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November 23, 2015

How Will The VW 'Dieselgate' Affect The Automotive Market

The ‘Dieselgate’ scandal - where international motor manufacturer VW falsified some of its diesel engined cars’ emissions in testing - has thrown the huge manufacturer into some disarray and has left ripples of unrest and uncertainty across the whole market.

With VW facing huge fines, compensation payments and possibly subsidies to offset lower ‘used values’ of certain cars and a 20% reduction in its share price, the fallout is serious. .

The VW diesel scandal

In North America, some VW diesel cars had ‘defeat’ software installed that made the car ‘know’ when it was undergoing emissions testing. The software made adjustments so the engine returned lower emissions readings than it would in normal use thus giving a false reading..

The question now is two-fold. How will VW act to save its reputation and who else, if anyone, carried out similar practices..

The effect on VW

The German manufacturer’s sales have dipped generally, suggesting confidence in the brand has taken a hit. According to the motor trade used price guide experts Glass’s, used VW diesels have seen a 0.2% reduction in values compared to an overall rise of 2.8% in diesel cars generally..

The VW models affected by the doctored testing are likely to need a subsidy from the manufacturer - and in some American states such as California they are effectively worthless as they no longer meet strict state emission standards..

A lot of VW’s reputation is based on the image of a modern-yet-dependable brand at the forefront of innovation; the sort of car you’re happy to learn to drive in and then graduate to eventually enjoy high performance driving within. There’s also been a sense of reassurance that its models are among the slowest depreciating in most market segments they compete in. This positive image and depreciation performance could be diluted or, even worse, fall away completely..

Some bookmakers are even prepared to take bets on the manufacturer ceasing to trade - or at least changing its format markedly – by late 2016. This seems a little extreme for a brand that still commands a loyal following, but the fact that some are considering the worst is telling in that it shows just how serious this scandal is seen..

The effect on markets generally

Faith in diesel cars in general is already dropping to a degree. For some while they’ve been promoted as the cleaner option compared to petrol, but this is based just on CO2 emissions. When other emissions such as particulates are factored in, then diesel is actually a high pollutant..

In some city centres surcharges for entering with diesel-powered vehicles are being levied, and some local authorities are charging extra for parking permits relating to diesel cars.

Buyers, who have had their arms twisted to appreciate the benefits of diesel have reacted by either buying a competitor’s petrol product or, if no-one offers it, buying a car from a different make or model altogether..

Another factor is petrol engine technology – which through necessity is becoming far more efficient and ‘cleaner’ with lower CO2 emissions. This is especially true in the case of smaller cars such as city models and superminis..

Against this backdrop and the VW diesel scandal, it’s possible diesel could fall out of fashion with a disastrous affect on the used market. More than 50% of the cars on UK roads are diesel, so a high percentage of these owners abandoning diesel power could cause big problems for the used market..

Of course, the sheer scale of this market could also be its salvation. With so many models on the roads, neither manufacturer nor owner will be quick to be weaned off their diesel use.

The future

Some manufacturers say that the EU emission targets can only be met by diesel or electric power, so it’s likely that the issues surrounding diesel could well hasten the general adoption of hybrid and purely electric powered vehicles in the medium to long term. This may well have happened regardless but ‘Dieselgate’ could well hasten this process..

The views and opinions expressed herein are the author's own, and do not necessarily reflect those of EconMatters. © EconMatters All Rights Reserved | Facebook | Twitter | Free Email | Kindle

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