Mercedes Isn't Looking Too Reliable These Days
(Bloomberg Opinion) -- When Volkswagen AG admitted rigging diesel emission tests in September 2015, its German rival Daimler AG sounded pretty dismissive in defending the compliance of its own Mercedes-Benz vehicles. “We categorically deny the accusation of manipulating emission tests regarding our vehicles,” the luxury car giant said. “A defeat device, a function which illegitimately reduces emissions during testing, has never been and will never be used at Daimler. This holds true for both diesel and petrol engines. Our engines meet and adhere to every legal requirement.”
If Daimler shareholders concluded from that statement that the company wouldn’t have to recall any diesel vehicles, or that it wouldn’t face any financial or legal repercussions related to its diesel emissions, they’ve been sorely disappointed. On Sunday Daimler warned of a high three-digit million euro hit to profit because of provisions for “various ongoing governmental proceedings and measures relating to diesel vehicles,” without saying what these were. Group operating profit is now expected to stagnate this year.
This was Daimler’s third profit warning in 12 months and all have involved unexpected diesel costs to some extent. The shares gave up about 2 billion euros ($2.3 billion) of market value on Monday – more than twice the expected hit to profit – which suggests investors fear this won’t be the end of it.
And who could blame them? On diesel, as with its own earnings forecasts, Daimler is in danger of being seen as unreliable counsel. The share price, which essentially has gone nowhere since 2007, reflects that distrust.
The distinction will probably be lost on city-dwellers who breathed in poisonous diesel fumes, but to this day Daimler insists its diesels didn’t break the law. European vehicle emissions rules were loosely written. Turning down or switching off emission controls to protect the engine in certain circumstances – such as lower temperatures – was allowed and loopholes like this were widely used (and abused by the industry).
So far, Daimler has escaped fines and the balance sheet damage has been limited. In contrast, VW has incurred about 30 billion euros of diesel-related costs since it confessed to cheating.
Daimler has, though, recalled millions of diesel vehicles since 2015 (some voluntarily, some not) after several models were shown to have belched out far more nitrogen oxide pollution when driven on streets than when tested in the laboratory. In fairness, Mercedes is by no means the only carmaker where that’s been the case. But national regulators have at times seemed oddly reluctant to investigate or punish such large employers.
Mercedes’s latest recall came over the weekend when thousands of GLK diesel SUVs were called back to the garage because of software that the regulator said potentially distorted test results.
The legal risks section of Daimler’s annual report discusses the various diesel-related troubles at some length. The legalese makes it hard to follow but there’s no hiding the fact that Daimler is facing trouble on more than one continent: Stuttgart prosecutors have opened a criminal investigation on suspicion of fraud and false advertising; the German regulator KBA has said the company used “impermissible defeat devices;” and the U.S. Department of Justice has asked Daimler to conduct an internal investigation. Meanwhile, the company faces class actions and other lawsuits over allegations of excessive diesel emissions and false advertising, which Daimler denies.
The car giant has a new chief executive and new chief financial officer (Ola Kaellenius and Harald Wilhelm) and therefore a rare opportunity for a fresh start. Getting to grips with the diesel problems, and communicating about them more transparently, needs to be a top priority.
There’s a danger it will become a millstone instead. Daimler has invested heavily in a new diesel engines and recent tests have shown them to be relatively clean. Selling lots of those vehicles would help lower the carbon dioxide emissions of the Mercedes fleet and thus avoid regulatory fines. However, another barrage of negative diesel headlines won’t help reassure a still skeptical car-buying public. Unfortunately for Daimler, there is also nothing it can do to speed up or resolve the various litigation proceedings and investigations.
At a time when heavy spending on electric and autonomous driving technology is putting pressure on Daimler’s cash flow, unexpected diesel costs are the last thing it needs. No wonder it’s been so vocal about the need to cut costs. Mercedes-Benz’s corporate slogan is “the best or nothing.” Right now it feels like the latter.
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Chris Bryant is a Bloomberg Opinion columnist covering industrial companies. He previously worked for the Financial Times.
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