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Has Volkswagen caused a pile-up in the auto industry?

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As the dust begins to settle on the Volkswagen scandal, what is the likely impact on the company and the wider industry? Seb Beloe considers the ramifications on the WHEB Group blog.

The numbers involved in the VW scandal are epic by pretty much any measure. Nearly 500,000 vehicles being recalled in the US alone, 11 million affected vehicles in total, potential fines of US$18bn, up to 241,000 extra tonnes of NOx emissions[i] and according to one expert at least US$10bn knocked off the company’s brand value.[ii]

Initially, several auto-analysts claimed that the scandal would only have a very temporary impact on the company’s business. They pointed to the long list of recent recalls that have affected the auto industry with little if any evidence of long-term damage to the companies in question. General Motors had to recall 13 million cars worldwide and paid compensation for 124 deaths associated with a faulty ignition switch through 2014-15. The result? GM is set to sell 10 million vehicles in 2015, a new record for the company.[iii]

But there are very good reasons to think that this time it really is different. Most scandals are due to negligence or a failure to come clean. VW’s case was deliberately fraudulent and may have involved criminal intent and will have resulted in emissions that have endangered the lives of millions and probably caused hundreds of excess deaths per year. Volkswagen may not be finished as a brand, but as one analyst claims “Like BP and Deepwater Horizon, this issue is going to last for longer, will get much worse and involve many more law suits than almost everyone expects.”[iv]

What are the lessons for investors?

The analogies with the Macondo Deepwater Horizon accident may go further. After the accident, analysts uncovered the ‘smoking gun’ of BP’s poor regulatory track record on health and safety in the US; a situation that was further compounded by poor regulatory oversight in the Gulf of Mexico.

Was the Volkswagen scandal similarly predictable? Certainly VW’s governance was widely regarded as poor. Institutional Shareholder Services (ISS) for example has been criticising the shareholder structure that is dominated by the Porsche/Piech family for a number of years and gave the company the worst governance score in its ranking system.[v] There has also been a track-record of issues with emission tests on Volkswagen vehicles and evidence that regulators – most obviously in the EU – had been ineffective in maintaining rigorous testing procedures for vehicles.

However, these patterns are much clearer with the benefit of hindsight. Most environmental, social and governance (ESG) analysis is focused on the policies and performance of the business’ operations rather than the performance of its products. One ESG research group conceded that while the episode marks “a substantial degradation in [VWs] customer and product responsibility and business ethics”, it said that these issues were outweighed in its scoring system by strong performance in other facets of the business, such as how it treats its staff.[vi]

This latest scandal, one hopes, will encourage the investment industry to pay much more attention to the environmental performance of products rather than corporate policies. This issue is particularly pressing in the automotive industry where 90% of the environmental impact is in the use of the car with only 10% due to the manufacturing process.

Whether or not the VW scandal was predictable, one thing that is abundantly clear is that the automotive industry – like the oil and gas industry before it – is subject to increasingly demanding performance standards. These are putting the industry’s technologies and products under huge pressure. Given the car companies’ history of aggressive lobbying,[vii] is it so surprising that they tried to cut a few corners? If investors must invest in the automotive OEMs[viii] (which WHEB does not), then the lesson is clearly to look very closely at environmental and regulatory track records.

Implications for the auto-industry

VW’s deliberate deceit is the critical issue in the damage to the company’s brand, but is the least important issue when considering the fall-out for the rest of the industry, in our view. Much more important, we believe, is that the deceit was considered necessary.

The fact is that Volkswagen, and possibly other diesel engine manufacturers, was struggling to achieve the US’s NOx emission standards at the same time as delivering good performance and meeting CO2 standards. One sell-side analyst believes, for example, that achieving the NOx standards will incur a 20% fuel efficiency penalty, in turn compromising CO2 emission targets.[ix] This is a problem that is only going to get worse as emission standards tighten – and possibly tighten precipitously if testing protocols are upgraded as they are now highly likely to be.[x]

As is often the case, the market has over-reacted in the short-term. We don’t believe that the diesel market will fall to zero as the share prices of companies like Johnson Matthey currently suggest. However, over the medium-term we do think the implications are significant. Achieving progressively higher emissions standards with diesel was already a challenge, but the poor performance that was masked by VW’s ‘cheat devices’ is clearly going to make this even more difficult. Higher standards in a more demanding test cycle is all but inevitable.

This will boost the catalyst manufacturers who provide technologies that improve emissions performance in both petrol and diesel engines. It will also accelerate the shift to plug-in hybrid and ultimately full electric cars as the cheapest route to delivering emission reductions.  Tesla may be the only publicly listed auto company today that has no exposure to rising auto-emission standards, but Apple, Google and others might now be thinking about accelerating their own plans to enter this troubled market.

Economy

Will Self-Driving Cars Be Better for the Environment?

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self-driving cars for green environment
Shutterstock Licensed Photo - By Zapp2Photo | https://www.shutterstock.com/g/zapp2photo

Technologists, engineers, lawmakers, and the general public have been excitedly debating about the merits of self-driving cars for the past several years, as companies like Waymo and Uber race to get the first fully autonomous vehicles on the market. Largely, the concerns have been about safety and ethics; is a self-driving car really capable of eliminating the human errors responsible for the majority of vehicular accidents? And if so, who’s responsible for programming life-or-death decisions, and who’s held liable in the event of an accident?

But while these questions continue being debated, protecting people on an individual level, it’s worth posing a different question: how will self-driving cars impact the environment?

The Big Picture

The Department of Energy attempted to answer this question in clear terms, using scientific research and existing data sets to project the short-term and long-term environmental impact that self-driving vehicles could have. Its findings? The emergence of self-driving vehicles could essentially go either way; it could reduce energy consumption in transportation by as much as 90 percent, or increase it by more than 200 percent.

That’s a margin of error so wide it might as well be a total guess, but there are too many unknown variables to form a solid conclusion. There are many ways autonomous vehicles could influence our energy consumption and environmental impact, and they could go well or poorly, depending on how they’re adopted.

Driver Reduction?

One of the big selling points of autonomous vehicles is their capacity to reduce the total number of vehicles—and human drivers—on the road. If you’re able to carpool to work in a self-driving vehicle, or rely on autonomous public transportation, you’ll spend far less time, money, and energy on your own car. The convenience and efficiency of autonomous vehicles would therefore reduce the total miles driven, and significantly reduce carbon emissions.

There’s a flip side to this argument, however. If autonomous vehicles are far more convenient and less expensive than previous means of travel, it could be an incentive for people to travel more frequently, or drive to more destinations they’d otherwise avoid. In this case, the total miles driven could actually increase with the rise of self-driving cars.

As an added consideration, the increase or decrease in drivers on the road could result in more or fewer vehicle collisions, respectively—especially in the early days of autonomous vehicle adoption, when so many human drivers are still on the road. Car accident injury cases, therefore, would become far more complicated, and the roads could be temporarily less safe.

Deadheading

Deadheading is a term used in trucking and ridesharing to refer to miles driven with an empty load. Assume for a moment that there’s a fleet of self-driving vehicles available to pick people up and carry them to their destinations. It’s a convenient service, but by necessity, these vehicles will spend at least some of their time driving without passengers, whether it’s spent waiting to pick someone up or en route to their location. The increase in miles from deadheading could nullify the potential benefits of people driving fewer total miles, or add to the damage done by their increased mileage.

Make and Model of Car

Much will also depend on the types of cars equipped to be self-driving. For example, Waymo recently launched a wave of self-driving hybrid minivans, capable of getting far better mileage than a gas-only vehicle. If the majority of self-driving cars are electric or hybrids, the environmental impact will be much lower than if they’re converted from existing vehicles. Good emissions ratings are also important here.

On the other hand, the increased demand for autonomous vehicles could put more pressure on factory production, and make older cars obsolete. In that case, the gas mileage savings could be counteracted by the increased environmental impact of factory production.

The Bottom Line

Right now, there are too many unanswered questions to make a confident determination whether self-driving vehicles will help or harm the environment. Will we start driving more, or less? How will they handle dead time? What kind of models are going to be on the road?

Engineers and the general public are in complete control of how this develops in the near future. Hopefully, we’ll be able to see all the safety benefits of having autonomous vehicles on the road, but without any of the extra environmental impact to deal with.

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Economy

New Zealand to Switch to Fully Renewable Energy by 2035

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renewable energy policy
Shutterstock Licensed Photo - By Eviart / https://www.shutterstock.com/g/adrian825

New Zealand’s prime minister-elect Jacinda Ardern is already taking steps towards reducing the country’s carbon footprint. She signed a coalition deal with NZ First in October, aiming to generate 100% of the country’s energy from renewable sources by 2035.

New Zealand is already one of the greenest countries in the world, sourcing over 80% of its energy for its 4.7 million people from renewable resources like hydroelectric, geothermal and wind. The majority of its electricity comes from hydro-power, which generated 60% of the country’s energy in 2016. Last winter, renewable generation peaked at 93%.

Now, Ardern is taking on the challenge of eliminating New Zealand’s remaining use of fossil fuels. One of the biggest obstacles will be filling in the gap left by hydropower sources during dry conditions. When lake levels drop, the country relies on gas and coal to provide energy. Eliminating fossil fuels will require finding an alternative source to avoid spikes in energy costs during droughts.

Business NZ’s executive director John Carnegie told Bloomberg he believes Ardern needs to balance her goals with affordability, stating, “It’s completely appropriate to have a focus on reducing carbon emissions, but there needs to be an open and transparent public conversation about the policies and how they are delivered.”

The coalition deal outlined a few steps towards achieving this, including investing more in solar, which currently only provides 0.1% of the country’s energy. Ardern’s plans also include switching the electricity grid to renewable energy, investing more funds into rail transport, and switching all government vehicles to green fuel within a decade.

Zero net emissions by 2050

Beyond powering the country’s electricity grid with 100% green energy, Ardern also wants to reach zero net emissions by 2050. This ambitious goal is very much in line with her focus on climate change throughout the course of her campaign. Environmental issues were one of her top priorities from the start, which increased her appeal with young voters and helped her become one of the youngest world leaders at only 37.

Reaching zero net emissions would require overcoming challenging issues like eliminating fossil fuels in vehicles. Ardern hasn’t outlined a plan for reaching this goal, but has suggested creating an independent commission to aid in the transition to a lower carbon economy.

She also set a goal of doubling the number of trees the country plants per year to 100 million, a goal she says is “absolutely achievable” using land that is marginal for farming animals.

Greenpeace New Zealand climate and energy campaigner Amanda Larsson believes that phasing out fossil fuels should be a priority for the new prime minister. She says that in order to reach zero net emissions, Ardern “must prioritize closing down coal, putting a moratorium on new fossil fuel plants, building more wind infrastructure, and opening the playing field for household and community solar.”

A worldwide shift to renewable energy

Addressing climate change is becoming more of a priority around the world and many governments are assessing how they can reduce their reliance on fossil fuels and switch to environmentally-friendly energy sources. Sustainable energy is becoming an increasingly profitable industry, giving companies more of an incentive to invest.

Ardern isn’t alone in her climate concerns, as other prominent world leaders like Justin Trudeau and Emmanuel Macron have made renewable energy a focus of their campaigns. She isn’t the first to set ambitious goals, either. Sweden and Norway share New Zealand’s goal of net zero emissions by 2045 and 2030, respectively.

Scotland already sources more than half of its electricity from renewable sources and aims to fully transition by 2020, while France announced plans in September to stop fossil fuel production by 2040. This would make it the first country to do so, and the first to end the sale of gasoline and diesel vehicles.

Many parts of the world still rely heavily on coal, but if these countries are successful in phasing out fossil fuels and transitioning to renewable resources, it could serve as a turning point. As other world leaders see that switching to sustainable energy is possible – and profitable – it could be the start of a worldwide shift towards environmentally-friendly energy.

Sources: https://www.bloomberg.com/news/articles/2017-11-06/green-dream-risks-energy-security-as-kiwis-aim-for-zero-carbon

https://www.reuters.com/article/us-france-hydrocarbons/france-plans-to-end-oil-and-gas-production-by-2040-idUSKCN1BH1AQ

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