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For German auto makers, diesel ruling a costly shift

ROME -- Diesel is dying, fast. It's good news for anyone who lives in cities choking on the soot and nitrogen dioxide spewed out by cars with diesel engines. It's bad news for the German car industry, whose rise was built on the back of the diesel engine.

On Tuesday, diesel's fortunes took another blow, a severe one this time, when a national court in Leipzig ruled that Stuttgart and Dusseldorf have the right to ban diesel cars. The decision upholds earlier decisions taken in lower courts, which were appealed.

The ruling will have far-reaching consequences for the German and global auto industries, all the more so since other cities could follow the example set by Stuttgart and Dusseldorf. The diesel cash cow is on its last legs. Auto makers will have to develop clean-propulsion technology much faster than they had expected only a few years ago and the price tag will be astronomical.

The Leipzig ruling was made on human health grounds. Last year, about 70 German cities failed to meet European Union pollution-level standards. The lower courts had argued that banning diesel cars from cities would be the most effective way to bring down pollution levels in a hurry, even if it meant harming car owners' rights.

The very newest diesel cars should be able to able to pass muster. The older ones are probably doomed, unless they are treated to expensive retrofits that neither the car owners nor the car manufacturers would by happy to fund. The value of secondhand diesel cars - roughly half the German fleet - is set to plummet.

Not long ago, it was gasoline, not diesel, that was the preferred fossil fuel. In most of Europe, diesel fuel was (and remains) slightly cheaper than gasoline. It allegedly came with better green credentials, since diesel engines operated more efficiently, resulting in better fuel economy and lower output of planet-warming carbon dioxide than gasoline engines.

Daimler, owner of Mercedes-Benz, BMW and Volkswagen all hitched their fortunes to diesel. Most German luxury cars, including Porsche SUVS, came with diesel engines and VW pushed diesel into the U.S. market, where gasoline was king.

That's where diesel suffered its first big blow.

In 2015, Volkswagen became a German national embarrassment and international pariah when it admitted to having rigged about 11 million diesel engines to pump out false readings in environmental tests. The engines were much worse polluters than advertised. So far, the bill for the "dieselgate" lawsuits and fines has reached US$25-billion. As a fuel, diesel was suddenly a bad word.

Meanwhile, Paris and other big European cities were announcing plans to ban diesel cars in the next decade or so and German courts were listening to arguments from environmentalists extolling the virtues of diesel-free city centres. The landmark ruling is a blow to the business model of the German car makers.

Even before Tuesday's decision, diesel was in near freefall in Germany. In 2015, diesel accounted for 48 per cent of the market.

Last year, the figure was 39 per cent. The decline can only accelerate. Note that Fiat Chrysler Automobiles, led by Italian-Canadian chief executive Sergio Marchionne, plans to kill off diesel cars by 2022, according to a Financial Times report, evidently because the cost of developing much cleaner diesel engines will be murderous. Toyota, for its part, has said it is unlikely to launch another diesel model.

For the German car makers, scandal-tainted VW especially, the Leipzig court ruling could not come at a worse time. They face only gruesomely expensive options. At some point fairly soon, they will have to decide whether retrofit about nine million German diesel cars built before September, 2015, when the latest EU emissions standards (known as Euro 6) came into force. According to analysts at Evercore ISI, the price of cleaning up the entire German diesel fleet would range from 15-billion ($23.4-billion) to 29-billion.

At they same time, they will have to accelerate their electrification drive, a gamble given that battery technology is expensive and consumer acceptance of electric vehicles is, so far, underwhelming; their market share is only about 1 per cent, although various estimates say they will take up between 5 per cent and 10 per cent by 2025. Development costs are the big issue. VW alone plans to spend 20-billion on 80 new electric car models, and another 14-billion on autonomous cars and shared mobility, by 2025.

Throw in the cost of dieselgate and VW faces a damages and development bill of almost 60billion in the next few years. So much could go wrong. Potential problems range from the severe shortage of cobalt needed to build car batteries - the smartphone market isn't going to give up its cobalt supplies easily - to the lack of a breakthrough in battery technology that would allow cars to travel long distances before recharging.

The price of ditching diesel and developing electric cars in a hurry might be unaffordable to some car makers, even a few of the biggies. As the bills pile up, more mergers are inevitable as investor returns diminish. The death of diesel is triggering a revolution, but it's not a revolution that the car companies, or their shareholders, wanted.

© The Globe and Mail

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