The European automotive industry has received a massive boost after lawmakers across the continent voted in favour of giving companies more leeway in reducing fuel emissions.
Under the latest proposals, the laboratory-run tests that controversially enabled Volkswagen (DE:VOW3) to cheat the system, and got Renault (FR:RNO) into hot water at the beginning of the year, will be replaced with more accurate on-road testing ones.
The final trigger for this change was the discovery that Renault's lab testing systems failed to reflect hot or very cold weather, a point discovered after French authorities raided the company's offices. Alarmingly, French energy minister Ségolène Royal admitted that several other unnamed firms had been guilty of committing similar errors.
Policymakers determined that lab tests also fail to capture the effects of fast and slow driving, slopes, hard accelerations, the use of air conditioning, plus brake and tyre wear. This realisation subsequently forced them to push through road-testing as part of a long-term bid to clean up the continent's polluted cities.
But there was a caveat. Calls for change were met with pleas from some quarters to bed in new legislation slowly, in a watered down version permitting manufacturers sufficient time to adapt. And it seems these requests have been heeded after the European parliament waved through weaker testing standards in a vote last week.
Because carmakers are important employers, several nations warned that immediately introducing severe new rules could cripple already fragile economies. Lawmakers responded to these concerns by introducing on-road emissions testing from 2017, while allowing auto companies to exceed limits for dangerous nitrogen oxides by 110 per cent until 2020.
After that date the threshold will be reduced to 50 per cent, representing a far more generous margin than the 20 per cent proposed by the commission. Officials claimed this leniency will provide car makers with adequate enough flexibility to factor in potential inaccuracies in the test process. Environmental campaigners hit back, alleging that the proposal was over generous and potentially illegal.
As the future regime will involve a combination of lab testing and portable emission monitoring, the most obvious beneficiary will be Japan's Horiba Ltd (JP:6856). The precision instruments manufacturer's exposure to this relatively new, legislation-backed technology shouldn't be sniffed at, particularly as there's currently limited competition in the space.
Plans to ease the transition ahead of a tougher testing regime represents good news for plenty of other companies responsible for providing car manufacturers with parts, including some listed in the UK. Most obvious are those supplying catalytic converters, devices that are mounted in the exhaust system to convert harmful fumes into non-toxic nitrogen gas. Johnson Matthey (JMAT), BASF (DE:BASX.N) and Umicore (BE:UMI) are leading makers of these stainless steel boxes.
But it doesn't stop there. This complex process also requires the expertise of companies capable of installing autocatalysts into exhaust systems such as Tenneco (US:TEN), Meritor (US:MTOR) and Faurecia (FR:EO).
It's equally worth bearing in mind the important role of fuel desulphurisation in this procedure. The removal of sulphur is key to catalytic converters functioning properly, meaning hydrogen suppliers Air Liquide (FR:AI), Linde (DE:LINX), Praxair (US:PX) and Air Products (US:APD) have a slice of this lucrative work. Given the high level of consolidation in the industry, these four names now account for roughly 80 per cent of industrial gases revenues.
There are also several companies that specialise in manufacturing materials with thermal resistance for the filters, including Corning (US:GLW), Ibiden (JP:4062), NGK (JP:5334) and, once again, Faurecia. And as modern emission control catalysts are coated with two to six grams of platinum metal, South African-listed Anglo American Platinum (ZA:AMS), Lonmin (LMI) and Russia's Norilsk Nickel (RU:GMKN) could also see their shares driven on.
