The fallout from news about Volkswagen’s diesel engine emissions cheating scandal brings new implications for the company itself, as well as others. For instance, Volkswagen itself faces increasing trouble ranging from criminal investigations and threats for fines to rapidly falling stock prices and considerable damage to its reputation. Furthermore, the U.S. Environmental Protection Agency has announced planned changes in its emissions testing will impact all diesel automotive companies. Finally, critical Volkswagen auto suppliers have also seen their own stocks fall.
Last week, the EPA announced it will significantly change the way it tests for diesel emissions after being tricked by the software in Volkswagen cars for seven years. In a letter to car manufacturers, the EPA said it will add on-road testing to its regimen, “using driving cycles and conditions that may reasonably be expected to be encountered in normal operation and use, for the purposes of investigating a potential defeat device” similar to the one used by Volkswagen. The testing will be in addition to the standard emissions test cycles already in place, the EPA said.
“We’re actually making sure that this is a one-off,” EPA Administrator Gina McCarthy said. The agency is going to “look at all of the other models aggressively and do the testing we need to make sure there aren’t any hidden software devices or other ways they could defeat the emission system.”
It didn’t take long for auto-parts makers to begin to feel the heat either. Indeed, shares of parts makers such as Tenneco, BorgWarner, Delphi Automotive PLC and Continental AG all fell noticeably last week.
Shares of Honeywell, a major supplier of the turbochargers often used in diesel-powered engines, are down roughly five percent since the day the Volkswagen news broke, the Wall Street Journal reports. What’s more, shares of Tenneco, which makes emissions systems and gets eight percent of its revenue from Volkswagen, sank almost eight percent last week; and shares of BorgWarner, which generates 17 percent of its revenue from the auto maker, fell six percent last week. Stock at Continental, a German supplier of engine components, also lost nearly six percent of its market value last week, the Wall Street Journal article reports.
“You can’t have an event like this without questions being raised, but that doesn’t mean the technology doesn’t work,” Terrence Hahn, chief executive of Honeywell International Inc.’s Transportation Systems unit, says in the WSJ article. “We have seen proven results around clean-diesel technology, and we don’t want what one auto maker has done to tarnish the industry or the technology.”
Not everyone shares that perspective, however. Whatever specifics emerge from a Volkswagen investigation, Barclays strongly believes that the emissions scandal will heighten the pressure on diesel in Europe, Barclays analyst Brian Johnson wrote in a research note last week.
“The end result of the [Volkswagen] issues will be to accelerate a move away from diesel in the European mass market, pressuring suppliers leveraged to diesel,” Johnson wrote.
Considering the spotlight now on diesel engines and increased scrutiny of their performance, not to mention increasing consumer skepticism, some industry observers believe auto makers may now need to accelerate development efforts of electric vehicles, hybrid and more-efficient gasoline engines. That could help parts makers, since many of the same companies will have to supply those components. If the industry consequently shifts away from diesel-powered cars in favor of those other alternatives, one must wonder what will happen to companies’ investments in diesel engines.
What are your thoughts on the diesel engine supply chain? Will all of these events spur greater interest in electric vehicles and hybrids?