Naming and shaming manufacturers only works if you have a strong regulator

Posted Wednesday, 17 January 2018, 04:01

Defeat devices, airbags that spray metal shards when they deploy, malfunctioning exhaust catalysts . . . what next will cause car manufacturers to recall hundreds of thousands of vehicles? Nissan, which recently recalled every passenger car it produced between October 2014 and October 2017 for sale in Japan, adds a new item to the list: failure to follow its own in-house guidelines, as required by Japanese regulations, to perform a final vehicle quality check.

Here's why I found this case inspiring, rather than just dispiriting: it shows how strong the Japanese regulatory agency — the Ministry of Land, Infrastructure, Transport and Tourism (MLIT) — is and how promptly, therefore, a manufacturer reacts to issues uncovered by its inspections.

Here's what happened. MLIT conducted a random inspection of the assembly plant, as it routinely does. That led to the discovery that Nissan had ignored its own guidelines. In such a situation in Japan, the ministry can charge Nissan with a violation even for disregarding in-house guidelines. Had this happened in Germany it would have received “barely a finger-wagging,” But because MLIT has such authority, Nissan promptly responded to ministry’s investigation, and within one month had initiated a large-scale recall that could cost the company $221.7 million.

None of this comes as a surprise to me, though. As our recent survey of government practices to enforce compliance with vehicle emission and energy efficiency showed, Japan has a complete and effective system: clear governmental authority, a reasonable regulatory framework, sufficient testing capacity, and serious penalties and corrective measures it can employ. With the United States and South Korea, Japan's is the most comprehensive compliance and enforcement program for vehicle emission and efficiency regulations in the world.

Both Japan's Ministry of Land, Infrastructure, Transport and Tourism and the agency that manages vehicle fuel efficiency, the Ministry of Economy, Trade and Industry, are fully empowered by several statutes (the Road Vehicle Act, Air Pollution Control Act, and the Act on the Rational Use of Energy) to enforce compliance with vehicle regulations. A government-funded national laboratory (NTSEL) conducts credible tests for vehicle type approval, or witnesses tests conducted by authorized laboratory. MLIT contracted with NTSEL to selectively test in-use vehicles after they had been sold. In addition, both manufacturer and agency collect defect information from users’ periodic maintenance, inspection, and service, and investigate and study the cause of defects. These various elements knit together a strong compliance system.

Mandatory recalls due to emission issues happen only rarely in Japan, especially in recent years. That doesn’t mean that the system only rarely uncovers noncompliance. Rather, compliance issues are addressed through voluntary recalls. Because maintaining a good public image is critical for companies in Japan, MLIT gives a manufacturer ample opportunity to correct problems voluntarily, and usually takes a “name and shame” approach if the manufacturer does not act as the agency recommends. Such approach works not only because of the culture in Japan, but also because MLIT also has the authority to order a mandatory recall, suspend and revoke vehicles’ type approval, and levy serious fiscal penalties on manufacturers—and they know it.

Japan has also been learning hard lessons. After Mitsubishi recently admitted cheating on fuel economy coastdown tests in Japan for decades, MLIT started to perform unannounced observations of manufacturers’ coastdown tests, starting in September 2016. And following the Dieselgate VW scandal, Japan plans to prohibit defeat devices after it switches to the WLTP Global Technical Regulations in 2018.

Even though Japan’s compliance and enforcement program is one of the most comprehensive, it could still be improved. Mostly importantly, MLIT needs a strict prohibition on the use of defeat devices. Japan is in a good position to learn from the different examples of the European Union and the United States, to close loopholes in the regulatory process and ease the burden on MLIT of monitoring compliance. In addition, Japan could make its program more financially sustainable by shifting the burden of funding the necessary surveillance testing of in-use vehicles from the government to manufacturers. And, in common with all other major vehicle markets, Japan could improve transparency by making compliance data and information publicly available, which would enable third-party monitoring.

Japan has an outsize influence on compliance and enforcement worldwide because it is home to major automotive manufacturers that sell their products worldwide. We should all hope that Japan's regulatory agencies keep playing tough, then, because that may translate into an outsize benefit to people’s health and the climate.