2017/01/16

American regulators accuse Fiat Chrysler of emissions cheating

After Volkswagen agrees to a large criminal fine, the Italian-American carmaker now faces action over noxious emissions
FOR each of the past three years, Fiat Chrysler Automobile’s (FCA) 3 litre V6 turbodiesel has made it to a list of the industry’s top ten engines compiled by Ward’s, a distinguished American car-industry trade publication. Its place on the shortlist for 2017 must now be in doubt. On January 12th America’s Environmental Protection Agency (EPA) accused FCA (whose chairman, John Elkann, sits on the board of The Economist’s parent company) of using illegal software in conjunction with the engines. This, it says, allowed 104,000 vehicles—mostly Dodge pickups and some Jeeps, fitted with the 3 litre V6 turbodiesel—to exceed legal limits of toxic emissions.
The news sent the firm’s shares plummeting by 17%, before recovering somewhat. Nervous investors feared a repeat of the huge penalty imposed on Germany’s Volkswagen (VW) for cheating American emissions laws. A day earlier VW had agreed to pay a criminal fine of $4.3bn for selling around 500,000 cars fitted with so-called “defeat devices” that are designed to reduce emissions of nitrogen oxide (NOx) under test conditions. With the latest sum included, its final bill will be over $20bn. Based on the number of cars involved, the same fining system, if applied to FCA, would land it with a bill of over $4bn.
Yet the noxious cloud may not prove quite so unpleasant for the Italian-American carmaker. Its rival, VW, admitted that it had widely employed an illegal defeat device.

The EPA found out that FCA’s engines were also sending out more emissions on the road than under its test conditions. The regulator has traced this back to undisclosed software that, under some circumstances, alters the characteristics of emissions controls. Crucially, however, the EPA has not determined whether these bits of software constitute a defeat device. Only if it decides that they are indeed defeat devices would FCA become liable for the same degree of punishment it meted out to VW.

Still, FCA is certainly in the EPA’s crosshairs. Failure to disclose this type of software also breaks the rules. FCA is now obliged to demonstrate that they are not illegal. Key to its argument will be the fact that excessive emissions are in fact permitted for limited periods, in circumstances where the engine may be damaged without allowing them, such as cold starts and running in very low temperatures.

Demonstrating this may be tricky. As the International Council on Clean Transportation (ICCT), an NGO that was involved in uncovering VW’s cheating, puts it, FCA’s software seems to “alter the operations of the emissions controls...to reduce the overall cost of the emissions-control system”. The ICCT reckons the software also improves overall fuel efficiency as well as the cost of filling the particular tank that holds fluid to feed the emissions-control system. If the software is deemed by the EPA to be designed to save FCA money, the company will be in trouble.

FCA has strongly denied any wrongdoing. Its chief executive, Sergio Marchionne, in typically forthright style, said his firm was “not trying to break the bloody law” and accused the EPA of “grandstanding”. The EPA probably had FCA in its sights for a while and was keen to begin proceedings before Donald Trump takes office. Mr Trump could relax emissions rules in return for concessions from carmakers, such as keeping production in America rather than relocating to Mexico or other lower-cost countries. (This week he tweeted praise for FCA’s plan to invest in production in Michigan and Ohio, which Mr Marchionne quickly said was in place before Mr Trump’s victory.)

The complexities of the case, more than with VW, may mean it will be hard to prosecute FCA, says Matthias Holweg, an expert on automotive manufacturing at the Said Business School in Oxford. That would be a relief for the firm. If FCA were hit along similar lines to VW, paying up would hurt far more, since the company is heavily indebted—its ratio of net debt to equity will be around 47% in 2016 according to Citigroup, a bank. It is also far less profitable than VW and most of its peers—despite its ability to turn out an engine of the year with impressive regularity.

But if FCA is found to have exploited grey areas in the rules, it will be no surprise that it has come a cropper in America. Europe’s testing regime allows diesel cars to emit up to 14 times more noxious gases on the road than under test conditions. They are allowed to shut down their emission controls on the grounds that not doing so might damage engines when the ambient temperature is low (though in some cases this is as high as 17°C) or when the vehicle is restarted hot.

In America, temporarily high emissions are also permitted to protect engines, but the liberties taken by carmakers in Europe would be illegal. Indeed, VW has subsequently decided that its “defeat device” does not actually contravene European regulations, though this contention will soon be tested in court as aggrieved car buyers and investors pursue the company at home.

Governments and other authorities in Europe have launched several probes of carmakers but to little end. The very latest, of Renault, which came the day after FCA was accused of sharp practices in America, saw the French carmaker’s shares slide by 6% initially. But even if others are found to have bent the rules, a lack of enforcement mechanisms or ways to punish firms offer little in the way of incentive for carmakers not to stretch what they can get away with. 
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