by Mark Bünger, Lux Research
In an echo of the multibillion-dollar emissions-cheating "Dieselgate" scandal that has engulfed Volkswagen (VW) for more than a year and is now leading to possible years in jail for its engineers and executives, the United States Environmental Protection Agency (EPA) is accusing Fiat Chrysler (FCA) of using hidden software in its vehicles' emissions systems in order to skirt environmental regulations. About 100,000 Jeep and Dodge vehicles are implicated, a small fraction of the 11 million VW vehicles involved in that company's misdeeds. While much more information is sure to come – the extent of VW's scandal stretched months past the initial announcement – it's still clear that FCA's situation has alarming parallels and key differences to be aware of.
First of all, this is certainly not a surprise. The auto industry has known for years that "clean diesel isn't [clean]" and that the reasons that the Germans (VW, Daimler, and BMW as well as the German government) spent more than a decade pushing diesel over ethanol, natural gas, and especially electric vehicles was political; any technical "fix" to that fact was fake. Then, over a year ago, as the VW scandal was widening, industry insiders were already saying that every carmaker does such things and VW was just the first to be caught; indeed, Renault fell under similar allegations. And last year, Germany specifically accused FCA of diesel cheating. Last year around this time, FCA, in response to VW’s issues, told investors that the company had added additional measures such as random, on-road emissions audit testing, internal and supplier software and calibration audits, and formalized compliance training for all software and emission calibration engineers (the last paragraph of this article). Apparently they didn’t. So, no one should be even slightly surprised, nor should anyone think that this is the last carmaker who will land in hot water because of software subterfuge.
Even if the scandal is smaller, the stakes for FCA are not, and there is real risk that this will be the beginning of the end of FCA; it's a much weaker company than VW in every way, from finance to government support to market presence and brand equity. The company is not well-prepared to survive a mild recession or recall, much less a major scandal.
In the FCA case, as in VW's, the protection of embedded software via the Digital Millennium Copyright Act (DMCA) enabled FCA to hide its software from scrutiny. VW has also abused its protection when it comes to its weak vehicle security systems (in 2016, 100 million of its cars were shown to be susceptible to wireless key hacking), by quashing legitimate security research into vulnerabilities. Automakers abuse the letter and spirit of DMCA, and are therefore now about to lose that protection, right at a time when software – as in autonomous vehicles – is becoming a strategic differentiator, and maybe even the most important one of all.
Software is especially relevant in FCA's case, because it is the carmaker working most closely with Google (Waymo) to make autonomous vehicles, which along with Tesla has the leading position in that field. Honda (which like FCA has barely had an autonomy program to speak of) and Ford have also warmed to the idea of working with the technology giant as a possible hedge against their own autonomy programs falling behind, or that ridesharing and driverless cars would gut the industry since vastly fewer vehicles could be needed in the market (see the report "Towards Intelligent Intermodal Trade: Industrial Big Data and Analytics in Transportation and Logistics"). Other carmakers, however, have spent billions to avoid having to work with Google, fearing they would get turned into Nokia, i.e. bankrupted by an automobile counterpart to Android, Google's smartphone operating system. FCA had neither the technical skill nor the balance sheet to grab an autonomy partner like Cruise, which GM bought for about $1 billion.
If the penalty for FCA expands as VW's did, it will almost certainly have to break up the company. Part of its remains could become the contract manufacturer of bodies for tech companies' autonomous programs at Google, Uber, Apple, and the slew of others – even Blackberry! – who have driving technology but lack manufacturing scale. Empowering the tech companies with manufacturing keys – but not the burden of debt, labor obligations, and cultural dysfunction that OEMs have – could have a cascading effect throughout the industry, and be the "Nokia Effect" that carmakers have long feared.
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January 24, 2017