It's an odd state of affairs when a company could be better off by simply paying a massive fine. But that's the situation Volkswagen may find itself in.
The U.S. Environmental Protection Agency may force the company to build electric cars in the U.S. and fund a network of electric charging points as part of its settlement over dieselgate, German newspaper Welt-am-Sonntag reported. On top of paying fines, the EPA appears to want VW to do something positive for the environment to atone for the cheating.
Although VW has already indicated it will accelerate development of electric vehicles as part of its efforts to move on from the scandal, its shareholders shouldn’t think doing “community service” in this manner means it would be getting off lightly.
To be clear, we don’t know the EPA will go down this route: Arndt Ellinghorst, analyst at Evercore ISI, said he would be “amazed” if a government agency could dictate a private company’s product line up and, hence, competition in the market. Nevertheless, the move would chime with the idea that VW may be made to clean up the pollution released by its dirty diesel engines.
VW better hope Ellinghorst is right. True, with the Model-S saloon Tesla has demonstrated there is a market for luxury electric vehicles but it is far from clear they will quickly become a mass-market phenomenon due to high costs and lingering concerns over their driving range. Nor should we forget that Tesla is still burning cash -- lots of it.
And while gas is cheap, it will be difficult to persuade U.S. consumers to pay a premium to go electric. FiatChrysler boss Sergio Marchionne has decided gas guzzling trucks are the way to go, Gadfly noted recently.
So even if VW commits to building electric cars in the U.S., it doesn’t mean consumers will buy them, or that they’ll make money. On the contrary, a forced push into electric cars could be a big drag on VW's profits.
Even before dieselgate struck, VW’s much-vaunted return to the U.S was stalling: analysts said it was losing money there (it doesn’t publish profit financial data on individual markets) amid a lack of fresh models.
VW has already pinned its American turnaround hopes on models like a seven-seat SUV, which is due to go into production at the very Chattanooga plant the EPA may have in its sights. And its exiting small electric models have failed to set the U.S. market alight, in the way, say, that Tesla has. VW sold 4,232 E-Golfs in the U.S. last year, barely 1 percent of its total there.
Of course, a company that last year spent more on research and development than any other global firm -- including Samsung and Google – will eventually get its act together; it is surely a fallacy to assume Tesla can sustain its head start in electric vehicles forever.
VW plans as many as 20 electric and plug-in hybrid vehicle models by 2020, and in December pledged to invest one billion euros to launch a Tesla-rivaling electric Porsche, dubbed the Mission E. Its Audi division will start building its first purely electric SUV in 2018.
But 2020 is a long time: VW shouldn’t imagine that rivals like Tesla will simply wait for it to catch up (Tesla is already rolling out its next vehicle –the Model X).
So it’s hard to imagine VW succeeding with electric vehicles in the U.S. (a technology about which the company’s engineers were until recently very sceptical) when it failed so badly with diesel (a technology it was supposed have mastery of). Paying a bigger fine might be the cheaper option.
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