The automotive manufacturing giant General Motors will pay as much as $146 million in penalties for not complying with emissions and fuel economy standards, which was announced by the Environmental Protection Agency and the Transportation Department last week.
In addition to the penalty, the company will also have to take other steps to resolve the issue, including removing excess emissions from almost 6 million vehicles on the US roads.
These vehicles are model years 2012 through 2018, covering 4.6 million full-size pickups and about 1.3 million popular midsize SUVs under the company”s Chevrolet brand. About 40 variations of GM vehicles are under the affected models, including the Chevy Silverado, Chevy Tahoe, and Cadillac Escalade.
The ruling comes after an EPA investigation found the vehicles by General Motors, including pickup trucks and SUVs, emit over 10% more CO2 on average than the initial claims made by the company’s testing reports on its compliance with the climate rule limiting carbon dioxide emissions for cars. EPA Administrator Michael Regan said the following in a statement:
“EPA’s vehicle standards depend on strong oversight in order to deliver public health benefits in the real world. Our investigation has achieved accountability and upholds an important program that’s reducing air pollution and protecting communities across the country.”
The automaker giant, however, does not admit any wrongdoing. GM vehicles complied with all regulations in pollution and mileage certification, said the company.
Bill Grotz, GM’s spokesman, said in a statement that paying the penalty and taking more steps is simply “the best course of action to swiftly resolve outstanding issues with the federal government regarding this matter.” Gotz further said that “GM remains committed to reducing auto emissions” and that it will continue working toward achieving its electrification goals.
According to the National Highway Traffic Safety Administration (NHTSA), a division of the Transportation Department, GM will cancel 50 million metric tons of GHG credits and roughly 30.6 million gas mileage credits that it received from the EPA and NHTSA, respectively, for complying with federal rules.
While an EPA spokesman said the violations were unintentional, David Cooke, a senior vehicles analyst for the Union of Concerned Scientists, shared doubts about GM not knowing that the problem was so widespread on so many different vehicles. He said:
“You don’t just make a more than 10 percent rounding error.”
Dan Becker, director of the Center for Biological Diversity’s Safe Climate Transport Campaign, meanwhile noted the importance of having deferral laws and oversight instead of just trusting automakers to make cleaner, more efficient vehicles. According to him:
“Automakers can’t be trusted to protect our air and health. EPA and NHTSA need to be constantly vigilant to protect our air and atmosphere.”
The History of Biggest Scandals
This is not the first time an automaker has been found not complying with the environment laws. Just late last year, the state of California and the Justice Department reached an agreement with Cummins, a truck engine manufacturer, to resolve claims that the company violated the Clean Air Act.
With a penalty of $1.6 billion, it was the largest penalty ever under the Act. Attorney General Merrick Garland said the following in a statement at the time:
“This historic agreement should make clear that the Justice Department will be aggressive in its efforts to hold accountable those who seek to profit at the expense of people’s health and safety.”
Cummins installed defeat devices on hundreds of thousands of its engines—630,000 model year 2013 to 2019 RAM 2500 and 3500 pickup trucks—which allowed them to pass emission inspection while releasing high levels of pollutants.
Like General Motors, Cummins didn’t admit any wrongdoing, saying it had “seen no evidence that anyone acted in bad faith” and had “already addressed many of the issues involved.” Stellantis, which manufactures these trucks, recalled the vehicles to recalibrate the software to ensure their compliance with federal emissions law.
The Environmental Protection Agency has been ramping up its investigations of illegal emissions control software since the Volkswagen scandal, popularly known as “Dieselgate.”
About a decade ago, the German automaker was found to be illegally installing software in millions of diesel passenger cars worldwide to evade smog-reducing standards. Volkswagen agreed to pay up to $14.7 billion in a consumer class-action settlement as well as buy back about 430,000 of 11 million cars that carried the cheating software. In total, the German automaker had to pay a fine of roughly $20 billion.
The EPA accused the automaker of using software to detect when the 4-cylinder Volkswagen and Audi vehicles from model years 2009-15 underwent their periodic state emissions testing and turned on their full emissions control systems only for that time while they remained turned off during normal driving situations. This allowed the cars to emit about 40x as much pollution as allowed under the Act.
In addition to fines, vehicle recalls, and settlements, Volkswagen also saw its executives charged. The company pledged to transition to EVs and implement more rigorous compliance measures. EVs are widely seen as the way to address the problem because they produce zero direct emissions.
A couple of months ago, the German auto giant announced plans for a cheaper-than-ever electric model with a price of around 20,000 euros ($21,800). While this new model won’t come until 2027, Volkswagen is also planning for a range of new battery-powered cars for under 25,000 euros by the end of next year.
The company’s progress on EVs, however, is slow, and the sector faces weak demand and increased competition from China. Recently, Volkswagen Group CEO Oliver Blume said that China’s EV makers will prove to be a formidable challenge. Traditionally, Volkswagen has been the leading automotive brand in China, but the title has now been overtaken by the Chinese EV maker BYD, which is backed by Warren Buffett’s Berkshire Hathaway.
This transition to EVs is a global phenomenon. The Biden administration recently finalized the climate regulations under which automakers are to increase the sales of EVs. This can be complied with by boosting sales of plug-in hybrid vehicles while slashing carbon emissions from gasoline-powered models. The rule, as per the EPA, will prevent 7.2 billion metric tons of carbon emissions from entering the atmosphere through 2055.
This has resulted in the market share of EVs spiking to 7.6% in 2023 after a record 1.2 million EVs were sold in the US, from 5.9% in the previous year.
Click here for a list of the top ten electric vehicle stocks.
More Instances of Cheating by Automakers
It’s not just Volkswagen, Cummins, or General Motors, either. Over the past two decades, as global interests and efforts to reduce vehicles’ negative impact on our environment have ramped up significantly, several auto manufacturers have been caught cheating or lying about emissions from their vehicles.
The Volkswagen “dieselgate” scandal actually pushed several auto manufacturers in Europe under scrutiny. A probe was launched into the French carmaker Renault in 2017 along with Peugeot maker PSA. It was found that some of Renault’s cars produced on-the-road nitrogen oxide (NOx) emissions more than ten times the regulatory limits set for them.
The French court charged the company with deception, but Renault maintained its innocence and said that their “vehicles are not equipped with any rigging software for pollution control devices.”
Its engineering boss, Gilles Le Borgne, said at the time that the anti-pollution technology called ‘NOx trap’ that was used in vehicles had known limitations and only worked optimally at low speeds. He said:
“The limits of these anti-pollution systems were linked to the security of our clients and to their own technological and chemicophysical limitations.”
In 2021, the company said a court had ordered it to pay $24 million in bail in addition to providing a bank guarantee of almost $65 million to cover any compensation orders.
In 2017, Fiat Chrysler Automobiles (FCA) was also accused of a multi-year emissions fraud surrounding more than 100,000 vehicles with diesel engines. This included Ram pickup trucks and Jeep sport-utility vehicles spanning model years 2014 to 2016. The US business of FCA, now part of Stellantis, pleaded guilty to criminal charges and paid $300 million in penalties.
Yet another case of a car company cheating emission tests through defeat devices has been Daimler. The German carmaker had a $1.5 billion settlement in 2021 with the US government in addition to $700 million to settle a class action lawsuit brought by owners.
With this settlement, US officials said at the time that they hoped the fine would deter future misbehavior. Meanwhile, Daimler denied the claims and called the deal an “important step” in avoiding “lengthy court actions with respective legal and financial risks.”
US authorities have been investigating the company since 2016 for installing software in 250,000 Mercedes cars and vans to evade emissions laws. The defeat devices were discovered in testing.
In 2018, Daimler recalled hundreds of thousands of vehicles in Europe that had these devices installed. Other brands, such as Porsche and BMW, also recalled their cars over the same issue.
Cheating hasn’t just been related to not meeting emission standards but even overstating fuel efficiency, as in the case of Mitsubishi. About a decade ago, Mitsubishi Motors was ordered to stop selling a number of its models after Japan’s transport ministry found that the company had been falsifying the fuel efficiency in variants of the Pajero, Outlander, and RVR SUV cars.
The fuel economy of Mitsubishi Motors’ vehicles was “as much as 8.8% and on average 4.2% lower than advertised.” The company admitted to rigging the tests for 25 years.
This led to the suspension of its vehicles, causing a sharp drop in the firm’s market value. The initial loss in the carmaker’s market value was about $3bln. This required a financial bailout by fellow carmaker Nissan, which took a 34% controlling stake in the company in a $2.2bn deal.
South Korean carmakers Hyundai and Kia have also been charged in the past for misleading US customers about the fuel economy of over a million cars. The companies agreed to pay $100 million in fines and forfeit $200 million in credits after the EPA and the Justice Department found fuel economy to be inflated by one to six miles per gallon and greenhouse gas emissions understated by about 4.75m metric tons over the vehicles’ estimated lifetime.
Back to GM, How’s the Company Holding Up?
As the news of the penalty broke out, GM’s share prices (GM:NYSE) initially dropped to $46.32 but have since recovered to previous levels.
It has been a good year for GM. The company has been enjoying nice growth, with its share prices up 30.23% year-to-date (YTD). Trading above $47, as of writing, General Motors’ market cap stands at $53.68 billion. Its share price is actually gradually moving towards its $64 peak hit in Nov. 2021.
With that, its ROE (TTM) is 15.57%, while its EPS (TTM) is 8.18, and its P/E (TTM) is 5.71.
While these gains have been in line with the broad market uptrend that has the S&P 500 up over 15% in the first half of 2024, the auto manufacturer has been enjoying some good times. Known for designing, building, and selling cars, trucks, crossovers, and automobile parts, the company recently released its stellar financial results for Q2 of 2024.
According to the report, General Motors and its dealers delivered 696,086 vehicles in the US during that time, an increase of 0.6% year over year. Meanwhile, in the first half of this year, the company delivered 1,290,319 vehicles, a 0.4% decline from the same period last year.
The second quarter saw GM’s best quarterly total sales in over three years. However, GM hasn’t been alone in its success; Chevrolet, Cadillac, GMC, and Buick all recorded retail gains. Tesla also reported a good quarter, with its deliveries beating analysts’ estimates.
The strong positive performance has been driven by EV sales, which were a record 21,930, up 40% year-over-year and 34% over Q1’s 38,355 vehicles. Retail EV registrations at the company, meanwhile, are up 17% YTD, far ahead of the industry’s 10% gain. So, it makes sense that GM plans to offer 10 EV nameplates by the end of the year, targeting major markets like New York, California, Michigan, Texas, and Florida.
“We can win as more customers embrace EVs, and we can keep winning if they want to stay with the engine technologies they know.”
– GM’s Senior Vice President and North American president, Marissa West
The country’s biggest carmaker has created a portfolio of diverse vehicles by adding EVs to its traditional internal combustion engine (ICE) vehicles. GM has been investing heavily in EV tech and infrastructure, and its Chevrolet Bolt EV and the GMC Hummer EV have received positive market reception.
While advancing in the EV sector, the automaker continues its dominance of the truck market, with the share of its full-size pickup market surging to 44.5% and midsize pickup retail market share rising above 28%. Additionally, the company has plans for eight new or redesigned SUVs by this year-end, with the Chevrolet Traverse being the first of them.
Despite enjoying all the success in the quarter, GM also faced challenges, as evidenced by the slight decline in year-over-year deliveries. The broader market challenges that also affected GM include fluctuating raw material costs, economic uncertainties, and supply chain disruptions. Supply chain issues have actually been going on since the onset of the pandemic.
Now, moving ahead, GM’s focus is likely to continue on EVs. The company’s plans for new EV models, the Chevrolet Silverado EV and the Cadillac Lyriq, and investment in its Ultium battery platform signifies this shift in trend.
The EV market, however, is also facing fierce competition with the likes of Tesla, Rivian, and Ford pushing the boundaries of electric mobility. Moreover, demand for EVs has been growing slower lately due to rising inflation, high interest rates, economic uncertainty, and consumer preference for hybrids, which have pushed EV brands to slash prices. And this pressure may not go away anytime soon.
Still, global EV sales are expected to rise from 13.7 million vehicles in 2023 to 16.6 million annually, according to the International Energy Agency.
Conclusion
The global focus on reducing the negative environmental impacts has risen significantly over the past many years. With the CO2 emission amount from the transport sector taking up 20% of total CO2 emissions, auto manufacturers are facing challenges in making a difference.
Amidst this struggle, vehicle operators have been seen cheating time and again and risking people’s lives and the environment. It is integral that bad actors are held accountable, but there is a clear need for better solutions as well.
A push towards EVs could help change the situation. But of course, that won’t be so easy, as they come with their own unique challenges. The road to sustainable and eco-friendly transportation is bumpy, for sure, and it would take years before technological advancement, organization implementation, and mainstream user adoption make a cleaner and greener future a reality.
