The broadening of the criminal inquiry in Germany into the Volkswagen diesel emissions scandal to include Hans Dieter Pötsch, chairman of its supervisory board, shows how badly VW lost its way.

The scandal is still shaking the company: its use of software on up to 11m cars to help them pass emissions tests has carried a heavy price, making VW set aside EURO18.2bn. It has also disillusioned the industry, ending Europe’s hope of “clean diesel” becoming an enduring alternative to petrol.

The lasting significance of the VW scandal will be to bring forward a shift in engine technology and alter the balance of power among the world’s biggest vehicle markets: the US, Europe and Asia. The lesson for carmakers is: go electric and go to China.

Fuel-efficient diesel, with exhaust filters to limit emissions of nitrogen oxide particles, was supposed both to curb greenhouse gases and limit pollution. In practice, Europe tried to ignore an inconvenient truth about the latter: the UK government was last week instructed by a court to cut diesel fumes in cities faster than it had planned.

No one could fail to notice such fumes in China. About one-third of the pollution that clogs the skies in cities such as Beijing and Chongqing comes from internal combustion engines as their citizens turn to driving. By the mid 2020s, Chinese consumers could be buying 40m cars a year, twice the number likely to be bought by Americans.

It is a problem but also an opportunity. China is already doing what countries such as the UK are being forced to consider: it is banning heavily polluting cars from cities by auctioning the right to own vehicle number plates while allowing “new energy vehicles” such as electric cars and plug-in electric hybrids an open road.

As a result, although the global electric car market is still tiny, it is most advanced in China, where 330,000 new energy vehicles were sold last year. Many of them are bought by local governments and state-owned enterprises for use as delivery vans, or in local ride-sharing schemes, thus giving China’s green carmakers a kick start.

These vehicles are not Teslas: many are quite basic. But they are handing China first-mover advantage in the regulation, technology and manufacturing of electric cars. While Europe’s car-makers and suppliers that specialised in diesel must now rethink, Chinese companies such as BYD and Anhui Jianghuai (JAC) occupy a sweet spot.

Diesel was under threat before the VW scandal: the tightening of European emissions standards will make it much more expensive for carmakers to offer diesel cars, levelling the price gap with electric vehicles. AlixPartners, the consultancy, expects diesel cars to account for only 9 per cent of European sales by 2030, compared with 56 per cent five years ago.

The limited range of electric cars, and lack of convenient recharging stations, has until now put off most buyers. Plug-in hybrids, such as the Chevrolet Volt and BMW 330e, make up for that by having two engines — one combustion and one electric. But this requires a lot of costly components from sophisticated European and US suppliers, such as Robert Bosch and Delphi.

Pure electric vehicles are simpler and do not need the same array of components. Battery advances mean that they should be able to drive up to 600km on one charge by 2020, the range VW promises for its proposed ID car. They would then be more appealing.

This provides the opportunity for China to leapfrog US and western technology in the same way that some developing countries adopted mobile smartphones before fixed networks were built. The Chinese government knows it: the five-year plan unveiled in April heavily endorses green technology.

China has an industrial stake in electric vehicles. While international carmakers tend to buy batteries produced by Japanese and South Korean companies, Chinese companies use Chinese suppliers including BYD and Amperex Technology. China’s lack of top-tier suppliers for combustion engines components matters less in electric.

The VW scandal does not eliminate every advantage of European manufacturers and suppliers. A simple form of hybrid engine involving more powerful electronics is one alternative to diesel: UBS, the investment bank, estimates that 48-volt mild hybrid technology will be a EURO4bn market by 2020.

Nor will China’s carmakers have it all their own way at home. About 95 per cent of electric cars sold in China last year were made by Chinese companies, according to Automotive Foresight Shanghai, a consultancy. As carmakers such as VW and Nissan focus more heavily on China, that is bound to fall. VW is planning an electric vehicle joint venture with JAC.

But China has plenty of levers to pull. Just as Europe’s dominance in diesel emerged from tight regulation of carbon emissions, China can lead the global electric vehicle market through force majeure. Its city-based experiments with electric transport have been a mixed bag but it will keep trying.

The danger for VW and other Europeans is of becoming stuck in the past, over-invested in diesel when the future is electric. Mr Pötsch’s earlier behaviour is not really the difficulty.