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Daimler joins Mitsubishi dealing blow to carmakers' credibility

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Mitsubishi Motors Corp's admission to manipulating fuel-economy tests and misleading consumers was an ominous echo of the scandal rocking Volkswagen AG. Daimler AG and PSA Group now risk becoming the latest examples of automakers trying to skirt an increasing array of government regulations.

[MICHIGAN] Mitsubishi Motors Corp's admission to manipulating fuel-economy tests and misleading consumers was an ominous echo of the scandal rocking Volkswagen AG. Daimler AG and PSA Group now risk becoming the latest examples of automakers trying to skirt an increasing array of government regulations.

The misconduct at Mitsubishi follow scrapes in recent years in which Hyundai Motor Co, Kia Motors Corp and Ford Motor Co apologized for misstating fuel economy on window stickers after regulators and watchdogs discovered discrepancies. 

Daimler has now begun an investigation of possible irregularities at the behest of the US Department of Justice, and French fraud investigators searched PSA premises on Thursday.

Driving the deception is a growing list of regulations aimed at limiting greenhouse gases and boosting fuel economy, such as the US mandate that automakers' models average 54.5 miles (87.7 kilometres) per gallon by 2025. Car companies are expected to self-regulate by conducting their own tests and submitting them to the government. The increasing number of mileage manipulators is calling that process into question and damaging automakers' credibility with consumers.

"This obviously causes an erosion of trust," said Jake Fisher, who as director of auto testing for Consumer Reports magazine uncovered Ford's failure to meet fuel economy ratings with its hybrid models.

"When you spend that much money on a product, you certainly need to be able to trust the automaker is not cheating and not playing the system. That's really a severe problem."

Mitsubishi Motors plunged 14 per cent Friday in Tokyo trading, extending its record three-day slump to 42 per cent. The scandal has wiped about 354 billion yen (S$4.33 billion) off the company's market capitalization. Daimler dropped as much as 6 per cent in Frankfurt, while PSA fell as much as 4.5 per cent.

Japan's transport ministry continued its inspection of Mitsubishi Motors facilities Friday after the automaker's admission that it manipulated tests to exaggerate the fuel economy of 625,000 minicars by as much as 10 per cent. The company also said it's been testing passenger cars using a method not compliant with Japanese standards since 2002.

Even before the latest revelations at Mitsubishi, auto executives had sounded warnings about a consumer backlash.

"This one company's deeds has damaged trust in the auto industry," Fumihiko Ike, chairman of Honda Motor Co, told reporters in Tokyo last year, after news emerged that Volkswagen had equipped diesel engines with software that cheated emissions tests.

After months of acrimonious negotiations with US authorities, Volkswagen said Thursday that it will fix or buy back about 500,000 tainted cars in the US to atone for its deception. The deal will cost Volkswagen at least US$10 billion, according to a person with direct knowledge of the matter.

Unlike Volkswagen and Mitsubishi, Daimler and PSA have not admitted to any wrongdoing. The maker of Mercedes-Benz luxury autos is conducting an internal investigation into the certification of its exhaust emissions at the request of the Justice Department and is cooperating with authorities, Daimler said in a statement Thursday.

The search at PSA premises in France was conducted by government fraud investigators as part of a probe into vehicle emissions, the Paris-based company said in a statement on Thursday. The French Economy Ministry's fraud office said it searched five premises following "anomalies" in the emissions test results of three vehicles, Agence France-Presse reported, citing a statement.

In late 2014, Hyundai and Kia agreed to pay a US$100 million fine to the US, give up US$200 million in emission credits and spend US$50 million setting up independent tests to certify mileage claims.

Ford in 2014 lowered mileage ratings for a second time in a year on its hybrids and compensated more than 200,000 owners of models such as the C-Max and Fusion hybrid. The US automaker blamed a mistake in the software it used to generate mileage estimates for the US Environmental Protection Agency.

"How come these guys never make a mistake on the low side?" said Karl Brauer, senior analyst for automotive researcher Kelley Blue Book Co. "That's a little telling."

The mistakes and manipulations have taken a toll on carmakers' relations with regulators. The EPA has increased scrutiny of the mileage claims it receives from automakers and is taking longer to verify them, said Alan Baum, an independent auto analyst who advises carmakers on the issue.

The number of cheating scandals "puts the auto companies in a more difficult position because of that lack of trust," Mr Baum said. "This puts the industry on the defensive in times when it wants to be more aggressive."

With US auto sales projected to hit another record this year, cars are stacking up while awaiting EPA validation of fuel-economy claims, Mr Baum said.

"They've lost the presumption that they're doing it right, and now they're going to have to show that they are," Mr Baum said. "Because the testing system is going to be more difficult, that's going to add costs on both the automaker side and the EPA side."

It also delays how quickly automakers can roll out new models, Mr Brauer said.

"This is going to have a big impact across the industry," Mr Brauer said. "This is slowing down the processing of vehicles right at the stage of introduction. I've heard that for the last few months from every manufacturer." With Mitsubishi enduring hostile headlines and a government raid on one of its Japanese facilities, that should encourage other automakers to play by the rules, said Mr Fisher of Consumer Reports.

"There's a lot of economic incentive for them to game the system, but as these scandals hit, there is backlash," Mr Fisher said. "So I think there's going to be less of this going forward."

Yet, in a brutally competitive industry where billions are spent to gain a 10th of a point of market share, the temptation to cheat may continue to prove irresistible.

"The cynical person would say they'll just come up with new and better ways to cheat," Mr Brauer said. "They'll say, 'Now, we need a new set of tricks that they aren't checking for yet.'"

BLOOMBERG