Autos

Chris Bryant is a Bloomberg Gadfly columnist covering industrial companies. He previously worked for the Financial Times.

It's taken a while, but Daimler AG is finally doing the right thing about diesel.

In a statement explaining its decision to recall nearly all the diesel vehicles it has sold in Europe since about 2009, the German car giant said it was making a “significant contribution to the reduction of nitrogen-oxide emissions” in European cities. I've been suggesting similar for a while.

Yet let's not carried away by the Mercedes-maker's saintly intentions. Its motives for re-calibrating some three million vehicles are almost certainly financial, not environmental. The recall won't cost much. The software fix works out at about 70 euros per vehicle, while the aggregate 220 million euro ($250 million) bill is about 2 percent of the company’s cash pile.

Instead, it's tempting to see the move as a cheap band-aid to make sure diesel's reputation isn't totally destroyed. This is pretty important to a company that's invested billions of euros in newer diesel engines , which are cleaner than the older technology.

Daimler will also be extremely keen to avoid plunging values in the diesel vehicles it has sold, which would trigger writedowns to Daimler's huge lease book. Half of its new car sales are either financed or leased by Daimler's financial services unit.

Taking action might help stem the steady erosion of shareholder wealth too. Despite the carmaker's record 8.5 billion euros of net profit last year, investors haven't rewarded Daimler. Its latest earnings update said diesel worries had negatively impacted the stock.

Diesel Doldrums
Daimler investors apply only a low multiple to the decent earnings its been generating
Source: Bloomberg

Whatever the motive, Daimler's actions are overdue. Some Mercedes-Benz vehicles emit far more nitrogen oxide when driven on the street than in the laboratory, contributing to respiratory diseases and unnecessary deaths. It's not the only carmaker at fault. 

Dirty Diesels
Lots of cars emit excessive amounts of nitrogen oxides when tested outside the laboratory
Source: Transport & Environment

At the latest, carmakers should have recalled their problematic diesels when Volkswagen confessed to fiddling the emissions of about 11 million vehicles in September 2015. Instead, they have seemed preoccupied with legal semantics over what exactly constitutes an illegal "defeat device".  

In the absence of a decisive industry response, negative media reports and the threat of city-wide driving bans have stoked consumer fears, leading to falling diesel sales.

Sinking Feeling
Diesel sales have declined since the 2015 Volkswagen emissions scandal
Source: LMC, Barclays Research

While two big German states this week signaled their support for recalls instead of outright bans, it's far from clear this will stop the rot. Nor will Daimler's belated action insulate it against probes in Germany and the U.S. It denies wrongdoing but has warned of material risks to profit and cash flow should the authorities disagree.

One would hope that rivals will have to follow its move. Daimler is recalling vehicles Europe-wide, not just in Germany. The cost of recalls could be higher for some manufacturers, depending on whether a software fix will suffice or new hardware is needed. HSBC estimates about 1,500 euros per car for the hardware option. But there's no guarantee this will happen. Italy, home of Fiat, has shown little interest in following the German lead. 

Diesel Deadweight
Mercedes-Benz has one of the highest diesel exposures in Europe
Source: Barclays, ICCT

Some carmakers may be reluctant to order repairs, lest this be interpreted as an admission or increase the vehicle's fuel consumption -- thus providing fodder for customer lawsuits.

Naturally, the industry also prefers to look to the future. Manufacturers such as Volkswagen and Volvo deserve credit for their ambitious electric vehicle targets. Yet unless carmakers deal satisfactorily with past mistakes, that future (like our cities) will be obscured by a noxious cloud. 

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

  1. Indepedent tests show Daimler's new OM 654 diesel engine emits very little Nox.

  2. So far the impact on residual values appears to have been negligible.

  3. Carmakers did recall a limited number of vehicles in Germany.

To contact the author of this story:
Chris Bryant in Berlin at cbryant32@bloomberg.net

To contact the editor responsible for this story:
James Boxell at jboxell@bloomberg.net