The Winners And Losers After VW Dieselgate: Not Quite Whom You Might Think


Although here at CC we don’t spend much time covering the news in the automobile world, cataclysmic events like the VW diesel scandal don’t exactly happen often. Since we’re focused more on history, the longer term repercussions are what particularly interest us, and those consequences are quickly coming into greater focus. Let’s get the key issue out right up front: the passenger car diesel’s best days are absolutely over, and a genuine paradigm shift has begun. But it’s going to affect car makers in quite different ways.

The key issue is that it’s not just VW’s “cheating” small diesels that are emitting more NOx than what they are supposed to.  Many, if not most of Europe’s other small passenger car diesels also emit more NOx in over-the-road tests than what they were certified for in laboratory certifications (although not to the extent of VW’s). But that’s not from cheating (we assume, until someone else is actually caught) by using software “defeat” tricks. It’s simply because the certification schemes used in the EU, by independent for-profit labs, simply don’t reflect what the actual on-road emissions typically end up being. It’s a  reality all the European manufacturers have been gaming very aggressively, and the VW diesel scandal just happened to blow that all into the open. They’re not denying it. And there’s no doubt that over-the-road certifications are coming, and that most diesel makers are essentially standing with their pants down, as their current crop of engines will not meet them, never mind just meeting the new Euro 6 standard in the lab.

Essentially, all of Europe made a colossal bet on diesels, fueled by government incentives (lower taxes on diesel fuel) and encouragement, as a way to meet ever-lower EU CO2 targets. And those targets, which are currently 130 grams per km, are scheduled to fall to 95 gpk in 2021. This nightmare couldn’t have happened at a worse time.

The upshot: the diesel will have to give way to the gas-hybrid in Europe, at least to a very considerable extent. Why? Because cleaning up the smaller diesel engines to meet actual emission standards will simply be too expensive, at least for the lower/middle part of the market. Currently, existing small diesels cost some 1,300 euros more than comparable gas engines. The new Euro 6 regs are adding some  600 euros to that. But the additional changes required to make them truly compliant will cost at least 300 euros or more. That simply starts to make the diesel an un-economic proposition for buyers of lower-cost cars.

This is hitting those makers that have been using Lean NOx Trap (LNT) technology, such as Opel, Renault and Fiat particularly hard. VW uses LNT in some of its engines as well as Select Catalytic Reduction (SCR, with urea fluid).

And if tax incentives on diesel fuel or other regulatory changes come about, it will only change the economics of the diesel for the worse. And who’s going to get hurt the most from this? Perhaps surprisingly, not VW. Certainly, Volkswagen faces enormous costs as a consequence of their actions, from owners, dealers, regulatory agencies, and the costs of dealing with the non-compliant cars already sold. But that’s all going to end at some point, and VW will survive it, one way or another. And a disproportionate percentage of its cars are more to the mid-upper and upper end (Audi, etc.), whose prices are high enough that the increased cost of truly clean diesels will not be a burden. VW is big enough that it can afford to bring more hybrids to market, which it has already begun.

“This VW tidal wave will accelerate the shift,” said a senior executive at a French supplier of diesel emissions technology. “Some carmakers aren’t ready for this.” (via  Ironically, it’s some of the other European car makers that will get hit the hardest, because they are least ready for this paradigm shift to hybrids, and have invested so much in diesels, especially in the lower spectrum of the market that would be most impacted by these changes. Think PSA (Peugeot/Citroen), Renault, Opel, Ford and Fiat. PSA is particularly vulnerable, as diesels make up 60% of its sales, and its only hybrid is a relatively expensive diesel-hybrid that is not a harbinger of the future. PSA lacks the resources to develop new hybrids on its own.

Renault is in a similar (or worse) pickle, having bet huge on diesels and pure EVs, which have not yet become commercial success. Renault-Nissan have almost no hybrid programs, and may have bet heavily on the wrong technology. Nissan shelved its hybrid plans after Carlos Ghosn arrived from Renault in 1999.

FCA (Fiat-Chrysler) has no current hybrids, and will struggle to develop a credible hybrid program across its lines. No wonder  Sergio Marchionne is so eager to find a merger partner; one with hybrid technology, undoubtedly.

Needless to say, the European car makers outside of VW are very unhappy about what VW has brought raining down on them. The EU diesel certification house of cards is collapsing, and the low-mid price diesel car along with it.

So the losers are obvious. What about the winners? As stated earlier, VW will survive; it has the largest R&D budget in Europe, by far. And it already has a toe in the hybrid market, albeit a little one, so far. Long term, VW will do what it has to to adapt to a changed world. And its premium brands will help fuel that transition.

The biggest winner undoubtedly is Toyota, which already offers a hybrid model in just about every size class in Europe. Honda has also improved its hybrid tech recently, and may benefit, but not to the scale that Toyota will. Ironically, the Japanese have been in retreat mode from Europe in the past decade or so, but thanks to VW, that will likely change to one extent or another.

One thing is for certain: this event will signal the biggest fundamental change in Europe’s car market since the first energy crisis and the arrival of the Japanese brands on their shores. The first triggered the whole diesel boom, most especially with the VW diesel Golf/Passat, and the second forced the Europeans to drastically address and improve reliability. Now once again, a massive change will have to take place, and the Europeans are going to have to play catch-up to the Japanese. The question is whether all of them will be able to.