Is diesel technology a dead-end? The VW emission scandal may help innovation - October 04, 2015

Is diesel technology a dead-end? The VW emission scandal may help innovation

In the last two weeks Volkswagen’s clean diesel scandal made a huge mess on the market which can bring significant changes in the automotive industry in the near future. It is obvious that there are lots of skeletons in the cupboard, VW-group’s brands (like Volkswagen, Audi, Skoda, Seat) announce one after another which of their cars are involved in the scandal, and here we are talking about millions of vehicles. We can clearly see the problems on their stocks as well: in two weeks the company lost 35 percent of its stock value, which leads to a breath-taking 26 billion Euro loss. The scandal took its toll on other parties of the industry as well.

European factories in the middle

European firms are the main innovators of diesel technology therefore they are involved in the scandal more than other companies. The highest sells are in the EU: two third of global diesel powered cars are sold here. What is more, Volvo’s, BMW’s, Audi’s and Mercedes’ main sellings are coming from diesel cars as well, and French companies are making 60% of their trade with the same tech. In the meanwhile, in the US, the market share of diesel cars is only 3 percent, and the second biggest economy, China barely gives 1 percent of global diesel sells.

For now, it is not clear what price the VW-group will have to pay because of the scandal. Their position is not good: probably several states will fine them while shareholders, car owners and resellers will probably sue the company. What is worse for VW, there is a huge cost of recalling 11 million diesel cars. All this can lead the company to be downgraded which will make their operation more expensive, therefore the firm will be less profitable. And there is the obvious loss of trust towards the company, which is even harder to put a price tag on.

Does diesel still make sense?

In the past, most scandals of the automotive industry ceased relatively easily. Consumers forget fast, plus factories started well targeted marketing campaigns and gave reductions too. But this time it is quite different, since this time it is not about one broken car part, this time it is about cheating with millions of cars. VW group made a software which helped cars to pass emission laboratory tests, but if the firm uses the same software settings on the streets, that will lead to downgraded real life performance. Customers will care about that.

If it turns out that diesel is not a clean technology – as it has been advertised – than the reason for its existence will be questionable.

New technologies and innovation

This scandal could lead companies to use alternate technologies like hybrid and electric engines. Elon Musk, CEO of Tesla already said that “what Volkswagen is really showing is that we’ve reached the limit of what’s possible with diesel and gasoline. The time has come to move to a new generation of technology.” But it is not only Tesla Corp which wants to enter the electric car business. Among car factories, Google and Apple are entering the business too. Google already has a self driving experiment with electric engine and Apple is long rumoured to start its own iCar by 2020.

The future

This scandal will affect all European factories, even if not all of them cheated. This is what we can see if we look at the stock prices: in Europe, every company took a hit, while producers of the Far East (Japan, South Korea) had to face a much smaller devaluation. The reason is simple: they are not that deeply involved in diesel technology.

On the short run, producing of diesel engines will probably not stop since huge investments were made to create them. But in the long-term it is quite possible that the share of diesel powered cars will recede. The scandal can also lead to the growth of companies like Tesla.

Altogether – from an investor’s point of view – at this time it might be a good idea to stay away from the stocks of automotive companies, even if the prices are low now. It is not clear yet how this whole scandal will affect the European economy, and that is a good reason for precaution. On the long run, however, it is possible that the sector will profit from this hiccup. Firms may rethink what technologies they use, and may invest in new directions. If innovation will take place, that could be profitable to all.

Diversification

Generally speaking, this scandal made it obvious again how important diversification is. In the last years German car companies were among the best investments: their sells were skyrocketing, and the stock not only had proper earnings, but they paid nice dividend as well. But still, even companies as big and strong as a European car factory can cheat on tests and that could lead to lose a third of their value in a week. This is why it is not a good idea to invest our money only in one place. While we are managing risks and plan our investments, it is always good to remember to put our money both in low and higher risk assets, and always do proper diversification.