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FCA needs to be cleaner than clean
The potential financial impact of Fiat Chrysler Automobiles NV's run-in with the U.S. vehicle emissions regulator is surprisingly wide. Analysts at Exane are banking on it being only $250 million, while warning it could be as much as $4 billion in a Volkswagen-style scenario. At the top end, that's a quarter of the carmaker's market value before the Environmental Protection Agency said Fiat had breached its clean air rules.Even if Fiat is not cheating with its emissions technology, it needs to be able to explain why this is the case to the regulator, to customers and to investors -- in ways everyone can understand.
The EPA says Fiat failed to disclose engine software that led to increased emissions of nitrogen oxide from 104,000 Jeeps and Dodge trucks with certain engines sold in the U.S. since 2014. Non-disclosure of software that "affects emissions" is a serious violation of the law, the regulator adds.Fiat says it believes its emission control systems meet the "applicable requirements." That could be read as a rebuttal to any suggestion that the software led to excess emissions, but it doesn't really address the EPA's complaint about inadequate disclosure. Exane's base-case number is based on penalties for reporting violations only.Even if this is only about the quality of Fiat's regulatory engagement, it's still an important and reputationally damaging matter.Two things are clear at this stage. One is that the workings and purpose of the software aren't easy for outsiders to grasp. Fiat says it has spent months providing "voluminous information" to the EPA and government authorities as it has tried to explain its emissions control technology. If the authorities aren't satisfied, the problem lies either with Fiat's communication, or with a software system so complicated that it's hard to prove it is compliant.The second is that the software isn't as good as it could be by today's standards. After all, Fiat has proposed what it calls extensive software changes that could be implemented immediately to improve emissions performance. True, technology may have advanced since these models were launched. All the same, the easy modifications show things could be better.This matters because it's hard to see why cars need to be as outsized and polluting as Sports Utility Vehicles. Besides the environmental impact, there's also a worry that feeling safe may make SUV drivers less attentive. If SUVs didn't exist, would we lose that much, even if Fiat itself lost out on all those sales of huge gas-guzzlers to Americans?It may be a bit unfair to single out Fiat besides other companies that make products of limited social utility. The financial services industry is hardly blameless when it comes to hard-to-explain products of questionable social value. But if Fiat is going to bring these vehicles into world, it should at least be able to show it's above suspicion in the way it makes them. The lesson for other businesses could be: if you can't explain your methods convincingly, don’t do it.