Car manufacturers see 50 billion in value evaporate in brown smoke

Car manufactures have seen up to €50 billion slashed from their market capitalisation over the past seven months following revelations about fraudulent emissions testing among their ranks. Mitsubishi and Volkswagen have been hit the hardest, however, Daimler and FiatChrysler too have seen a considerable market downturn

Diesel combustion from cars remains a public health hazard. The combustion creates a wide ranges of noxious gases, including NOx and PM2.5. In the UK these gases are linked to 9,500 premature deaths per year in London, while air pollution from the two pollutants as a whole results in 40,000 – 80,000 premature deaths per year in the UK. To limit the damage to their population’s health, countries, including the UK, have regulated the diesel industry. Particularly car manufacturers have been required to limit the level of noxious gas in car exhausts in line with regulations. 

Last year it was revealed that a number of car manufacturers have been ‘lying’ to the public and to regulators about the level of noxious gases that the cars they produce release into the local atmosphere. Following an investigation by the United States Environmental Protection Agency (EPA), German car manufacturer Volkswagen Group was found to be in violation of the US Clean Air Act. The researchers found that the manufacturer had installed software in their cars that would deliberately lower the emissions of the car when it was being tested. In reality, the cars emitted 40 times more NOx in real-world driving conditions than is permitted by US regulations. The programme was endemic in its car fleet, affecting around eleven million cars worldwide, and 500,000 in the United States, during model years 2009 through 2015.

It is not merely Volkswagen that has been found to committing systematic fraud. Mitsubishi too has come out to reveal that they have been illegally manipulating efficiency data to make their vehicles appear more efficient than their competitors. Since the revelations, a number of other car manufacturers are being scrutinised by regulators, with, for instance, manufactures’ offices raided by French authorities, as well as continued scrutiny by US authorities.

Market capitalisation loss
The effect of the scandal on the market capitalisation of manufacturers has been considerable. An analysis on the market capitalisation of Volkswagen between September and 2015 and April 2016 shows that the German carmaker has lost 15% of its value, while Daimler lost 13%. Mitsubishi, in part punished by strict Japanese cultural values, has seen 48% shaved of its capitalisation since its admission. Most manufacturers have seen considerable losses however, with only Renault and General Motors managing to make gains, at 19% and 2% respectively. In total €50 billion has been stripped off the total market capitalisation of the 10 larger global auto manufacturers. 

Many of the manufacturers blame systematic competition for their fraudulent activity, suggesting that they were driven toward illegal activity in a bid to compete. The coming decade will also see further regulations aimed at incentivising a considerable reduction in noxious and greenhouse gas emission from manufacturers, as the EU seeks to reduce its climate change affecting footprint, as well as medical costs associated with vehicles. Meeting those targets, and additional laws, will be no easy task for manufacturers who risk facing up to €2 billion in fines yearly, according to PA Consulting Group, suggesting that it is long past time for innovation. 

The consequences for car makers, and the industry’s ecosystem (OEMs, etc), may be devastating, as authorities consider the level of fines to be handed out. The social consequences too are considerable, with one report assessing that Volkswagen’s ‘Dieselgate’ alone costs society €29 billion in economic damages.