Welcome to Fort NOx: Diesel Industry Braces For Impact

By Dr. Maximilian Martin

“Welcome to Fort NOx!” This is how a Greenpeace banner from the roof of the German Federal Ministry of Transport greeted German auto industry guests attending the Diesel Summit, convened by the German government on August 2, 2017, in Berlin.

Two years earlier, dark clouds had started to form because of the Volkswagen dieselgate emissions scandal. The summit aimed at dispelling them. Recent accusations that Germany’s leading automakers may have been colluding to minimize the costly cleaning of diesel nitrogen oxides had further undermined public confidence.

Could this industry really come up with a solution itself? Or was the mobility transition more like the energy transition, requiring bold steps from above, such as Germany’s exit from nuclear energy?

By not offering a compelling solution, the summit ended up moving the issue to the center of the German federal election campaign currently under way, raising political and capital market risk.

A new mobility paradigm in the making

The summit’s backdrop is the transformation of mobility around the world, best compared to replacing horses a century ago. Cars are becoming clean-energy powered computers that transport passengers. The joint impact of autonomous driving, car sharing, and electrification will turn auto makers into something more akin to handset producers in the mobile phone industry. The Near Future report views the $2 trillion global automotive industry market with 73.9 million vehicles shipped in 2015 as the world’s biggest tech market, way ahead of smartphones, computers and televisions. On the verge of being completely transformed by autonomous driving technology, it predicts car ownership falling to perhaps only one car per every 12 people, auto insurance cost dropping by over 60 percent, and emissions by 90 percent, once self-driving vehicles become the new normal.

In such an environment, much of the value will be derived from platform-related services such as Apple’s App Store in smartphones, rather than the commoditized hardware itself. Companies that fail to adapt to the shift toward clean mobility will moreover carry higher levels of environmental, social and governance (ESG) risk. Eventually, this is bound to affect their valuations and cost of capital.

The early signs of a seismic shift are here

On July 5, 2017, Volvo’s CEO Håkan Samuelsson set 2019 as the date for the total phase-out of combustion-engine-only models. From then on, the Chinese-owned Scandinavian carmaker will make all of its cars electric or hybrid. Venture capitalists channeled over $1 billion to early-stage tech companies with a primary focus on autonomous vehicle technology and systems in eighty-seven deals in 2016, setting a new record. General Motors bought Cruise, a two-year-old startup building an autonomous driving system for $1 billion. In Europe, countries such as France and the UK plan not to allow any new cars with internal combustion engines on the road after 2040. If horses are anything to go by, the transition could also happen much faster, depending on technology, political will, and capital markets.

Catalytic events will accelerate the mobility transition

Back in Germany, stakeholders wanted the summit to provide answers: how do the approximately 8.6 million diesel vehicles currently registered in Germany that fall into the Euro 5 emission class or the concerned part of the Euro 6 class fit with the emerging mobility paradigm?

Vehicles subject to the Euro 6 norm on average emit more than six times the nitrogen oxide (NOx) permitted. Would they be able to circulate everywhere in the future, unhindered? Owners are hardly pleased that their expensive cars risk becoming stranded consumer assets.

The summit offered little in terms of a forward-looking solution reconciling clean mobility with car maker competitiveness. Rather than mechanical retrofitting with Selective Catalytic Reduction (SCR) active emissions control technology to bring NOx emissions down to the required levels, automakers proposed installing a new software patch in more than five million diesel cars. This counting in the 2.5 million Volkswagen vehicles where work is already in progress.

Manage the shift away from diesel and gasoline

The tradeoff between carbon dioxide (CO2) and NOx emissions, paired with the growth of e-mobility from a low baseline adds to the challenge, and needs to be managed. In 2014, Green Car Report estimated that 1.2 billion cars were circulating on the world’s roads. The global car fleet is expected to grow to two billion by 2035. Helped by policy incentives, widespread e-mobility is currently emerging as a third option for the global car industry.

Otto motors running on gasoline and diesel engines nevertheless remain the bedrock of the world’s car fleet today. They offer different climate tradeoffs. When two combustion engines are built to withstand identical mechanical and thermal stress, the cycle efficiency of diesel engines is higher than that of Otto motors. As a result, comparable diesel engines emit less carbon dioxide. But they are also dirtier: in the European Union, a total of 28,500 deaths due to diesel nitrogen oxide was estimated in 2015.

With environmental standards gradually tightening over the last three decades, the car industry faced a strategic choice: to render petrol engines more fuel efficient (like a diesel), or to make diesel engines cleaner, as a gasoline. Dieselgate has shown that the latter effort has thus far largely failed.

For e-mobility to become core to mobility, among other things, it will be essential to resolve the current constraint of the physical availability of cobalt, a needed component for high-energy lithium-ion batteries. Otherwise, supply scarcity will limit the growth of the likes of Tesla, as well as those who are now embracing e-mobility, such as a consortium of 17 German firms and research institutes, which unveiled plans for a new lithium-ion battery plant designed to rival Tesla Inc.’s Gigafactory two months ago.

In the grand scheme of things, the other options theoretically on the table, fuel cells and “DiesOtto” engines, currently look like side shows. The reaction between a fuel, such as liquid hydrogen, and an oxidant, such as liquid oxygen, creates energy in a fuel cell that is converted into electrical energy. DiesOtto motors combine diesel engines’ lower fuel consumption and reduced CO2 emissions with cleaner and higher performing gasoline engines. The auto industry enthusiastically announced the marriage of diesel and gasoline a decade ago; not much has happened since.

All in all, Green Car Congress expected just 2.5 percent of the new additions to the global car fleet to be battery electric, plug-in hybrid, or fuel-cell vehicles by 2035, with the rest running on gasoline or diesel fuel. This may be overly pessimistic. Notwithstanding, a successful national mobility transition is more likely to succeed if it is actively managed, combining market incentives with exit rules that create planning certainty, and if it understands the tech dimension of the future of mobility.

With capital market risk rising, brace for impact

There is growing clarity which firms are successfully embracing the new sustainable business models that disrupt industries, and who are the laggards. For the German auto industry incumbents, capital market risk is now rising. If diesel sales keep tanking, these automakers will not be able to fulfill the European Union car fleet target value of 95 g/km of CO2 from 2021 on. Billions of Euros in fines would provide a blow to company valuations.

By doing too little, the Diesel Summit may well end up helping create the perfect storm that will ultimately accelerate the mobility transition. Depending on the outcome of the upcoming German federal election, carmakers and their investors might want to brace for impact. Fort NOx may not be so impenetrable after all.

Dr. Maximilian Martin is the Founder of Impact Economy. The opinions expressed in this article are the author’s own and do not reflect the views of organizations whom he serves in an executive or board of directors’ capacity.

Image credit: Flickr / nakhon100