05 Nov 2015   |   News

Volkswagen scandal sparking a charge into electric cars

As the German carmaker’s pollution problems deepen, pressure is increasing on the industry to shift resources to low-carbon cars, with hopes the nascent electric car industry can be propelled into the mass market

The still-unfolding cheating revelations at Volkswagen are being treated in some quarters as a blessing in disguise.

This week, the United Nation’s climate chief Christiana Figueres suggested the automaker should use the challenge of reducing emissions to spur innovation.

“I am actually delighted about Volkswagen,” she told an audience in Washington, DC on Tuesday. “What is their corporate strategy? We are going to scrap diesel and move to electric vehicles."

After misleading millions around the world – in September the company admitted it had fitted 11 million of its diesel vehicles with devices designed to suppress nitrogen oxide emissions during official pollution tests – going electric is certainly one route to recovering trust among environmentally conscious buyers for Europe’s biggest carmaker.

This week the company’s position worsened when an internal probe found that another 800,000 vehicles showed “irregularities”, in this case relating to carbon dioxide emissions.

In October, Volkswagen confirmed the company will shift its resources, cutting investment plans at its biggest division, diesel, and stepping up development of long-range plug-in hybrids.

Germany’s deputy environment minister, Jochen Flasbarth, says the carmaker is capable of a turnaround. “I expect that German carmakers, especially in the current environment, have little desire to break European laws,” he said on Wednesday. “If this doesn’t work with diesel, then they will have to do it a different way.”

German Chancellor Angela Merkel’s chief of staff has made the challenge even more explicit. “I would be very pleased if the German carmakers would be able to produce an e-car that’s better and cheaper than [Tesla boss] Elon Musk’s car,” Peter Altmaier said in an interview with Bloomberg last week.

There are some suggestions Volkswagen should offer to replace errant diesel cars with electric models, to help shore up its reputation and offset the damage to air quality caused by the ‘defeat devices’ – software that optimised the nitrogen oxide outputs when a car was being tested .

But as the beleaguered company braces itself for fines, lawsuits stretching several years into the future and recall costs that could quickly run into billions, there seems to be little appetite in Germany to offer anything beyond supportive words. So far, the strategy has been to keep the damaged company at arm’s length. 

Germany has ambitious plans to put one million electric cars on its roads by 2020, but so far has not said anything about using subsidies to push electric cars out of their niche.

Even in countries where there are generous incentives, not many people have embraced greener cars. Sales remain underwhelming, and even though Tesla this week announced it had a 50 per cent rise in orders compared with the same period last year, low petrol prices and concerns about vehicle price and battery range are conspiring against the industry.

Slowly turning away from diesel

Musk, one of the biggest advocates for electric vehicles, seized on the Volkwagen scandal during an interview in Belgium in September, saying it demonstrates, “That we’ve reached the limit of what’s possible with diesel and gasoline. And so the time has come to move to a new generation of technology.” 

In Europe, which is the biggest market for diesels, every carmaker took a hit on the stock market in the wake of the Volkswagen revelations.

So far the scandal has cost Volkswagen at least €20 billion in market value and forced the resignation of its chief executive officer Martin Winterkorn. Last week, the company posted a €3.48 billion third-quarter operating loss, its first in more than 15 years.

The shares were hit again on Tuesday and Wednesday, with the scandal now seeming to have spread to Volkswagen’s upmarket subsidiaries, Audi and Porsche. 

Car producers in Japan and South Korea that are not as deeply involved in diesel technology have suffered much smaller devaluations.

If carmakers weren’t serious about climate-friendly cars before, they certainly are now, says Ioannis Ioannou, assistant professor of strategy and entrepreneurship at London Business School.

“Given all the talk about emissions and the car industry’s dependence on oil and gas, it’s hard for me to see how sustainability is not a daily preoccupation for the sector’s corporate leaders,” he said.  

“The best companies do not wait for laws and regulations to be introduced,” Ioannou added. “If decarbonising leads to more efficient operations and energy savings, they should go ahead and do it before [new] regulation comes in.”

European manufacturers have been criticised for taking too big a bet on diesel technology. However, governments chasing greenhouse gas targets take a lot of the blame, with policies such as taxing CO2 emissions, pushing manufacturers and drivers towards diesel vehicles.

Two thirds of diesel-powered cars are sold in Europe. The biggest selling cars belonging to Volvo, BMW, Audi and Mercedes run on diesel.

Today electric cars make up only a sliver of total car sales in the world. But with emissions standards tightening, most major car companies are gearing up to invest billions of euros in plans to launch electric cars between now and the end of the decade.

After years of lip service, Europe’s governments and manufacturers are belatedly waking up to the need to back electric technology. At the start of the year the French government, which owns about 15 per cent of carmakers Renault and PSA Peugeot Citroën, pledged to progressively ban diesel vehicles from 2015.

Companies including General Motors, BMW, Mercedes, and Jaguar have all announced plans to launch electric cars before 2020.

Audi plans to bring an electric sports vehicle to market in 2018 and build additional electric models in the future. “That’s our answer to the diesel issue,” Rupert Stadler, chief executive said.

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