Written in collaboration with Corrado Clini, Former Minister for the Environment of Italy
THE CASE AGAINST VOLKSWAGEN: A BLOW TO THE EUROPEAN MARKET
The case against Volkswagen is a blow for the diesel market and raises questions about the European automotive industry. The future lies in innovation. Today, automakers spend more than $100 billion annually on research and development (R&D) — $18 billion in the US alone. To lead innovation, companies need to focus on disruptive “leapfrogging” rather than on incremental improvements. Faced with adverse environmental situations and global recurring crises, carmakers are faced with mounting pressure to slash costs and innovate within the industry, but cost reduction must not happen at the expense of innovation. Are European companies fit for the fight? The case against Volkswagen, or strategic choices made by the former Fiat Group may suggest quite the contrary.
THE AUTO APP-OCALYPSE IS NIGH
Humankind is at the threshold of a new Industrial Revolution. A series of disruptive technologies will reshape the automotive sector and drive the emergence of new players. The Holy Grail of the industry is vehicles’ fuel-efficiency. Companies are working to develop ever improving hybrid and electric models, more efficient power trains and lighter car bodies. If real innovation happens by disruption, conventional thinking and old business models will be annihilated by the rapidly emerging ‘Industry 4.0’. While current carmakers could be consigned to the history books, the mobility market of tomorrow may well be dominated by Google, Tesla, Apple or Nissan; the Japanese automaker recently set up a new research center in Silicon Valley. Is an Auto App-ocalypse happening in the US innovation ecosystem?
USA vs EUROPE: THE ROLE OF LAWMAKERS
Lawmakers have a role in supporting industry trends and sustainable growth. Unsurprisingly, California, leader both in green-tech and green schools, recently passed sweeping auto emission standards that include a mandate to have 1.4 million electric and hybrid vehicles on state roads by 2025. Gasoline, however, has been king of the road in the US since the advent of the automotive era. The federal government, staying to form, has done its part to keep it that way by taxing diesel at a consistently higher rate than gasoline. Over in Europe the opposite is true, where governments and automakers ramped up diesel engine production, apparently in an attempt to curb CO2 emissions. Diesel, once a niche market in Europe, was significantly incentivised and went mainstream on the continent. However, there was a trade-off: less CO2 versus more nitrogen dioxide pollution (NO2) and particulates. Japanese and American carmakers took a leap into tech and backed research into hybrid and electric cars to find viable solutions.
It is impossible to deny that the proximity of politics and the auto industry in Germany, as well as in Brussels, operated on a “shorter-term” perspective. Car analysts and regulators have long been aware that the trade-off between reducing climate emissions and increasing health problems was not widely debated, let alone dealt with. As a major switch to diesel was seen as a fast and cost-effective way to reduce CO2 emissions, Brussels readily embraced the position of the car lobbies.
Diesel has never taken root in the United States while European carmakers have invested massively in it. Yet this is more a choice by automakers than the product of a different set of regulations on either side of the Atlantic. European standards are in fact no less strict than those in the US. The EU, however, operates a fundamentally different system to the US when it comes to how tests are performed. With cars scrutinised under controlled laboratory conditions, tests in the EU are not fully representative of on-road conditions. This method is largely controversial and discussions on a new emissions test were ongoing between the European Commission and industry representatives as the Volkswagen scandal broke.
INNOVATE OR DIE: A MESSAGE FOR EUROPEAN AUTOMAKERS
The automotive sector represents one of the backbones of the European economy. A change in the test regime is urgent but it is not the only answer to the current crisis and the survival technology questions it raises. The latter have to be tackled with a sharp and pronounced move towards hybrid and electric solutions; fuel cells and other technologies may also play a role. Global competition and new tech scenarios require a great deal of transformation within companies.
Traditional industries, however, are resistant to change. Volkswagen proves it. The history of the Italian automaker Fiat – otherwise a successful case – is also ripe with opportunities frittered away.
“WHEN THE OPPORTUNITY APPEARS, DON’T PULL THE SHADES”
In the early 90’s, outstanding achievements in R&D had placed Fiat ahead of its competitors. The carmaker had developed a new injection solution bound to spark a revolution on the diesel market. The common rail was prototyped in the 1990s, jointly by Centro Ricerche Fiat, Magneti Marelli and Elasis. Somewhat surprisingly, in 1993 Fiat sold the patent to Bosch for 13.4 million euro. In retrospect, the rationale for such a decision may be questioned.
“When the opportunity appears, don’t pull down the shades” advises the American business writer Tom Peters. To persist, another saying goes, is of the devil. Fiat may claim a consistent track record in missing propitious opportunities. Innovation thrives when vision meets pragmatism. Both were found in abundance at the Fiat Research Center headed by Giancarlo Michellone, and the company entered a golden age for R&D. At the time, the Italian carmaker seemed ready to take the lead in hybrid technology. Matching the company’s own investment, the national government had provided targeted funding to develop a fleet of ultra-low emission vehicles. As a result, a hybrid vehicle was to go on sale by the end of decade under the name Multipla. Unexpectedly, the new car outperformed the otherwise unbeatable Toyota Prius, a top seller ever since in its market niche. For once, politicians were thinking long-term. Additional state incentives would bridge the initial sales price differential. In spite of its market potential and cutting edge technology, the hybrid Multipla was soon to fade into oblivion as Fiat stopped working on electric cars.
FIAT: A CHANCE ONCE MISSED?
In 2010, the Chinese Premier Wen Jao Bao paid an official visit to Italy “to deepen relations” with the southern European country. A bilateral agreement to promote electric mobility was signed. With pollution in China reaching epic proportions, economic growth and social stability are also threatened. Beijing’s strong support for the development and the adoption of electric cars, therefore, is no surprise. When in 2012 Corrado Clini, then Minister for Environment, visited Shanghai, Italy was ready to reap the fruits of the labour; a golden harvest indeed. Fiat was warmly invited to set up a new production line for e-vehicles in its plant in Chansha. Established in 2010, Chansha can build up to 140.000 cars a year and will soon assemble five models. None of those, alas, is electric.
This comes to no surprise as Sergio Marchionne, the Fiat-Chrysler CEO, doesn’t believe in electric cars. Perhaps, under current market conditions, his famous plea: “Please don’t buy our electric cars because every time I sell one it costs me $14,000” makes perfect sense. However, excellence in environmental technology is turning into a crucial competitive factor in the industry.
Was it a smart move to decline an invitation from the Chinese government? A chess master, like a business strategist, must consider many moves down the road. If we look at the facts, nonetheless, some doubts arise. Undeniably, Beijing has been working hard to put more low emissions vehicles on bitumen, saving energy and reducing pollution. In March 2015, the Ministry of Transport set a target of 300,000 new energy commercial vehicles on China’s roads by 2020: 200,000 new energy buses and 100,000 new energy taxis and delivery vehicles.
THE LEGACY OF THE VOLKWSWAGEN EMISSIONS SCANDAL
Speaking at a conference in Berlin last June, the German Economic Affairs Minister Sigmar Gabriel said that the country has a lot of catch up to do in the e-mobility sector. In general, Germany, and the European industry as a whole, must adapt to demographic change, transition to a low-carbon economy and embrace the creative disruption brought about by digitalisation. Europe has to roll out far-reaching strategies to face the challenges ahead and foster innovation. Albeit painful, technological turnarounds are urgent and cannot be postponed.
Time is running out. Ultimately, this could be the legacy of the Volkswagen emissions scandal.
