The Volkswagen scandal is the beginning of the end for the internal combustion engine

There has been speculation that the ongoing Volkswagen emissions scandal could spell out the end of the diesel car. But Morgan Stanley thinks the consequences are far greater — that it could help kill off the internal combustion engine
altogether.

In a research note published Tuesday, the investment firm makes the case that the news “could raise the cost of doing business for all participants in the internal combustion engine business, accelerating a potential move to EVs [electric vehicles] that is just taking root.”

Earlier this month, VW was discovered to have cheated on its emissions tests — with real-world emissions as much as 50 times higher than legal limits. Its stock has subsequently plummeted and the CEO has been ousted, as the industry reels from a scandal that has been described as bigger than Enron.

Auto manufacturers across the board are going to be faced with rising costs due to greater regulatory scrutiny. In the last week, the market capitalisation of public auto companies dropped by $US200 billion globally, Morgan Stanley points out — the total market cap of Toyota.

Couple this with a growing trend towards electric vehicles, including Tesla, Google’s self-driving cars, and “Project Titan,” Apple’s rumoured electric car project, slated to launch commercially in 2019. Electric battery prices are dropping while emission standards are likely to become much more stringent.

Taken together, these factors “may help to call into question more than a century of [internal combustion engine powertrain dominance.”

Of course — this won’t be an overnight shift. Morgan Stanley makes clear that is is “not at all suggesting that internal combustion engine technology will disappear in 10 or 15 years.” However, “the initial change and steepness of the telemetry may take the market by surprise over the next 3 to 5 years.”

Change is coming — and thanks to VW, likely faster than you think.

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