There are other differences here too, I think. The water heater trick is passive manipulation that stays in place at all times, which limits how far from "real" performance it can get. And per the story, it seems more like "teaching to the test" than "cheating". That is, Volkswagen consciously moved away from the mandate outside of testing. The water heater was (potentially) as energy-efficient as they could design, with the test score manipulated on top of that.
None of that makes it harmless - if "as good as you can make" doesn't hit standards without manipulating them, that's still a problem. But I do find it less galling than "intentionally worsens emissions outside the test bench".
The difference between the water heater and VW is the water heater manufacturer is providing a representative sample. And VW was not. It'd also be dubious to say that the water heater company is acting in bad faith. Where VW's bad faith rose to the level of criminal. On the other hand Volvo appears to be acting in strictly good faith.
Bad faith for a crash test would be crafting a silver plate model for testing. Reminds me that's what my uncle said the power supply manufacturer he worked for did.
While I agree that this particular water heater manufacturer was doing something shady in order to get the best score, at least they weren't selling a product that did something differently while under test conditions vs. in real-world usage. They merely realized that the test itself had wide error bars, and designed their heater to "err" in the positive side of those.
VW, in contrast, sold a product that lied to the testers about its emissions in order to pass certifications, while in real-world driving would behave in a way that would not pass muster.
And to me I think that's the key: VW's cars intentionally behaved differently depending on if they were being tested or if they were being driven in normal real-world usage. This water heater behaved the same regardless of whether it was being tested or was heating water in someone's home.
In a way I think of this in academic terms. The water heater manufacturer studied the SAT to learn what kind of questions were going to be asked. VW stole the answer key to the test and memorized it.