A probe into Hino Motors (7205.T), Toyota’s (7203.T) truck and bus manufacturing unit, found that the company has been falsifying data concerning engine certification since 2003, over a decade earlier than was previously reported.
“I am so deeply sorry”, said Hino president Satoshi Ogiso at a press conference following the release of the investigation’s results. “Unfortunately, misconduct has been carried out for a widespread variety of models”.
Hino formed an independent investigative committee
Hino first acknowledged its misconduct in March 2022, and formed the Special Investigation Committee with outside experts to lead an internal investigation. The probe revealed that employees at the manufacturer altered emissions-related durability tests on a number of vehicle and industrial diesel engines.
They were also found to have tampered with fuel efficiency measurements in heavy-duty engines, in order to align with emissions regulations in Japan. It is understood that some of the issues goes as far back as 2003.
The falsified engine data is believed to have impacted as many as 115,000 vehicles, or double Hino’s annual sales in Japan. Production and distribution of the bus and trucks affected has been halted, and the company is recalling the vehicles already in the market.
When the truck unit first admitted to falsifying data in March 2022, the group suffered its biggest one-day share price drop, falling 16.8%. The group suffered another blow when the results of the probe were released, plunging another 10%.
Pressures to meet goals fuelled cheating
One of the major reasons for the misconduct cited in the report was management “creating an environment and mechanism prioritising meeting schedules and numerical goals over due process”.
The report found that the company’s “inward-looking and conservative culture” prevented employees on the frontlines from speaking out about the emissions cheating, under the pressure to meet deadlines and quotas.
The report also blames management for a “lack of awareness in and a mechanism for managing its business operations as a corporate organisation”. The Committee report found that company executives outside of the unit affected were unaware of the misconduct, but that the “issues should have been found” if the proper monitoring functions were in place.
Falsifications fuelled by poor governance practice
Although Hino is a subsidiary of Toyota, the company is listed and managed separately. The fact that the tampering happened, as well as concerns raised in the independent report, show significant problems with corporate governance in both countries.
While the failings in management oversight are clear, another reason for the falsification of data could have also been to receive tax benefits for low emission vehicles. Established in 2009, Japan’s Eco-Car Tax Break provides a reduction on the rate of automobile acquisition tax by 2.7% for low emission vehicles purchased.
Hino has said it also intends to further investigate the company’s position in terms of tax benefits related to emissions and fuel consumption, and is prepared to “bear the cost of any additional tax payments”.
As a result of the emissions cheating backlash, Hino has pledged to improve corporate culture and its governance systems, bolster control and supervision functions, and reinforce more comprehensive certification structures and processes. The company expects to deploy these measures in the next three months.
Engine emissions data-rigging is nothing new in the automotive sector
The truck manufacturer claims to take the Committee’s recommendations “seriously”, and will take steps to prevent this misconduct in the future to “[regain] the trust of its stakeholders”.
But Hino is only the latest manufacturer to come under fire for falsifying engine emissions data. In Japan in 2015, Mistubishi (8058.T) and Suzuki (7269.T) were the first car makers to admit to cheating on emissions testing.
This launched a slew of government-mandated investigations for the country’s car manufacturing sector. Over the next couple years, Nissan (7201.T), Subaru (7270.T), Mazda (7261.T), and Yamaha (7272.T) also confessed to falsification of emissions tests.
The 2015 Volkswagen (VOW3.DE) scandal was perhaps the first to bring car manufacturers emissions problems into the mainstream conversation. The US Environmental Protection Agency (EPA) first issued a notice to the car manufacturer in September 2015.
The EPA said that the company had violated the country’s Clean Air Act by installing ‘defeat devices’ in its model year 2009-2015 2.0 liter diesel cars, which allowed these cars to emit up to 40 times more pollution than emissions standards allowed. The device was then found to be included in other vehicle models, affecting approximately 590,000 vehicles in total.
In 2017, Volkswagen agreed to plead guilty to three criminal felony counts and pay a $28 billion criminal penalty, as well as an additional $1.5 billion in separate civil resolutions.
A similar scandal was exposed in 2020, when it was shown when British law firm Harcus Parker launched a lawsuit claiming that 1.3 million diesel vehicles manufactured by Nissan and Renault (RNO.PA) were fitted with defeat devices. These allowed vehicles to produce up to 15 times the legal level of nitrogen oxides. This lawsuit was the first to also claim that petrol cars were affected by the cheating emissions trend.
Band-aid solutions for a deeper problem
With the proliferation of data-rigging issues in the automotive industry, billion dollar fines and a slap on the wrist from shareholders does not seem to be enough to curb the misconduct.
Countries and regions across the world have been putting in stricter regulations on vehicles to align with emissions reductions targets. However, the same crackdown has yet to be applied to reporting of these emissions.
Reporting on emissions and fuel efficiency is primarily the responsibility of the manufacturer, with tax subsidies and consumer demand creating the incentive for manufacturers to fudge their numbers. Currently, there are no globally accepted standardised reporting mechanisms or frameworks for emissions and fuel efficiency, which creates an environment where misconduct can thrive.
Other sectors have also experienced ‘greenwashing’ in climate-related reporting, such as the finance and ESG sector. However, governments and international bodies have taken action to stem misinformation around climate claims through the introduction of comprehensive reporting requirements aligned with international standards.
For example, the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD) have been integrated into the EU’s Sustainable Finance Disclosure Regulations (SFDR), as well as proposed requirements from the US’s Securities and Exchange Commission (SEC), the UK’s Sustainability Disclosure Requirements, and Monetary Authority of Singapore.