How EU rules caused a diesel stink

The diesel emissions scandal shows how the profit motive seems always to have overriden concerns over unhealthy emissions, says James Lewisohn.


The Audi Q7: profitable geegaws trumped clean exhausts

This week James Dyson announced he'll invest £2bn to build an electric car in the UK (see below). Dyson's passion for vehicles dates to the 1990s, when he tried to market the cyclone technology that powers his posh vacuum cleaners as a means of removing sooty emissions from diesel exhausts. Like his hoovers, it was pretty expensive compared with the alternative (in this case, not removing emissions). Carmakers weren't interested. Two decades later, the diesel emissions scandal shows how the profit motive seems always to have overriden concerns over unhealthy emissions.

Picture the scene that the US Department of Justice (DoJ) alleges took place at a design meeting for the 2015 Audi Q7. Under US rules, this seven-seater's diesel exhaust was so toxic that it required constant dosing with a urea-based liquid called AdBlue. But "the requisite tank size for onboard [AdBlue] storage was believed by certain Audi employees to interfere with features considered to be attractive to customers, such as a high-end sound system", claims the DoJ's criminal complaint. In other words, Audi faced the dilemma of whether to install a suitable AdBlue tank or to devote the same space to housing a huge 14-speaker, 1,000 watt Bang & Olufsen optional extra in-car hi-fi. Such geegaws are among the most profitable items carmakers can sell: the Q7's mega stereo added £4,500 to its price. No prizes for guessing Audi's alleged decision.

Thanks to punitive US tort laws, European carmakers' US liabilities will dwarf the fines they'll receive elsewhere. On Friday VW's North American charges hit $30bn after it announced a further charge of $3bn to cover unseen complexities in buying back or retro-fitting diesel vehicles. Yet the vast scale of these costs portrays a false impression of diesel's success outside the European Union (EU). Within the EU, diesel accounted for 55% of new car registrations and 40% of vehicles on the road at its peak in 2015. Yet, for all the aggressive marketing, diesel was a damp squib in the US, where it never exceeded 3% of total US vehicle registrations.

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In fact, ex-EU sales of diesel cars and vans were so scant that the EU became in effect a "global diesel island", as a new report from the Transport & Environment lobby group puts it, accounting for 70% of global diesel car and van sales. With the modest exceptions of the US, India, South Korea and Turkey, diesel pretty much bombed everywhere else.

Dyson, a long-standing critic of the EU, will reason that the diesel scandal shows it at its worst: its regulations and taxes on new cars and fuel favoured diesel, the highly profitable domestic technology, to the detriment of foreign alternatives such as petrol-hybrid vehicles even as evidence mounted that emissions from diesel exhausts were killing tens of thousands of EU citizens each year. Capitalism requires Schumpeter's "creative destruction", which can't occur unless new firms are allowed to challenge the incumbents. The EU's non-tariff barrier favouring diesels reduced contestability by foreign firms. Not surprisingly, the EU's support of large European businesses, especially major employers such as carmakers, made these businesses huge supporters of the single market and its protective mechanisms.

Yet that support was, ultimately, myopic: keeping out foreign rivals made Europe's carmakers rich and lazy enough that an entirely new foreign innovator Tesla has risen to threaten their entire business model. When Brexiteers such as Dyson attack the EU, they target precisely its propensity towards the entrenchment of vested interests such as Europe's carmakers. We can only imagine what our streets would look like if diesel had not been promoted and protected by the EU. Transport & Environment thinks we would be driving cheaper and cleaner vehicles. This is the vision that Dyson is seeking to bring to reality. We should wish him luck.

A hard road from cleaners to cars

writes Chris Carter

If only it were so simple, says Lex in the Financial Times. The entrepreneur's autobiography may be called Against the Odds, "but his bet-the-company plan to move into electric cars is taking things to extremes". Electric-car maker Tesla's capital expenditure for the last 12 months alone was $2.7bn more than Dyson's budget. Worse still, Elon Musk's company hasn't turned a profit after 14 years. Is James Dyson prepared to make such a sacrifice? If he's serious, he will need to raise some serious cash from public shareholders, just as Tesla did in America, raising $10bn since 2012. That may mean that Dyson needs to consider a stockmarket float.

Whatever Dyson decides to do, he has his work cut out, says The Economist. A brand associated with washroom hand-dryers may lack the necessary allure to attract high-end buyers. That said, in the last 24 years Dyson has morphed into a company with revenues of £2.5bn, "a triumph of marketing as much as clever technology". James Dyson, like Musk, seems untroubled by self-doubt. It remains to be seen whether he can clean up again or whether the electric-car business will simply hoover up his fortune.

James Lewisohn began his career as an investment banker in New York with Bear, Stearns & Co. He went on to work as an M&A advisor in London at UBS Warburg, and was head of private equity for Lord (Jacob) Rothschild's investment group, including RIT Capital Partners Plc and the Yad Hanadiv Foundation. 


James currently works as an advisor to investment funds, family offices and companies, and is chairman of the Investment Committee of Poul & Erna Sehested Hansens Fond, a Danish medical and educational charity. He is also a trustee of Barry & Martin's Trust, a UK charity dedicated to HIV/AIDS prevention and care in China.