January 13, 2017 / 12:22 PM / 7 months ago

Market bets Fiat mess is a muddle, not a fiddle

A screen displays the ticker information for Fiat Chrysler Automobiles NV at the post where it's traded on the floor of the New York Stock Exchange (NYSE) in New York City, U.S., January 12, 2016.Brendan McDermid

LONDON (Reuters Breakingviews) - Fiat Chrysler investors are betting that emissions issues in the United States are a muddle, rather than a fiddle. The carmaker's Chief Executive Sergio Marchionne on Jan. 12 vigorously denied any intentional emissions cheating and confirmed an ambitious 2018 financial target. The next day the group's shares rebounded smartly.

The U.S. Environmental Protection Agency (EPA) says Fiat used undisclosed engine management software in 104,000 Dodge and Jeep diesel vehicles sold since 2014, resulting in higher emissions of toxic nitrogen oxides. As Volkswagen's experience shows, the intentional manipulation of emissions data can be harshly punished. The German carmaker sold almost 600,000 vehicles with illegal "defeat devices" in the United States. Fines, recalls and buybacks and compensation payments so far add up to 23 billion euros.

Were Fiat's sins similar to Volkswagen's, the carmaker's total hit for these three areas would be up to $4.2 billion (3.9 billion euros), according to Breakingviews calculations. However, post-rebound the market is pricing in just about $1.8 billion. Unless this resembles a bet on leniency by the incoming U.S. President Donald Trump, shareholders seem to be assuming Fiat made a technical slip-up rather than an intentional manipulation.

That's possible. Every modern car is stuffed with software designed to tweak the engine and emissions after-treatment systems, for instance to avoid damage during starting or in cold temperatures. But these so called "auxiliary emission control devices" are only legal if the carmaker fully discloses and explains them to authorities during the vehicle's certification process. So far, the U.S. regulator is yet to reveal its opinion.

If Fiat can convince the EPA that the contested code serves legitimate purposes, it may be able to avoid the full VW-style treatment of criminal charges, civil penalties and lavish compensation for customers. It would still have to bring the 104,000 vehicles on American roads in line with emissions rules, which could yet be tricky and costly. But if a recall is sufficient, and Fiat can match the estimated recall costs of Volkswagen subsidiary Audi of just around $1,500 per car, this would imply a bill for Fiat of only $156 million. Marchionne's confidence presumably reflects something nearer that than a full, VW-style fate.

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