"You've Got to Be Crazy Not to Buy a Diesel" (int'l edition)

Cheap-to-run engines are revving car sales in Europe

Didier Wolf hated paying $2,500 a year for gasoline. So the 40-year-old Belgian doctor last month traded in his gas-powered Audi A4 for a $31,000 BMW 520 station wagon with a diesel engine. Diesel fuel costs about 25% less than heavily taxed gas in Belgium, and diesel engines get up to 35% better mileage. Wolf expects to cut his fuel costs by half. "You've got to be crazy not to buy a diesel these days in Europe," he says.

More and more Europeans agree. While overall car sales have slipped 5% so far this year in Europe, diesel automobile sales are up by 5%. Currently, diesel engines account for one-third of the market, up from just 14% in 1990. The shift in preferences is now turning into a key competitive issue on the Continent. Companies that have invested the most in diesel--PSA Peugeot Citroën and Volkswagen--are picking up profits and market share, while those with weak diesel technology, notably the Americans and Japanese, are losing money. "We've clearly been behind the curve," concedes GM Europe President Mike Burns.

Demand is so high that carmakers can charge a hefty premium for diesel models. French auto maker Renault, for example, prices its gas-powered Laguna sedan at $17,000, but demands 15% more for the diesel version. Some of the difference is due to the higher cost of building the heavier diesel engines, but most of it goes to the bottom line. And though diesel makers are working flat out, buyers have to be patient for delivery. At a VW dealership on Paris' Left Bank, salesman Carlo Marraccini says 70% of his customers are ordering diesel cars despite long delays. "It's a three- to six-month wait, because we're not making as many as people want," he says.

Diesel made a big difference in auto makers' 2000 results. Peugeot's operating profit jumped 27%, to $1.9 billion, while VW's more than doubled, to $2.75 billion. On the other side of the market, carmakers who scrimped on diesel technology are struggling. GM Europe posted a $257 million operating loss in 2000. Ford of Europe had a $35 million operating loss and just scaled back sales targets for its new $27,300 Jaguar X-type, partly because it lacks a diesel version.

U.S. carmakers have been scared off by diesel's dirty image. The soot emissions of the older diesel cars were unpopular with customers and environmental regulators. Fewer than 1% of cars sold in the U.S. run on diesel. But the Americans are using their global partnerships to catch up. GM is pushing to get diesel engines from its allies Fiat and Isuzu Motors Ltd. And on Apr. 26, Ford and Peugeot unveiled the first motor built under a $1.1 billion venture they formed in 1998. The 1.4-liter diesel engine will equip $13,300 Peugeot 206 compacts and $13,000 Ford Fiestas. "We will be the largest diesel-engine maker in the world," predicts Peugeot CEO Jean-Martin Folz.

CLEAN AND QUIET. The new diesel cars are a far cry from their tractorlike predecessors. Technological advances have reduced noise and pepped up performance. They're cleaner, too. Compared with gas engines, diesels emit up to 35% less carbon dioxide, the main culprit associated with global warming. Diesel's drawback is that cars spew out far more particulates--tiny particles linked to respiratory diseases--than their gas counterparts. Peugeot claims to have cracked that problem with a filter it developed in 1999 that cuts diesel particulate emissions to levels produced by gas-powered cars. The filter is already in place on the company's more expensive cars, such as the Peugeot 607 and Citroën C5.

European carmakers are doing all they can to cash in on the diesel craze. They're ramping up capacity and adapting the new diesel technology--currently available mostly on 1.9- and 2.2-liter engines--to smaller motors between 1.2 and 1.5 liters for compact cars. "Last year, 23% of our sales were diesel cars. This year, it's more like 30%," says BMW sales director Michael Gamal. With much of the market in the doldrums, the rage for diesel couldn't come at a better time.

By Christine Tierney in Frankfurt and William Echikson in Brussels, with bureau reports

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