Did Volkswagen Kill the Diesel Market? Or Was It Already Dead?

Image: Rust-covered Volkswagen logo
A Volkswagen logo covered in rust.KARL-JOSEF HILDENBRAND / EPA, file

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By Paul A. Eisenstein

After Volkswagen was caught cheating on diesel emissions, consumers have become more skeptical about diesel vehicles. Now, manufacturers across the globe are forced to rethink their plans for the high-mileage technology.

Facing accusations that it also duped emissions tests, Daimler AG this week announced the recall of 3 million diesel vehicles sold in Europe. Industry analysts believe the automaker could follow up with a similar move in the U.S. where it is under investigation by the Environmental Protection Agency.

Daimler’s Mercedes-Benz brand previously announced it wouldn’t sell any diesel models in the United States during the 2017 model-year, and it has not said whether it will return with any of its so-called “oil burners” in future years.

A Volkswagen logo covered in rust.KARL-JOSEF HILDENBRAND / EPA, file

Daimler is just the latest manufacturer to face allegations it rigged its diesel engines to illegally pass emissions tests. Volkswagen AG has so far spent about $30 billion on legal fees, fines and a massive buyback after admitting it rigged two of its engines with what the EPA called a “defeat device.” The U.S. government is currently suing Fiat Chrysler Automobiles in a similar case.

Still other automakers are finding themselves under a cloud of diesel smoke. And that is raising the prospect that what had looked like a strong comeback for high-mileage diesel technology just a few years ago may be turning into a bust.

Porsche CEO Oliver Blume told Reuters this week, “We are looking at the issue” and may stop offering diesels entirely in the next few years, though he added, “We have not made a decision” yet.

A Shift from Diesel to Electric

The Volkswagen brand, which once counted on diesels for one-quarter of its U.S. sales, won’t bring the technology over any more and is looking to scale back diesel technology globally, shifting focus to electrified powertrain technologies: hybrids, plug-in hybrids and pure battery-electric vehicles.

The maker has been forced to buy back or repair over 500,000 TDI models, and got permission from the EPA to sell off some leftover 2016 offerings that have been updated to meet tough American emissions standards. They’ve been going quickly, in part due to sizable incentives. But no new diesel models will follow.

Whether Daimler will bring diesels back to the U.S. has not yet been decided, said Rob Moran, chief spokesman for Mercedes-Benz USA. “We constantly review our portfolio offerings,” he told NBC News, adding that even if the company is cleared by regulators, “with the increased effort to certify diesel engines in the U.S., we have put the certification process for diesel passenger cars on hold.”

In the early part of the decade, diesel technology looked ready to stage its first significant comeback since the 1980s. Manufacturers, especially Europeans, started rolling out a new generation of “oil-burners” that shed all the problems of the diesels that Americans came to hate in the 1980s. Those older models were slow, noisy and smelly. The new engines, the industry said, were quick, clean — and even more fuel-efficient than before.

Or so it seemed.

A Multi-Billion-Dollar Problem

In September 2015, the U.S. Environmental Protection Agency accused Volkswagen of using a “defeat device” to reduce emissions of smog-causing oxides of nitrogen when the vehicles were being tested. In real-world use, however, they would produce up to 40 times the allowable limit.

VW soon acknowledged that subterfuge, which put sales of vehicles using both its 2.0- and 3.0-liter diesels on hold. It has since spent nearly $30 billion in fines and settlements and on a plan to buy back almost all of the vehicles using those rigged engines. It has, however, received permission to fix some later-model vehicles, including the 2015 VWs it is now trying to sell off.

The scandal cast a smoky pall over the entire industry, regulators going back to see if other makers had played similar games. In January, the EPA charged Fiat Chrysler Automobiles with rigging some of its own diesel models, a charge CEO Sergio Marchionne has vociferously rejected. But, for now, the agency has refused to certify diesel versions of the Jeep Grand Cherokee and Ram 1500 pickups, meaning they can’t be sold in the U.S.

“I think a lot of industry marketing types are worrying about getting a black eye if another glitch shows up,” analyst Joe Phillippi of AutoTrends Consulting told NBC News. And, ultimately, “the question becomes whether you can justify the cost if the volumes aren’t there," he said.

There are some manufacturers still committed to diesel, notably General Motors, which has options available on its Chevrolet Cruze passenger car line, as well as the midsize Chevrolet Colorado and GMC Canyon pickups.

Mazda, after struggling to come up with a formula that would deliver good mileage and performance — and meet emissions rules — is finally set to launch the SkyActiv-D engine in its CX-5 crossover, and it has suggested that if that diesel reaches a 10 percent share it will look at other models to use it in.

Diesels have long remained an engine of choice for medium- and heavy-duty truck buyers. And Ford recently announced plans to add a diesel option for its light duty full-size F-150.

Diesel demand “took a hit after the Volkswagen crisis,” said Steve Hansen, of the trade group, the Diesel Technology Forum, but “there has been an upturn in recent months, along with some significant announcements from automakers.”

But the numbers aren’t quite so upbeat. U.S. diesel sales are down 35 percent year-over-year, according to HybridCars.com. (Though the website does not track all heavy-duty models, observers say it captures the general trend of recent times.)

A Global Decline in Diesel

What’s worrisome to manufacturers committed to diesel is that the U.S. trend isn’t entirely unique. Backed by government subsidies, diesel demand has been declining in Europe. There, a growing number of environmentalists and regulators have begun echoing the skepticism of their American counterparts. Paris, for example, is looking to ban diesels entirely.

Related: These Countries Want to Ban Diesel and Gas Vehicles

Where diesels currently account for about 50 percent of European sales, that is projected to drop to as little as 30 percent by 2020, and the UBS Group forecasts the global share held by diesels will drop from 13.5 percent today to just 4 percent by 2025.

There are some questionable assumptions baked into such forecasts, notably the expectation that after a very slow start electrified vehicles will suddenly gain traction in the marketplace. Last year, all forms of battery-based models, from light hybrids to pure EVs, however, captured barely 3 percent of the American market, and it remains to be seen if U.S. buyers will be more interested in the lower-priced, longer-range models just now coming to showrooms.

But automakers are shifting resources. Long one of the biggest diesel proponents, VW now plans to have 30 pure electric models in its portfolio by 2025 and is even launching a battery sub-brand, VW I.D.

Should such vehicles fail to catch on, automakers may have to rethink their product plans, and diesels could give them a way to meet increasingly tough global emissions and mileage standards. But, as it now stands, oil-burners are likely to face tough times in the coming years.