A good crisis should never be wasted and Volkswagen has created one that might benefit the members of the planet who are fond of breathing.
In London, bicycle-loving Mayor Boris Johnson wants to create a clean traffic zone in the city centre that would heavily penalize diesel-powered cars. Other smog-choked European cities are considering similar diesel-bashing measures. Diesel was turning into urban enemy No. 1 even before VW rigged its cars to hide their true, and appalling, output of nitrogen oxides and lung-clogging black soot. Now it is enemy No. 1 and the car companies are suddenly on the defensive.
So, to the liars at VW, danke! For you will force the auto industry to spend vast fortunes to clean up its act. That's the good news. The bad news, at least for the car companies, is the high cleanup bill is bound to clobber their investment returns, to the point that a few will drive off a cliff while others will be forced into the parking lots of bigger rivals.
There is no doubt that car fleets have been getting cleaner in recent years, thanks to ever-tighter emissions and fuel-economy standards in North America and in Europe (less so in other parts of the world, sadly). But they were never as clean as advertised. In almost every case, real-world driving tests produced far lower fuel-economy figures, and hence higher outputs of pollutants and greenhouse gases, than those spewed out in static laboratory tests.
Even before VW recklessly installed "defeat" mechanisms in as many as 11 million diesel cars to launder their emissions, regulators were tightening up standards on both sides of the Atlantic. In Europe, the so-called Euro 6 standard will force the car companies to drop the fleet-average output of carbon dioxide, the main greenhouse gas, to 95 grams per kilometre in 2021 from 130 grams today.
The Euro 6 standard will add as much as €600 ($880) to the cost of a car, Renault-Nissan chief executive officer Carlos Ghosn recently told Reuters. Post-VW, the cost will rise, perhaps enormously, because regulators have come under pressure to close the loopholes that allowed the laboratory tests to enter the realm of fantasy. Goldman Sachs said the No-More-Mr.-Nice-Guy regulations could boost the cost of diesel engines by €300, and diesels are already more expensive to buy than gasoline engines. The extra cost might not price them out of the market, but it is bound to reduce their popularity everywhere, damaging some car makers along the way. In Europe, diesel cars own about half the market. They account for almost two-thirds of the European sales of France's PSA Peugeot Citroën.
The car makers will have to overhaul gasoline engines too, and launch new versions, to meet the tightened standards. They were doing so before – note the sudden ubiquity of tiny, three-cylinder gasoline engines now used by Ford and Fiat's two-cylinder versions – and will have to spend billions more to make them even more efficient and less polluting. Electric and gas-electric hybrids will have to be launched, a market where the Europeans are way behind the Japanese.
The Europeans made the mistake of embracing diesel at the expense of most other technologies. It seemed to be a winning strategy until VW ruined their party. The European car companies have nothing that can compete with the Toyota Prius or Tesla's all-electric cars. No wonder Elon Musk just opened a Tesla factory in Europe. He is making a clean and quiet glide into a sea of belching diesels.
As cars get the cleanup treatment, city air will become less toxic. Consumers probably will benefit too. They will get treated to fuel-efficient cars that probably will not cost a lot more than the relatively grubby beasts they drive now. The industry is so competitive that only a small portion of the cost will be passed on to buyers. That means shrinking profit margins and shabbier returns for investors as the car makers fail to earn the cost of capital devoted to powertrain development programs.
Which brings us to Sergio Marchionne, the CEO of Fiat Chrysler Automobiles. For years, the has been banging away about rising research and development costs, and that was before VW's shenanigans added untold billions more to the bill. The cash burn on proprietary R&D is not just unsustainable, it's unnecessary, he has argued, because it "is duplicative, does not deliver real value to consumers and is pure economic waste."
He's right. What is the point of each car maker blowing its brains out on battery technology when the end result will be essentially similar to rival battery technology? Far better to pool R&D resources, and that means consolidation.
To that end, Mr. Marchionne has been pursuing a merger with General Motors. It hasn't worked so far – GM isn't interested. But GM may change its mind when it tallies up the regulatory cost of the VW scandal. If it does, others may follow, or not. Historically, car mergers have been disasters, as the Daimler-Chrysler merger was in the past decade.
What is certain is that the VW scandal will greatly accelerate the change that was already under way in the global auto industry. Cars will have to get leaner and cleaner a lot faster. Air quality and car buyers will benefit. The car companies and their investors probably will not. VW was not an equal-opportunity crisis.
Eric Reguly