life revolved around danger and food.
If we sensed a large animal like a lion or tiger, we had to react extremely fast. We could not take our own sweet time thinking about the approaching lion.
We worried about what we were going to eat today – not what we would eat 1 month later. If we didn’t arrange food immediately, we would die from starvation.
This is why we can think about the short term instinctively and without difficulty.
It comes naturally to us.
But in our modern world where we have technology and civilization, the rules are different.
Our life is a lot less in danger. The chances that we’ll be alive years from now are also much higher now.
Why did the people at VW think they could cheat and nobody would catch them? It was most likely this short-term thinking brain of humans.
They thought about the immediate revenue and profits they would earn from selling lakhs of vehicles.
They did not think that someone would eventually find out.
Make no mistake – there is nothing wrong with short-term thinking. It is necessary in our lives.
It’s just that in our modern world, there are times when we need to not think short term, and think long term.
Investing
This kind of thinking is seen in investing also.
Thinking about long-term investing is less common. We usually think about the short term a lot more.
Many investors are far more interested in investing in intraday and F&O.
Fewer people talk about investing in a mutual fund or in stocks for 10 years.
Making money over a long time is much easier than investing in short-term investments. But it also requires us to think about a time that is far away in the future – something we have never been good at.
Money doubles in 21 days. This sounds exciting. We can picture how it will feel.
Even though in many cases, their investment does not work out – they lose money.
Money doubles in 6 years. This is harder to picture. It takes a bit more thinking to imagine compounding at 12% per annum.
The chance of the investment doubling is much higher in the longer run – still, we struggle a bit to think about it.
The illustrations used above are made using an AI tool (DALL-E).
Quick Takes
+Spectrum auction will begin from 20 May. Eight spectrum bands will be auctioned at a base price of Rs 96,317.65 cr ($11.6 billion).
+The Indian government has reduced LPG cylinder price by Rs 100 per cylinder.
+Equity mutual funds recorded net inflow of Rs 26,703.06 cr in Feb 2024, up from Rs 21,749 cr in Jan. Debt funds recorded net inflows of Rs 63,809 cr vs Rs 76,469 cr in Jan.
+The dearness allowance for central government employees has been hiked by 4%. Dearness relief has been increased by 4% too.
+Tinna Trade has acquired a 100% stake in Fratelli Wines Pvt making it India's second-largest wine maker.
+UPI is now live for cross-border transactions between India and Nepal.
+2.73 lakh international patents were filed in 2023, a decline of 1.8% year-on-year. India recorded a growth.
+Customers to be allowed to choose which card network they want for credit cards: RBI. Card networks include Rupay, Visa, Mastercard, etc.
+DGCA has given Air Operator’s Certificate to ‘FLY91’ airline. The company is expected to start operations soon.
+Chinese EV maker BYD is planning to get 90% market share of the EV market in India by this year-end. Launched BYD Seal (premium car) today.
+Indian bonds will be added to the Bloomberg Emerging Market Local Currency Index and related indices in a phased manner from 31 Jan, 2025.
+Ola Electric published 205 patents in the EV-related tech space in FY2023. TVS was 2nd with 156 patents, followed by Suzuki, Honda, and BYD: Intellectual Property India.
6-Day-Course
Theme of the week: comparing investments
We’ve reached the end of this week’s course that started on Monday.
Here’s a test you should take. Get pen and paper!
Question 1:
Returns should be compared using:
-CAGR
-Absolute profit
Question 2:
Which usually has better liquidity?
-Real estate
-Gold
Question 3:
Which metric best measures risk?
-Returns
-Beta (volatility)
-None
Question 4:
The investment horizon in which case is shorter?
-FD
-Shares
-Both are same
Question 5:
Case 1: 10% p.a. returns; 10% tax on profits
Case 2: 12% p.a. returns; 30% tax on profits
Which is better?
-Case 1
-Case 2
Answers:
Q1: CAGR
Q2: Gold
Q3: None
Q4: FD
Q5: Case 1
The information contained in this Groww Digest is purely for knowledge. This Groww Digest does not contain any recommendations or advice.
Team Groww Digest