After Volkswagen agrees to a large
criminal fine, the Italian-American carmaker now faces action over noxious
emissions
FOR each of the past three
years, Fiat Chrysler Automobile’s (FCA) 3 litre V6 turbodiesel has made it to a
list of the industry’s top ten engines compiled by Ward’s, a distinguished American car-industry trade
publication. Its place on the shortlist for 2017 must now be in doubt.
On
January 12th America’s Environmental Protection Agency (EPA) accused FCA (whose
chairman, John Elkann, sits on the board of The Economist’s
parent company) of using illegal software in conjunction with the engines.
This, it says, allowed 104,000 vehicles—mostly Dodge pickups and some Jeeps,
fitted with the 3 litre V6 turbodiesel—to exceed legal limits of toxic
emissions.
The news sent the firm’s
shares plummeting by 17%, before recovering somewhat. Nervous investors feared
a repeat of the huge penalty imposed on Germany’s Volkswagen (VW) for cheating
American emissions laws. A day earlier VW had agreed to pay a criminal fine of
$4.3bn for selling around 500,000 cars fitted with so-called “defeat devices”
that are designed to reduce emissions of nitrogen oxide (NOx) under test
conditions. With the latest sum included, its final bill will be over $20bn.
Based on the number of cars involved, the same fining system, if applied to
FCA, would land it with a bill of over $4bn.
Yet the noxious cloud may not
prove quite so unpleasant for the Italian-American carmaker. Its rival, VW,
admitted that it had widely employed an illegal defeat device. The EPA found
out that FCA’s engines were also sending out more emissions on the road than
under its test conditions. The regulator has traced this back to undisclosed
software that, under some circumstances, alters the characteristics of
emissions controls. Crucially, however, the EPA has not determined whether
these bits of software constitute a defeat device. Only if it decides that they
are indeed defeat devices would FCA become liable for the same degree of
punishment it meted out to VW.
Still, FCA is certainly in the
EPA’s crosshairs. Failure to disclose this type of software also breaks the
rules. FCA is now obliged to demonstrate that they are not illegal. Key to its
argument will be the fact that excessive emissions are in fact permitted for
limited periods, in circumstances where the engine may be damaged without
allowing them, such as cold starts and running in very low temperatures.
Demonstrating this may be
tricky. As the International Council on Clean Transportation (ICCT), an NGO
that was involved in uncovering VW’s cheating, puts it, FCA’s software seems to
“alter the operations of the emissions controls...to reduce the overall cost of
the emissions-control system”. The ICCT reckons the software also improves
overall fuel efficiency as well as the cost of filling the particular tank that
holds fluid to feed the emissions-control system. If the software is deemed by
the EPA to be designed to save FCA money, the company will be in trouble.
FCA has strongly denied any
wrongdoing. Its chief executive, Sergio Marchionne, in typically forthright
style, said his firm was “not trying to break the bloody law” and accused the
EPA of “grandstanding”. The EPA probably had FCA in its sights for a while and
was keen to begin proceedings before Donald Trump takes office. Mr Trump could
relax emissions rules in return for concessions from carmakers, such as keeping
production in America rather than relocating to Mexico or other lower-cost
countries. (This week he tweeted praise for FCA’s plan to invest in production in
Michigan and Ohio, which Mr Marchionne quickly said was in place before Mr
Trump’s victory.)
The complexities of the case,
more than with VW, may mean it will be hard to prosecute FCA, says Matthias
Holweg, an expert on automotive manufacturing at the Said Business School in
Oxford. That would be a relief for the firm. If FCA were hit along similar
lines to VW, paying up would hurt far more, since the company is heavily
indebted—its ratio of net debt to equity will be around 47% in 2016 according
to Citigroup, a bank. It is also far less profitable than VW and most of its
peers—despite its ability to turn out an engine of the year with impressive
regularity.
But if FCA is found to have
exploited grey areas in the rules, it will be no surprise that it has come a
cropper in America. Europe’s testing regime allows diesel cars to emit up to 14
times more noxious gases on the road than under test conditions. They are
allowed to shut down their emission controls on the grounds that not doing so
might damage engines when the ambient temperature is low (though in some cases
this is as high as 17°C) or when the vehicle is restarted hot.
In America, temporarily high
emissions are also permitted to protect engines, but the liberties taken by
carmakers in Europe would be illegal. Indeed, VW has subsequently decided that
its “defeat device” does not actually contravene European regulations, though
this contention will soon be tested in court as aggrieved car buyers and
investors pursue the company at home.
Governments and other
authorities in Europe have launched several probes of carmakers but to little
end. The very latest, of Renault, which came the day after FCA was accused of
sharp practices in America, saw the French carmaker’s shares slide by 6%
initially. But even if others are found to have bent the rules, a lack of
enforcement mechanisms or ways to punish firms offer little in the way of
incentive for carmakers not to stretch what they can get away with.
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