Paris/Brussels, October 3

Volkswagen’s cheating on emissions tests has soured the European car industry’s heavy bet on diesel, with Renault, Peugeot and Fiat Chrysler potentially facing bigger long-term setbacks than the company that sparked the crisis.

In the face of that perceived injustice, tensions are mounting behind the united facade that European manufacturers present to regulators, some of their representatives say.

VW’s use of a banned ‘defeat device’ has drawn scrutiny of more widely practised test manipulation which, although legal, has allowed real-world nitrogen oxide (NOx) emissions to surge to more than seven times their European limits.

A renewed push to close EU test loopholes promises to add billions of euros to diesel engine costs already at the limit of mass-market viability, hitting small-car brands hardest while shifting demand to hybrids, where Europeans are behind Japanese competitors.

“This VW tidal wave will accelerate the shift,” said a senior executive at a French supplier of diesel emissions technology. “Some carmakers aren’t ready for this.”

In the near term, VW will continue to suffer the worst repercussions of its test-rigging, exposed by US authorities on September 18. The carmaker may raise new capital, a company source said on Thursday, if the costs of recalling millions of vehicles, fines and lawsuits far exceed the 6.5 billion euros it has set aside.

But when the diesel soot eventually settles, smaller victims may turn out to be more critically injured.

The blackening of diesel, whose superior fuel-economy has been crucial to meeting ever-tougher carbon emissions rules, may force carmakers to spend billions fixing their NOx problem, and billions more to bring forward rechargeable hybrids.

The average CO2 limit for European carmakers’ fleets will fall from 130 grammes per km to 95 grammes in 2021 — a goal carmakers say can’t be met if diesel sales fall significantly.

The industry now faces a hefty bill just to ‘commercialise technology that may have a limited long-term future’, Morgan Stanley Analyst Adam Jonas said. “On top of this, they have the burden of developing alternative powertrains at the same time.”

Goldman Sachs believes a regulatory crackdown could add 300 euros per engine to diesel costs that are already some 1,300 euros above their petrol equivalents, as carmakers race to bring real NOx emissions closer to their much lower test-bench scores.

That threatens the very existence of small diesel cars, which currently account for about 60 per cent of European sales by PSA Peugeot Citroen and Renault, and 40 per cent of Fiat’s. Premium and larger models can more easily absorb the extra outlay and still turn a profit.

The carmakers declined to comment on the longer-term impact of the emissions scandal.

In a letter to EU policymakers this week, industry’s main Brussels lobby group insisted that significant progress on NOx was impossible before 2019.

But behind the scenes divisions have emerged over plans for tougher real-world tests, with Peugeot and Renault aggrieved to be sharing public blame for German foot-dragging.