Auto-Parts Makers Hit by VW Scandal – Wall Street Journal

Posted: Monday, September 28, 2015

In the U.S., diesel engines are largely confined to heavier trucks, with diesel-powered cars representing just a small part of the market.

Auto-parts makers with big exposure to the diesel-car market are racing to salvage the technology’s reputation in the wake of the Volkswagen AG


emissions-cheating scandal.

Shares of the parts makers, which include Tenneco Inc.,


BorgWarner Inc.,


Delphi Automotive


PLC and Continental AG


, were pummeled last week following the Environmental Protection Agency’s disclosure that VW cheated for years on emissions tests of its diesel-powered cars.

The parts industry’s focus has shifted to defending the viability of diesel technology amid concerns that betrayed consumers or auto makers, which face tighter government scrutiny of diesel, will turn their attention to hybrids and electric-powered vehicles.

“You can’t have an event like this without questions being raised, but that doesn’t mean the technology doesn’t work,” said Terrence Hahn, chief executive of Honeywell International Inc.


’s $3.8 billion Transportation Systems unit.

“We have seen proven results around clean-diesel technology, and we don’t want what one auto maker has done to tarnish the industry or the technology,” Mr. Hahn said.


Wall Street wasn’t convinced, however. Shares of Honeywell, a major supplier of the turbochargers often used to make diesel-powered cars peppier, fell 10 cents Friday to $93.52, down about 5% from their close on Sept. 18. That was the day the EPA accused VW of installing illegal software that sharply reduces nitrogen-oxide emissions, but only when the cars are undergoing strict emission tests.

VW later acknowledged its use of the software and issued an apology.

The company promised to find a remedy to repair the 482,000 VW diesel cars in the U.S. as soon as possible. On Sunday, it launched the website to tell VW diesel owners about the company’s plans to fix their vehicles.

Shares of Tenneco, which makes emissions systems and gets 8% of its revenue from VW, sank almost 8% last week, while those of BorgWarner, which generates 17% of its revenue from the auto maker, fell 6%, finishing the week at $40.

BorgWarner recently opened plants in Portugal and South Korea, partly to produce more components used in starting diesel engines.

Continental, a German supplier of engine components, also was under pressure. Its stock lost nearly 6% of its market value last week.

Closely held Robert Bosch GmbH, the German giant that supplied the components now at the center of the emissions probe, has said VW was responsible for how the parts were installed.

On Friday, the EPA indicated it would step up scrutiny of diesel vehicles by overhauling the way it oversees the industry’s compliance with emissions standards.

The regulator sent a letter to auto makers saying that it will conduct tests of 2015 and 2016 vehicles under normal driving conditions, rather than accepting lab results, as it has done in the past.

In the U.S., diesel engines are largely confined to heavier trucks, with diesel-powered cars representing just a small part of the passenger-car market. But diesel is dominant in Europe, accounting for more than 50% of the passenger-car market in 2015, according to Barclays.

Before the scandal broke, J.D. Power & Associates expected diesel to expand to 7% of the U.S. light-vehicle market by 2017 from 3% this year.

Barclays analyst Brian Johnson suggests those growth expectations need to change, both in the U.S. and Europe. And that will squeeze some parts makers.

“Whatever the specifics that emerge from a VW investigation, we believe strongly that the VW scandal will heighten the pressure on diesel in Europe,” he said in a research note last week.

“The end result of the VW issues will be to accelerate a move away from diesel in the European mass market, pressuring suppliers leveraged to diesel,” Mr. Johnson said.

Mike Jackson, chief executive of AutoNation Inc., the largest U.S. auto retailer, said it would tough to rebuild trust with potential diesel buyers in the U.S. “It is another black eye for diesel engines overall,” he said.

Mr. Johnson of Barclays added that auto makers might need to accelerate development efforts of electric vehicles, hybrid and more-efficient gasoline engines.

That could help parts makers, since many of the same companies will have to supply those component. But their investments in diesel-powered cars could be lost if the industry shifts to those alternatives.

Write to Jeff Bennett at


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