Why Shares of Fiat Chrysler Automobiles Fell Over 10% Today

By John Rosevear Markets Fool.com

The EPA said the engine-control software for the 3.0 liter V6 diesel engine used in Ram pickups and Jeep Grand Cherokees violated the Clean Air Act. Image source: FiatChrysler Automobiles.

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What

Shares of Fiat Chrysler Automobiles (NYSE: FCAU) had a rough day at the office on Thursday after the U.S. Environmental Protection Agency said the Italian-American automaker had sold diesel engines with software that violated the Clean Air Act.

That was enough to send investors scrambling. FCA's shares closed in New York at $9.96, down 10.2% on the day.

So what

Unless you've lived under a rock (or ignored the auto industry) since September of 2015, you know that German auto giant Volkswagen AG (NASDAQOTH: VLKAY) got in epic trouble for deliberately programming millions of diesel-powered vehicles to cheat on emissions tests.

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The VWs (and some Audis and Porsches with similar software) were able to detect when a government emissions test was under way and temporarily clean up their acts to pass -- but they were much dirtier than the law allows in regular driving. That's bad enough, but VW executives tried to cover it up, which greatly compounded the company's woes.

The diesel mess has cost VW over $20 billion (and counting) in civil and criminal penalties and payments to owners and dealers. A similar expense would put FCA at significant risk of going bust. Fear of FCA ending up in VW-like trouble is almost certainly why the company's shares plunged on Thursday.

But I need to be very clear: This isn't that. At least, not yet.

At least right now, there's no suggestion that FCA did anything to deliberately evade emissions testing. There's certainly no suggestion (again, as of right now) that FCA has covered up anything. And FCA said it will contest the allegations.

What's going on is that the EPA and FCA (and the California Air Resources Board, or CARB) have apparently been bickering for several months over whether some of the software FCA uses to control its 3.0 liter V6 "EcoDiesel" engine violates technical provisions of the Clean Air Act. If it does, FCA will have committed civil (not criminal) violations, and it will probably be obliged to fix the software and pay a fine.

The engines were used in about 104,000 Ram 1500 pickups and Jeep Grand Cherokee SUVs. That's a lot of vehicles. But if the EPA requires a recall and repair, the "repair" is likely to be a software update. As recalls go, it won't be very expensive for FCA.

Now what

Generally speaking, when automakers and regulators bicker over the interpretation of regulations, the automakers tend to lose. That doesn't bode well for FCA's chances in this case. But as I said, unless there are dramatic developments in the case, the consequences for FCA are likely to be small potatoes compared to VW's woes.

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John Rosevear has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.