Good morning.
Voltaire said that, while other states had an army, in Prussia, the army had a state. If he were alive today, he’d probably substitute the words “Germany” for “Prussia” and “auto sector” for “army.” Some states own car companies, but in Germany, the car industry, to a large degree, owns the state.
And that’s a problem for both the state and the sector right now.
Allegations last week that the big five of Daimler, BMW, VW, Audi and Porsche colluded for nearly 20 years, over an ever-wider range of issues, to the detriment of rivals and consumers, have rocked the industry and further damaged its image in the public. The most serious allegation is that the companies deliberately chose not to fit their diesel cars with the best exhaust-cleaning equipment but rather used smaller urea tanks that didn’t take up as much trunk space. That in turn left illegal software as the only way to appear to be meeting U.S. and EU standards.
The allegations (if proven) explode an already threadbare defense that Dieselgate was the plot of a few over-matched and under-ethicked engineers. They transform it into an industry-wide conspiracy against global competition and against the global public. The existence of the collusive working groups was common knowledge to other departments, such as sales and marketing. An internal Audi memo explicitly refers to board-level intervention in the diesel issue, according to Der Spiegel, which broke the story.
The air is thick with legal jeopardy from antitrust regulators, rivals, suppliers, customers and, not least, shareholders.
But beyond the financial liabilities, the damage to the industry’s reputation is immense. It promised clean cars and delivered dirty ones. It promised state-of-the-art and deliberately delivered something much worse.
It all adds up to a formidable headache for a government that has allowed itself to be captured by a sector accounting—directly and indirectly— for one in seven jobs in the country, that has lobbied aggressively on the industry’s behalf from California to Brussels and Beijing, and that now has to face the consequences for being its dupe.
It also adds up to an immense opportunity for Tesla, Toyota, Nissan, Volvo and every other company that is making more sincere steps to provide a cleaner mobility future.
News below.
Geoffrey Smith
@geoffreytsmith
geoffrey.smith@fortune.com
Top News
• If We Can’t Keep You Out, At Least Let Us In
The Trump administration is preparing its first major trade action against China, according to multiple reports. The planned measures focus on China’s intellectual property practices, which force companies to share their IP with a local partner in return for access to the Chinese market. It’s a shift in emphasis for the administration after an initial focus on Chinese imports into the U.S., where the desire to act was inhibited by the threat of reprisals by other trade partners. Reports of the new initiative come after President Trump reverted to his former criticisms of China over its failure to rein in North Korea, although there is no explicit causal link. Fortune
• Tablets, Macs Drive Apple Surge
Shares in Apple jumped 6.2% (around $50 billion) after hours as the company posted a 12% rise in net profit. The market hadn’t expected anything as strong at the end of the current iPhone cycle. The surprise came from strong sales of both iPads and Macs: tablet shipments rose for the first time in over three years, while Mac shipments bucked a 4% drop in the global market for PCs. In a conference call, CEO Tim Cook defended his decision to comply with repressive censorship laws to defend the company’s business in China, saying “we follow the law wherever we do business.” Fortune
• Lots of Discontent
The decline in U.S. auto sales gathered pace in July, as the traditional decline in incentives after the July 4 holiday accentuated an already weakening trend. GM’s sales fell by 15% on the year, Ford’s by 7.4% and Fiat Chrysler’s by 10%. All three scaled back their (low-margin) sales to car rental fleets, but defense of the margins is likely to come at the expense of volume. That in turn raises the risk of overcapacity and future job cuts. There was better news from the industry overnight—from Honda, which raised its forecasts for fiscal 2018 after a strong first quarter. Fortune
• Mondelez’ Rosenfeld to Step Down in November
Irene Rosenfeld is to step down as CEO of snacking giant Mondelez in November, to be succeeded by McCain Foods CEO and President Dirk Van de Put. He’ll inherit Rosenfeld’s demanding goal of generating half of group sales from healthy products by 2020. Still, as head of the world’s largest maker of French fries, he’s no stranger to the challenges of changing consumer tastes. Rosenfeld explained her decision to Fortune’s Beth Kowitt this week. You can read her story here. Fortune
Around the Water Cooler
• OCC Moves to Relax Volcker Rule
The Office of the Comptroller of the Currency will take its first steps today towards loosening the Volcker Rule, the post-crisis regulation that restricts banks from making bets on markets with their own money. How far the OCC’s initiative will get under a caretaker head (Keith Noreika) and without support from the other four agencies whose approval is needed for changes to the regulation is a moot point. However, it reaffirms the direction of travel to less onerous regulation, a shift that has driven the rally in financial stocks this year. The Dow Jones Financials sub-index hit its highest level since the collapse of Bear Stearns in early 2008. FT, metered access
• Shale Won't Drill Itself Into a New Hole
This seems to be where the recovery in the shale oil and gas sector tops out. Pioneer Natural Resources became the latest of the big players Tuesday to cut its capital spending, following similar moves by Anadarko, Whiting and Hess last week. Baker Hughes’ rig count, which rose by 310 in the year to June 30, has risen by only 10 since then. With hedge funds having reduced their short positions markedly in recent weeks, the market appears to be in a rare moment of both financial and fundamental equilibrium. History suggests that won’t last forever, but greater capital discipline by the shale sector and Saudi Arabia’s continued willingness to shoulder the burden of the OPEC output deal, certainly give it a chance of lasting longer than it otherwise would. Reuters
• Bitcoin Reaches a Fork in the Road and Takes It
Bitcoin split into two yesterday, after a civil war between users over how to meet the challenge of scaling. The new ‘Bitcoin Cash,’ designed by a minority of developers to facilitate faster and higher trading volumes, had a volatile first day, due largely to the fact that exchanges either couldn’t or didn’t want to quote prices for it. Most of the virtual currency’s value appears to have stayed with the original iteration, which lost only 4% against the dollar and is still within spitting distance of its all-time high. For now, it seems too early to say whether the first major virtual currency has solved what is an existential governance issue. Fortune
• Costco Mourns Jeff Brotman
Costco said its founder and co-chairman Jeff Brotman had died, aged 74. It’s been 34 years since Brotman and partner James Sinegal founded the chain on the principle of not marking up any goods by more than 14%, a recipe that still appears to be protecting it even against the incursions of Amazon. Its shares have bounced handily since the sector-wide shock of Amazon’s bid for Whole Foods, even if they are still down slightly since January. Neal Gabler profiled Costco, its culture, its strengths and its challenges for Fortune late last year. That story is still well worth a read, here. Fortune