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Mild Damage Expected From EPA’s Fiat Chrysler Diesel Foray

Mild Damage Expected From EPA’s Fiat Chrysler Diesel Foray.

“We have done nothing, in our view, that is illegal” – Marchionne

Fiat Chrysler Automobiles (FCA) investors quickly realised the damage likely from U.S. government accusations of diesel emissions rules contraventions was unlikely to be anything like as damaging as Volkswagen’s transgressions

After diving nearly 20 per cent when the news was announced, FCA shares turned around one day later. Since the end of September the FCA share price has doubled to just over 10.5 euros. It slumped up to 20 per cent after the EPA news broke, but started to recover as it became clear this was no new VW dieselgate.

Meanwhile, reports France launched an investigation into possible cheating on diesel exhaust emissions at Renault stirred worries the controversy might eventually encompass most of the industry. In a statement Renault said its vehicles don’t carry emission regulations defeat devices.

Investment bank Morgan Stanley said despite the risks of FCA incurring financial penalties, and commercial and strategic disruption, the share price fall was a good opportunity to buy. 

Analysts said the main differences between FCA and VW offences, were that the German violations were pre-meditated from defeat devices. FCA’s transgressions, if proven, were probably accidental. There was also some hope that as the Environmental Protection Agency (EPA) case was brought so close to the end of the current administration’s tenure, it might be terminated by an incoming Trump government.

The EPA accused FCA of using illegal software in 104,000 Jeep Cherokees and Ram pickup trucks, which it said could lead to fines of up to $4.63 billion. VW had 600,000 diesel vehicles in the U.S. breaking the rules, and millions worldwide.

“We have done nothing, in our view, that is illegal,” CEO Sergio Marchionne was quoted as saying by the Wall Street Journal, which also quoted Tim Murphy (R.,Pa) and John Shimkus (R.,Ill) who head separate House Energy and Commerce subcommittees saying jointly “There is much we do not know about the details of this investigation.”

Blow to investors
But the sudden drop in FCA’s share price was a blow to investors who had benefitted from months of progress, propelled by hopes the premium subsidiaries Maserati and Alfa Romeo might be sold to pay off huge debt, and the more proven profitability of the Jeep brand.

Citi Research said this isn’t the first time FCA’s emission controls have been questioned so it’s unlikely to be dismissed as a misunderstanding.

“(But) There are key differences to VW – it is not yet deemed a defeat device,” said Citi Research analyst Michael Tyndall.

“The market will immediately draw parallels to VW, but it is worth noting that at this stage the EPA/CARB has not declared the software a defeat device and unlike VW, FCA is denying the allegation. In VW’s case the notice of violation came after it confessed to the existence of the device. This could prove to be a key point in the progress from here as a defeat device points to a more egregious violation,” Tyndall said.

Tyndall said the VW experience points to a potential extra cost of more than €3 billion, but the business impact was likely to be limited given the low U.S. sales of implicated vehicles.

Reuters Breaking Views columnist Olaf Storbeck said this development could derail Marchionne’s plan to retire at the start of 2019 with FCA in healthy financial shape. Based on VW’s costs of between $20,000 and $32,000 per vehicle, this could cost FCA between $2.1 billion and $3.4 billion.

“That would drive Fiat Chrysler off its current path to prosperity,” Storbeck said.

No defeat device
Investment researcher Evercore ISI also said investors shouldn’t compare FCA’s problem with VW’s because there was no defeat device involved.

“In the event that FCA might need to remedy any of the vehicles in question, investors should be aware that FCA’s engines are fitted with SCR systems,” said Evercore ISI analyst Arndt Ellinghorst.

 SCR, or Selective Catalytic Reduction, is a more expensive and effective way of curbing NOX emissions which many offending VW vehicles didn’t have.

“As a result, an ECU/software flash is likely to prove a sufficient fix. The cost associated with this is relatively immaterial and, once more, should not be compared with costs incurred by Volkswagen,” Ellinghorst said.

The long run up in FCA’s stock price reflected investor hopes that a Trump boom might also bolster sales in the U.S. FCA makes most of its profits there as it concentrates on highly profitable SUVs and pickup trucks, and eschews unpopular mid-sized sedans.

FCA is expected to announce its forecasts for 2017 later this month.

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