- Wealth PMS
Volkwagen could been fined upto $18 billion for manipulating emission tests in America. They apparently used a “defeat device” in certain diesel cars that were designed to reduce emissions only if the car was being tested.
Diesel cars have become more popular worldwide recently, as engines have evolved. Diesel engines use more compression and as a fuel diesel can provide greater economy (30% more distance driven than for petrol). But it’s a more “dirty” fuel, in that it produces more Nitrogen Oxides, or NOx. (But apparently, less carbon monoxide). NOx is responsible for smog, so the US in particular is very stringent on NOx emission norms.
Diesel engines used to be noisy and rattled a lot, but changes in engine design ensured that they ran smoother and had lower emissions, while retaining great fuel efficiency. But VW apparently couldn’t cut the emissions enough to have good performance and fuel efficiency, so they cheated.
How? It’s a complex thing, but they mapped what the US EPA would do to to check emissions, and when that combination of patterns was detected they would switch on the NOx emission control systems. These systems would appear harmless when running on rollers (which is how tests are conducted) but on a real road, they might show seriously degraded performance – but on a real road, the software would keep the emission controllers off, so you emitted more NOx but got better performance or mileage.
Read this VOX article for an awesome context of the issue.
How was this found? It was a bunch of people called the Clean Air group that took the cars out on a real world drive with an emission testing device in the tailpipe, when they found emissions were 5x to 35x the norm. This then resulted in an investigation by the US EPA, and eventually when the regulators asked tough questions, the Volkswagen folks admitted they had software code in there that was designed to rig the tests.
It’s already hurt Volkwagens shares, which have fallen from 160 euros to about 120.
The company has to recall cars made between 2009 and 2015 in the US. Other countries too are considering looking into their tests and the emission sequences. The CEO has resigned. The company will take a big hit – $18 billion might be the worst case, but it is 150% of their 2014 profit.
Car and truck companies do this all the time, apparently. There was a case in which trucks, when run on a constant speed over a long period of time, would release more noxious fumes than if they had just been started (or were run up and down).
So Motherson Sumi supplies to Volkswagen, which is 12% of Motherson’s revenue. The fear has taken the stock down too, from 280 to 230 (it’s back up to 251 now). The problem now is that fear has taken over to the point that people think all cars are impacted (only diesel models, exports to the US, from VW) and that all hell is breaking loose.
But there is a need to be cautious with auto ancilliaries, no matter what. This will spread and countries will change the way they do emission testing. Other car manufacturers who may have been using a similar defeat device currently not detected will have to change their strategy. (There is never only one cockroach). The car market in Europe is seeing lower demand anyhow. These can crimp future growth.
Having said that, this is not a problem so big that it cannot be fixed or solved. Engines have to emit less NOx, and that’s not impossible. But meanwhile, we will keep our volatility.