Diesel cars produced by just about every major European car maker have come under scrutiny over the past week in an emissions testing scandal that appears may be widening. Audi (XETRA: NSU), Renault (PARIS: RNO), BMW (XETRA: BMW), Peugeot (PARIS: UG), and Mercedes (owned by Daimler [XETRA: DAI]) cars have been named in reports issued by emissions watchdogs Transport & Environment and The International Council On Clean Transportation as generating “gaps” between official reported CO2 emissions figures and those observed in practical use.
Shares of Volkswagen AG (USOTC: VLKAY, XETRA: VOW) lost 29.3 percent of their value over the past week on reports that the company installed “defeat devices” in 11 million vehicles manufactured between 2008 and 2015. The devices reportedly artificially lower carbon dioxide (CO2) emissions when cars are connected to testing equipment. Watchdogs noted an increasing gap between official CO2 levels reported by manufacturers and those observed by independent testers.
Apparently, Volkswagen was not the only company to take part in these deceptions. It appears that what may have started as some mild number fudging may have turned into a game of leapfrog, where testing firms employed by manufacturers began competing to see who could report the lowest official emissions figures for their diesel cars. Forty million diesel cars have been produced in Europe since 2009 — about 17 percent of cars on the road today. Diesel cars are more popular in Europe than the rest of the world.
The disparity between official fuel economy figures and those observed in real world use has grown to 40 percent. Just one of ten cars is reported to meet regulatory requirements, and nitrogen oxide emissions average 500 percent above allowable levels.
The Transport & Environment group reported examples of just how far above regulatory limits European car emissions have gone.
“A diesel Audi A8 tested in Europe produced nitrogen oxide emissions 21.9 times over the legal limit on the road; a BMW X3 diesel was 9.9 times over the limit on the road; an Opal Zafira Tourer, 9.5 times; Citroen C4 Picasso 5.1 times. All these vehicles passed the laboratory test.”
Opel is a subsidiary of General Motors (NYSE: GM), and Citroen is a subsidiary of Peugeot.
Over the past week, shares of Audi lost 11.3 percent, shares of Renault lost 11.9 percent, shares of BMW lost 8.0 percent, shares of Peugeot lost 15.9 percent, and shares of Daimler lost 9.1 percent. Though thought to have limited exposure to the scandal, shares of U.S. automakers GM and Ford (NYSE: F) fell 6.1 percent and 5.3 percent, respectively, perhaps partly in sympathy.
“We est. that adding $100 of cost to General Motors’ EU diesel volume impacts annual profits only $50-60mln—both General Motors & Ford are somewhat underweight EU diesel exposure vs. peers,” Itay Michaeli was quoted by Barron’s with regard to the U.S. automakers. Michaeli reports that trends toward tighter regulation had already been “set in motion” and would come as little surprise to GM or Ford management or shareholders.
Unlike with Volkswagen, consensus earnings estimates for the group remained steady through the week. 2016 Volkswagen EPS estimates were cut to $2.40 from $5.36, or 56.7 percent, which is responsible for the huge markdown in Volkswagen stock.
The reports discuss the difference between the regulatory framework for cars manufactured in the United States versus Europe. U.S. authorities directly test 10 to 15 percent of new model cars in official laboratories. In Europe, a group of organizations are certified and compete with each other for automakers’ business, seemingly incentivizing them to provide the lowest figures possible, leading to the situation faced today.
Remarkably, a €20 (US$22.40) tariff is reported to be all that is required to implement a fully independent emissions oversight authority. It is reported that in 2014, over 500,000 people died from premature deaths in Europe due to air pollution problems, with associated costs estimated to be “€1 trillion.”
[Mercedes Photo by Scott Olson / Getty Images — Audi Photo by Michael Buckner / Getty Images — Peugeot Photo by Hannelore Foerster / Getty Images]