{}
*VOLKSWAGEN SPOKESMAN COMMENTS BY PHONE
*VOLKSWAGEN SAYS WILL CONTACT CUSTOMERS `PROMPTLY'
*VOLKSWAGEN SAYS FIX WILL BE COST-FREE FOR CUSTOMERS
Diageo Is on the Road to Recovery
The glass looks more than half-full for the seller of Johnnie Walker Scotch whisky and Captain Morgan rum. Some analysts see the stock rising 25%.
That could translate into a modest improvement in earnings, notwithstanding muted price increases, unfavorable foreign-exchange rates, and tougher comparisons later in the fiscal year. If current positive trends persist, the company’s London-traded shares (ticker: DGE.UK) could return about 25% in the next 12 months.
For at least a year, the glass has been half-empty at Diageo, whose brands include Smirnoff vodka, Johnnie Walker Scotch whisky, Captain Morgan rum, Baileys liqueur, and Guinness stout. The shares, which peaked in August 2013 at 21.37 pounds, finished Friday at £17.50 ($26.55), down about 22% from an all-time high. The stock is off about 5% since the start of this year, compared with a rise of 6% in the Stoxx Europe 600 food-and-beverage sector over the same period.
Diageo also has American depositary receipts that trade in New York under the symbol DEO. Each ADR is equivalent to four ordinary shares. The ADRs fetched $106.31 on Friday, not far above their 12-month low of $100.59.
The London shares trade for about 18 times estimated earnings for the fiscal year ending in June 2017. Diageo has traded for as much as 21 times future earnings in the past five years.
A consensus of analysts’ price targets of £19.45 points to potential upside of 11% in the next 12 months, but some of Diageo’s more ardent fans see the stock climbing as much as 26%, to £22, driven by a more efficient operating platform, improving sales, and better cash conversion.
DIAGEO IS EXPECTED to report net income of £2.43 billion, or 97 pence a share, in the fiscal year ending in June 2017, up 8% from this year’s forecast of £2.25 billion, or 90 pence per share. Sales in the current fiscal year are likely to be flat with last year’s £10.81 billion.
Diageo has been hurt by weakness in emerging markets, which account for 43% of revenue but less than 30% of operating profits. Management is trying to alter its EM strategy to grow more profitable in developing markets. The company raised its stake to 55% in India’s United Spirits (532432.India) in 2014, and subsequently attempted to force out the chairman over questionable financial dealings. It is also crafting a beer strategy for Africa.
Diageo’s biggest market is North America, which accounts for 45% of operating profit and 32% of sales. Revenue could grow 3% in the current fiscal year, matching last year’s performance. It would be a creditable achievement after the company revamped, putting its focus on sales to retailers rather than shipments to wholesalers.
Diageo is under investigation by the Securities and Exchange Commission for alleged “channel stuffing,” or shipping excess inventory to wholesalers in a bid to boost sales. A personnel shakeout at its North American division took place over the summer.
Despite those problems, last week’s corporate update is cause for optimism. It suggests that Chief Executive Ivan Menezes’ strategy to “de-layer” the organization and deliver operating efficiencies through a focus on core and high-end brands, innovation, distribution, and cost savings, is showing more promise.
Last year, Diageo’s free cash flow increased by £700 million, to £2 billion, largely due to improvements in working capital. That figure could top £2.5 billion this year. The company’s balance sheet is healthy.
DIAGEO “IS A SELF-HELP STORY,” says Chris Dyer, London-based director of global equity at Eaton Vance Investment Managers, which owns the stock.
The British company, formed in 1997 from the merger of Grand Metropolitan and Guinness, appears capable of meeting its target of a one-percentage-point improvement in operating profit margin in two years, rather than the three that it is aiming for.
However, currency markets continue to be nettlesome. Diageo estimates that the stronger dollar and British pound will trim earnings by £150 million this year.
Foreign-exchange woes could add to the pressure on management to sell assets to boost returns. Its reserve-brands portfolio or beer brands could be candidates for divestment.
“Without solid execution over the next six to 12 months…Diageo could become increasingly subject to scrutiny from activist investors, who could seek to sell assets deemed as noncore,” Morningstar senior analyst Philip Gorham wrote last week in a research note. “Either way, we believe there is value in Diageo’s shares at current levels.
It’s Too Early in the Crisis to Bet on VW Shares
An emissions-falsification scandal that clobbered the stock could pave the way for the auto company to overhaul management and implement reforms.
On Friday, German Transport Minister Alexander Dobrindt said that VW, currently the world’s largest car manufacturer, had rigged emission tests on about 2.8 million diesel vehicles in Germany—nearly six times the approximately 500,000 it has admitted to rigging in the U.S. He added that, in addition to the 2.0-liter and 1.6-liter four-cylinder diesel engines already implicated, 1.2-liter engines might be affected, too.
VW has admitted that engine-control software that could rig emissions tests exists in 11 million of its cars worldwide. In the U.S., the affected vehicles are VWs and Audis; in all, Volkswagen has 12 brands, including Porsche. The software is designed to automatically turn on during tests, curbing emissions, but turn off on the road, letting vehicles spew much higher amounts of pollutants, but apparently boosting acceleration and fuel economy.
By Friday, officials in virtually every nation in which diesel VWs have been sold had pledged to begin stringent real-world tests aimed at determining whether the vehicles’ pollution-control systems were performing properly.
On the week, VW’s shares (ticker: VOW.Germany) tanked 28%, closing at 115.55 euros ($129.50), erasing €23 billion ($26 billion) from Volkswagen’s market value.
While the selling may be overdone, venturing into the shares before the potential toll of the scandal becomes clear is dangerous. VW could be fined about $18 billion in the U.S. alone (although that’s unlikely), and it could face billions of dollars in fines in Germany and other countries that find that tests have been rigged. In addition, the cost of bringing the cars into compliance and dealing with lawsuits linked to the mess could easily surpass the €6.5 billion that the company is setting aside “to cover the necessary service measures and other efforts to win back the trust of our customers.”
If the problem can be addressed with a software fix, that might be relatively inexpensive. But it’s probable that the reason VW put the test-cheating program into its cars in the first place is because no software could make them meet the emission standards without subtracting fuel efficiency, acceleration, and maybe driveability.
If a mechanical fix is necessary, it could cost hundreds of dollars a car, which would add up to a hefty sum for the 3.3 million affected vehicles in the U.S. and Germany alone.
VW had a net liquidity position of €21 billion at the end of June, according to Société Générale. But the potential costs of the diesel problem present a massive challenge to VW’s new CEO, Matthias Müller, Porsche’s chief, who is replacing Martin Winterkorn, who resigned on Wednesday.
The crisis isn’t the only challenge Müller faces. By many measures, VW is inefficiently managed. Almost all of its cost ratios are high, compared with rivals’, says Arndt Ellinghorst, head of global automotive research at Evercore ISI in London. “These shortcomings can be turned into opportunities if there’s a management team in place that focuses on lifting value,” says Ellinghorst.
Telling numbers: VW sold 10.14 million cars last year and has about 600,000 employees around the globe, many in high-wage Germany. Toyota (TM), which sold 10.23 million vehicles, has about 344,000 employees. (So far this year, VW is No. 1 in global sales.)
Volkswagen’s shares trade for 5.1 times estimated 2016 earnings, and 0.6 times book value, though analysts’ earnings forecasts are falling to account for potential charges. The price/earnings ratio and a recent intraday low of €102 are reminiscent of the situation four years ago, when Barron’s Vito J. Racanelli wrote a positive cover story about Volkswagen (“World Beater,” Sept. 26, 2011), calling the stock a bargain. It was a good call; VW hit a high of €254.50 six months ago, up almost 174%.
Is the current situation similar?
“If you have the luxury of patient capital and aren’t marking to market, it is an opportunity to buy,” says Bernd Ondruch, founder of Astellon Capital Partners in London.
But we’d suggest keeping your foot on the brake until the scandal’s ultimate potential toll becomes clearer.
--> Some emerging-market investors see value in sovereign debt. but they are hesitant to guess when that value will be realized
Emerging Markets Haven’t Hit Bottom Yet
Twenty percent drops haven’t made EM stocks cheap. Fixed income looks better, but be wary. Three bond ETFs.
When Mark Mobius urges caution on emerging markets, you know they’re in trouble. The septuagenarian executive chairman of Franklin Templeton’s emerging-markets group has been boosting the asset class for decades, exhorting investors to pile back in after crises and meltdowns. Now, not so much. “Things have changed since the 1998, 2008, and 2011 downturns,” he says. “It would be dangerous to make an overall or categorywide judgment.”
The dean of Franklin Templeton is not alone in seeing longer-term shifts behind the latest debacle of his beloved asset class. Emerging-market equities have crashed by 20% over the past year after treading water for two years, as measured by the widely held iShares MSCI Emerging Markets exchange-traded fund (ticker: EEM). The raw growth that cleansed all sins in times past has tapered significantly. Average economic expansion for developing countries has fallen below 5% annually, from 8% in 2007. Their growth advantage over developed economies is at its lowest since 2002—about 2.5 percentage points.
All of that looks like the new normal, says Rashique Rahman, head of emerging-markets fixed income at Invesco. “We’re looking for a long, drawn-out period of subdued economic growth. It will feel like there’s no end in sight,” he says.
Emerging markets are in part victims of their success. China’s gross domestic product has more than quadrupled since 2001, when Goldman Sachs’ Jim O’Neill coined the phrase BRICs for Brazil, Russia, India, and China. That makes a growth slowdown a mathematical certainty. But the developing world is also “living through the impact of global rebalancing,” says Jorge Mariscal, chief investment officer for emerging markets at UBS Wealth Management.
IN THE GOLDEN AGE of emerging markets, before 2008, rich countries borrowed at a hectic pace, partly to gorge on poorer countries’ goods and commodities. In the silver age—2009 to 2011—deleveraging Western consumers were replaced by a hyperleveraging China, and by global investors eager to lend to faraway companies rather than accept near-zero interest at home. Bond issuance by emerging-market corporates has more than doubled since 2009, to $2.4 trillion.
Those powerful props have fallen away over the past year or two. China tightened its stimulus tap, and growth is slumping there, from 7.8% in 2013 to an expected 6.8% this year and 6% in 2017, according to the International Monetary Fund. China’s arrested development is visible in dozens of so-called ghost cities that were thrown up during the frenetic boom years and now await inhabitants.
China’s slowdown, combined with subpar recovery in the U.S. and Europe, has slashed demand for the wares of other developing countries. Emerging-market exports have stopped growing after posting 10% to 20% annual gains throughout the 2000s, Mariscal says. The Federal Reserve meanwhile ended its quantitative-easing program and signaled, again and again, that it will raise rates eventually.
Funds rushed back to the U.S., emerging markets’ currencies crashed, and their new mountain of debt began to look much more ominous. A Bank for International Settlements report earlier this month found that a half-dozen big markets—led by China itself, Brazil, and Turkey—have ratios of credit to GDP that historically have been associated with “serious banking strains.”
Emerging-market governments and companies did little to prepare for leaner times. National leaders stopped trying to privatize the massive state-owned banks, utilities, and resource producers that clog the heart of many developing economies. Private corporations grew complacent on easy credit. Average return on equity and capital has declined for the past four years straight, says Chuck Knudsen, an emerging-markets equity strategist at T. Rowe Price.
The resulting drop in profits means emerging-market stocks are not as cheap as you might expect. The average forward price/earnings ratio across the asset class is about 10.6, about the same as it was three years ago. “Equities are not quite yet at capitulation levels,” Mariscal says. “There are still some positions to be sold.”
But emerging markets have also improved in some ways over time, and these improvements make fixed-income investment more interesting than equities after the latest wipeout. Nearly two decades have passed since the last full-blown emerging-market crisis, in 1997-98, marked by a wave of sovereign defaults and currency collapses. Governments have learned fiscal discipline since then, save for a few outliers like Venezuela and Argentina.
Bigger debtors should keep paying their bills through the current slowdown, despite jarring downgrades to junk this year for once-prized issuers like Russia and Brazil. “Our base-case scenario is no sovereign defaults among mainstream countries,” says Invesco’s Rahman. That could create opportunity in funds like the iShares Emerging Market USD Bond ETF (EMB), whose price has fallen 6.5% since April, a dramatic move by bond-market standards.
Another change stabilizing emerging markets on a macro level has been a mass shift from pegged to floating currencies, which act as a shock absorber in tough times. Instead of the abrupt meltdowns that afflicted the Korean won, Thai baht, or Mexican peso in crises of yore, EM currencies have lost altitude gradually since mid-2011, scraping 15-year lows against the dollar.
THAT PAINFUL ADJUSTMENT may bottom out soon because cheaper currencies are doing what they are supposed to, cutting import appetites and shrinking the current account deficits that drove devaluation in the first place. That is particularly true for oil importers, which are also getting a big break on fuel prices. India has shown dramatic improvement, its accounts gap shrinking from 4.8% of GDP in 2013 to 0.2% in the first quarter of this year. Turkey and South Africa, which joined India on Morgan Stanley’s much-publicized Fragile Five list two years ago, are also improving steadily.
Against this background, brave investors might want to take a punt on the Wisdom Tree Emerging Currency Strategy fund (CEW), which has fallen 17% over the past year. An indirect way to bet on firming money is through a local-currency bond fund like the iShares Emerging Markets Local Currency Bond ETF (LEMB), which looks suitably beat up with a 21% decline over the past 12 months. Even the more bullish pros warn against betting the farm, however. “We do see value in EM debt, but when one realizes that value remains to be seen,” says Edwin Gutierrez, head of emerging-market sovereign debt at Aberdeen Asset Management.
EMERGING-MARKET EQUITY diehards say they can isolate pockets of the old explosive growth within the larger lackluster landscape. The Chicago-based William Blair Emerging Markets Small Cap Growth fund (BESIX) has been an anomalous outperformer, rising some 30% over the past three years, though it is down 7% year to date.
Fund co-manager Todd McClone says he’s piling into fertile market niches like Chinese pollution-control and alternative-energy firms, or mortgage lenders and private hospitals in India. T. Rowe Price’s Knudsen points to the global growth potential of sectors like insurance and food retailing, even as the emerging-market raw-materials and manufacturing engines sputter.
But few investors will wager heavily on an eclectic portfolio whose liquidity risk is hard for the layman to gauge. McClone’s fund boasts modest assets of $281 million. The dominant EEM ETF holds $21 billion by comparison. It is weighted toward Chinese state banks and mature industrials like Samsung Electronics (005930.Korea) and Taiwan Semiconductor(TSM), which show little promise of outgrowing the macro backdrop. “The rapid growth of ETFs has increased herd behavior as investors focus on beating or at least following the index,” laments Mobius, whose own Templeton Emerging Markets Small Cap fund (TEMMX) has gained 6% over the past three years.
Emerging markets’ greatest strength going forward may be the weakness of competing investments, with multiyear bull runs in the U.S. and Japanese stock markets looking tapped out and the Fed’s restraint indicating that fixed-income yields will remain low in the developed world. The toxic mixture of low growth, high debt, and lagging reform make emerging-market equities unattractive, anyway. But try EM bond markets first, and be careful.
Weekly Market Update: Markets Exhausted by VW, Biotechs, and China Worries
After the chaos of August, global equities have moved sideways in September as the Fed holds rates steady, Beijing keeps propping up its economy and Europe makes baby steps toward growth. The week saw plenty of dramatic corporate stories (Volkswagen's Dieselgate, Glencore's slide lower, biotech drug pricing) and mixed data (better European PMIs, better US GDP, more bad Chinese numbers), but there was an absence of catalysts that would break markets out to the upside or the downside. Meanwhile, major media was distracted by the theatrics of overlapping US state visits by Pope Francis and China President Xi, not to mention the resignation of House Speaker Boehner and the diplomatic maneuvering leading up the UN General Assembly. For the week, the DJIA slipped 0.4%, the S&P500 lost 1.4% and the Nasdaq tumbled 2.9%, weighed down by biotech names.
Fed officials worked to shape expectations after the FOMC left rates on ice last week. Chair Yellen disclosed that a large majority of voting members, including herself, still expects rates to rise this year, although St. Louis Fed President Bullard warned that there might not be enough new data by October to convince the committee to raise rates at that month's meeting. Lacker justified his dissent at last week's decision by saying that further delay of liftoff would be a departure from past Fed behavior and that the softness in inflation was merely the transitory impact of low oil prices. Regarding the market volatility justification for last week's hold, moderate Lockhart said the FOMC is not concerned about markets per se, but rather about how tighter financial conditions could create headwinds for US growth. Dove Williams again argued that a little more patience was needed before raising rates.
The Fed's big hold raised expectations that the ECB might be forced to expand its QE program, a feeling that was exacerbated by weak euro zone August CPI and the September consumer confidence and ZEW readings. ECB governors Nowotny, Praet, Weidmann, and Jazbec were out with remarks downplaying the speculation, and Mario Draghi reiterated that while he was prepared to adjust the size, composition and duration of QE if needed, there was no need to do so right now. EUR/USD has been highly volatile over recent weeks, with the pair spiking late last week to 1.1460 then tanking to 1.1105 on Tuesday, a level it tested again late in the week.
Norway's central bank (Norges) unexpectedly cut its key interest rate by 25 bps to an all-time low of 0.75% and said it may ease policy further. This follows on the heels of the last rate cut just three months ago, after which the central bank said it may need to cut again if oil prices didn't recover. Obviously, there has been no recovery in oil prices. Analysts note that oil companies in Norway have cut 20,000 jobs this year, driving unemployment to ten-year highs. USD/NOK rose to highs around 8.47 in the wake of the rate decision from below 8.30 prior, to its highest levels in 15 years. Norges Governor Olsen warned that the possibility of another rate cut in the next 12 month is greater than 50%.
On Tuesday, the Asian Development Bank lowered its forecast for China 2015 GDP to +6.8% from +7.2% prior. Chinese officials immediately responded by reiterating their 7% target growth rate for the year, however commodity prices moved notably lower, taking materials names lower along with them. The September Caixin/Markit flash PMI reading was weaker than expected (47.0 v 47.5e), dropping to a 78-month low and marking its seventh straight month in contraction. Note that Japan's September preliminary manufacturing PMI remained in expansion but fell to 50.9 from 51.7 in August, with survey respondents citing the decline in sales volumes from China.
Materials names were hit hard by weak Chinese economic data as well as the grim stories out of Caterpillar and Glencore. Cat slashed its FY15 revenue forecast for the second time this year and announced a restructuring program that will see it shed 10,000 jobs by the end of 2018. Additionally, the firm warned that its FY16 revenue would decline 5% y/y, its fourth consecutive year of lower sales. Goldman Sachs published a note this week casting doubt on the ability of Glencore to maintain its BBB investment-grade bond credit rating, given the dynamics of its recent equity raise and debt reduction efforts. Shares of Glencore have been on the wane since the spring, and this week they fell ~25% and dipped below 100 pence for the first time ever. The backdrop for this group continues to be a deflationary price environment. Oil prices remain mired in the mid $40's while copper fell back to a 1-month low below $2.30. In a sign of the times a report emerged on Friday that Airbus was demanding price cuts of up to 10% from its A320 suppliers.
Under intense pressure from conservative GOP members, House Speaker John Boehner said he would resign from Congress at the end of October. A government shutdown was looming as conservatives pushed Boehner to delay passage of continuing funding resolutions over issues related to Planned Parenthood and the Iran nuclear deal, however there is a feeling that Boehner's departure ensures a short-term funding resolution will be passed in the days ahead. In the medium term, there are concerns that a more conservative speaker may revive prior attempts to use the upcoming debt ceiling issue to force a shutdown, possibly later in the fall, with negative implications for the US economy and Fed policy.
The US housing market remained robust in August, while price gains appear to have eased somewhat. New homes sold at an annualized rate of 552K in August, topping expectations and marking the highest level since early 2008. Existing home sales declined to an annualized rate of 5.31 million units from the July rate of 5.58 million, missing expectations. Median prices of new homes were only up 0.3% y/y, while median existing home prices fell to their lowest level in a year. Both Lennar and KB Homes beat expectations in their third quarter reports, with double-digit gains seen in orders disclosed by both firms.
The revelation that Volkswagen manipulated diesel emissions on selected US and European car models knocked shares of the giant automaker down 35% this week. Volkswagen said it would set aside a €6.5 billion provision to deal with the charges and warned FY15 guidance would be adjusted as necessary. CEO Martin Winterkorn stepped down, asserting that he had no knowledge of the misconduct but that VW needs a fresh start. He will be replaced by Porsche chief, Matthias Mueller. In response to the scandal, the EPA said it would enact stricter emissions testing across the industry, and a host of agencies in Europe and the US said they had begun investigations of Volkswagen. There were press reports of excessive emissions from a BMW model, sending shares of BMW down more than 6% on Thursday and raising momentary fears Diesel-gate would spread to other auto makers, however it appears that Volkswagen was alone in its attempt to deliberately cheat.
Biotech stocks saw sharp declines in response to the Turing Pharmaceuticals fracas. Privately held Turing acquired toxoplasmosis treatment Daraprim earlier this year, and the firm quietly announced plans to raise the price on the obscure, 68-year old drug by 5,000%, to $750 per pill, up from $13.50. After weeks of social media debate on the development, the story was covered by the New York Times last weekend, prompting presidential candidate Hilary Clinton to spotlight plans to tackle "price gouging" in the drug market. The media circus led Turing to dial back its price hike, but broader biotech stocks saw losses on fears that regulators might reduce exclusivity periods and enforce stricter pricing caps. The iShares Nasdaq Biotech Index (IBB) lost over 10% on the week, and entered bear market territory at over 20% off of its recent peak.
There were few M&A deals announced this week. The biggest story was Atmel's deal to be acquired by Dialog Semiconductor for $4.6B in cash and stock. Dialog is heavily exposed to Apple and Samsung, and with Atmel the company will be able to expand its presence in the internet of things. Shares of Office Depot and Staples lost ground on press reports that the FTC would block the merger following a similar rationale as the Federal judge who blocked the Sysco/US Foods merger back in June.
- Volkswagen Internal Evaluation Found About 5M Cars Affected
- VW Spvy BD Meeting Ended, Mueller Elected CEO: Handelsblatt
- Italy’s Renzi Says VW Should Be ‘Severely Punished’: Ansa
- Switzerland Sets Temporary Sales Ban on Affected VW Cars: AWP
FT Article : {http://www.ft.com/intl/cms/s/0/72d9fdc6-63a4-11e5-a28b-50226830d644.html#axzz3mqGTwqto}
- Suzuki Motor Says It Sold All Its Shares of Volkswagen
- Porsche Buys 1.5% Volkswagen Stake From Suzuki to Expand Holding
- EU Warned About Car Test Cheating Like VW’s Two Years Ago: FT
Commission knew software skewed results of exhaust readings
EU officials had warned of the dangers of defeat devices two years before the Volkswagen emissions scandal broke, highlighting Europe’s failure to police the car industry.
A 2013 report by the European Commission’s Joint Research Centre drew attention to the challenges posed by the devices, which are able to skew the results of exhaust readings.
But regulators then failed to pursue the issue — despite the fact the technology had been illegal in Europe since 2007. EU officials said they had never specifically looked for such a device themselves and were not aware of any national authority that located one.
The technology is at the heart of a scandal that exploded last Friday when US regulators revealed Volkswagen had used it to rig emissions tests, potentially laying itself open to criminal charges and substantial fines.
The Environmental Protection Agency said the defeat devices turn on emissions controls when vehicles are being tested but turn them off during regular driving. This means that while on the road, the cars are able to emit up to 40 times the amount of nitrogen oxides that US environmental standards allow.
Volkswagen’s supervisory board announced on Friday that it had appointed Matthias Müller, head of Porsche, as its new chief executive. He replaces Martin Winterkorn, who stood down over the scandal.
Initially the focus was exclusively on cars sold by Volkswagen in the US market. But Germany has now said that the company cheated in the same way in Europe as well.
The inability of regulators across the EU to expose this deceit has shone a spotlight on the lobbying power of the European motor industry, which has made a huge gamble on diesel. Some 53 per cent of new car sales in the EU are diesels, up from just over 10 per cent in the early 1990s.
The issue of who knew what, and when, about defeat devices also surfaced in the UK. The opposition Labour party attacked the government after it admitted receiving evidence nearly a year ago that some diesel cars were fitted to rig emissions testing.
The Department for Transport said that in October 2014 it received a report by the International Council on Clean Transportation saying there was a “real world nitrogen oxides compliance issue” for diesel passenger cars.
The ICCT said it tested 15 vehicles and found they produced an average of seven times the legal limit for the deadly gas. One car produced 25 times the limit.
The DfT said the report demonstrated the shortcomings in the old testing system and that ministers had been pushing for the EU to accelerate the introduction of a real-driving emissions test.
The European Commission’s Joint Research Centre drew a similar conclusion, arguing in its report that diesel cars should be tested on the road rather in the lab to reduce the risk of manipulation.
“Sensors and electronic components in modern light-duty vehicles are capable of ‘detecting’ the start of an emissions test in the laboratory,’’ it said. The devices could also “activate, modulate, delay, or deactivate emissions control systems”,’ the report warned. Moving to on-road testing should ensure “that the use of defeat strategies is decreased as far as possible’’.
On-road emissions tests conducted by the JRC “show that the real-world nitrogen oxides (NOx) emissions of . . . light-duty diesel vehicles substantially exceed the regulatory emissions standards’’, the study added. “The existing on-road tests unequivocally point to weaknesses in the current type-approval procedure.’’
Since the EU banned defeat devices in 2007, the European Commission has attempted to introduce legislation to test diesel cars in a more realistic “real-world” environment. It argues that these new on-the-road tests will be able to counter the effect of illegal software.
High quality global journalism requires investment. Please share this article with others using the link below, do not cut & paste the article. See our Ts&Cs and Copyright Policy for more detail. Email ftsales.support@ft.com to buy additional rights. http://www.ft.com/cms/s/0/d0d7ba40-6394-11e5-9846-de406ccb37f2.html#ixzz3mqH8FBUd
However, green groups and members of the European Parliament have protested that these reforms have been delayed for eight years by the powerful diesel lobby.
Greenpeace complained that, according to publicly available data, diesel manufacturers had spent as much as €18.5m lobbying Brussels in 2014, employing 184 lobbyists.
“As evidence emerges that the German government and the European Commission knew about the test-cheating software, people will be wondering why it took the Americans to expose it. The extent of the carmakers’ lobbying power could provide some clues to the answer,” said John Sauven, executive director of Greenpeace UK.
Two EU officials observed that there was nothing new in mid-level technical officials flagging their worries about a seemingly doctored test environment. However, attempts to act on those fears never gained much traction in a highly politicised commission environment, one said.
Authorities across Europe have been passing the buck over who is responsible. The European Commission argues that it has no power to force the national authorities to look for default devices. But Germany has responded to a question about the cheating in tests by citing the view of the commission that there was no agreed method for preventing the use of illegal software.
Christofer Fjellner, a Swedish parliamentarian, said it was unacceptable for Brussels to pass the blame entirely to member states.
“The commission is responsible for seeing we have a control framework that works. We know there are companies that don’t give a damn about the rules,” he said.
A spokeswoman for the European Commission said: “When it comes to policing of companies’ compliance with EU law and investigative powers that is for the national authorities in this area.’’
“We are inviting all member states to carry out investigations,’’ she said, adding that the commission’s role was to act as a “a platform to facilitate the exchange of information between member state authorities”.
Officials from national transport ministries and the commission will discuss the issue on October 6, when there will be a discussion on expanding the scope of the investigation beyond VW.