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Volkswagen Diesel Cheating Scandal Claims CEO Winterkorn

Guest Column

Volkswagen's scandal over cheating on U.S. emissions tests has expanded to 11 million cars worldwide, has cost the company $26 billion in shareholder value so far, and has already claimed CEO Martin Winterkorn, who announced his resignation on Wednesday.

The automaker's supervisory board is expected to name Porsche chief Matthias Mueller Volkswagen AG's new CEO by the time it meets Friday, according to a report in the newspaper, Tagesspiegel, citing interviews with board members. VW officials say the reports are premature.

VW's board is considering whether to go outside the company's ranks for Winterkorn's replacement as a way to signal a clean break from the executives and culture responsible for the scandal, industry sources say.

"VW is an overly complex company with a pending [in-flux] leadership and cultural issue," says Arndt Ellinghorst, an auto industry analyst with Evercore ISI. "Maybe VW is also 'too German' for a global consumer company."

Supervisory board action to find Winterkorn's replacement would be swift if completed Friday, and would come just months after he won an unlikely internal battle with former VW supervisory board chairman Ferdinand Piech — grandson of Ferdinand Porsche — who was forced from VW along with his wife. Piech wanted to replace Winterkorn with Mueller, but the board sided with the 68-year-old Winterkorn.

After the scandal broke, Winterkorn said he "is endlessly sorry," according to the German-born Volkswagen of America chief Michael Horn.

"Our company was dishonest," Horn added. "We totally screwed up."

Horn was speaking to reporters in New York City at the introduction of the 2016 Volkswagen Passat, which has received some upgrades and enhancements. It was blunt talk from a U.S. executive, considering how loath VW of America's senior staff has been to publicly criticize German management.

The enormity of the scandal and its potential financial fallout certainly drove the speed of Winterkorn's ouster. VW shares dropped 40 percent in two days this week after the scandal broke, and the automaker has so far set aside $7.3 billion to cover costs of recalls and fixes on millions of cars.

That may not be enough. Besides the EPA, which can impose fines of up to $18 billion for the 482,000 VW and Audi A3 2.0-liter diesels sold here since the 2009 model year, the Federal Trade Commission could fine the company for deceptive advertising. Other countries are pondering action, too.

At issue is software that made VW's turbocharged clean-diesel engines perform well enough to pass EPA emissions tests, as well as tests administered by other countries. When not undergoing testing, the software changed the engine performance, and by extension, the engines emitted some 40 times the particulates indicated in the EPA test.

To make matters worse, VW lied to the EPA for more than a year, insisting that the discrepancy between real-world emissions and the data provided to the regulatory agency was "a technical issue."

"This is a colossal nowhere-to-hide kind of scandal that will have lasting effects on how people view this company and the brand," says Dennis Keene, a Los Angeles-based marketing consultant who counsels companies on corporate image and marketing strategy. "People who buy Volkswagens are not like people who buy other brands—they are more highly educated and have a greater emotional connection to the brand historically."

Indeed, Volkswagen's TDI vehicles have an almost cult following and represent about a fifth of VW's U.S. sales. The company has driven the increasing popularity of diesel in the U.S., at least in non-luxury cars. When VW began building Passats in its Tennessee plant, it allocated nearly 50 percent of production to diesel models because of the popularity of the cars' high fuel economy. The EPA rated the Passat TDI at 42 mpg highway with the automatic and 44 mpg with the manual.

In 2009, the Jetta TDI won the Green Car of the Year award from Green Car Journal. The Audi A3 TDI won the award in 2010. The magazine has not indicated whether those awards will be revoked.
How was the deception uncovered? The International Council on Clean Transportation (ICCT) was studying European diesel cars and discovered the on-road emissions of some models were notably higher than those measured in lab testing. The group replicated its tests in the U.S., which has stricter emissions limits (Tier 2, Bin 5) than Euro 5 standards in force until this year.
How should VW deal with the crisis? The automaker can't take any shortcuts, says Eric Dezenhall, a crisis manager who has worked for numerous companies, including Bridgestone-Firestone during the Ford Explorer/Firestone tire debacle of 2000-2001.

"The truth is that crises like these are deeper than 'PR problems' and are actually resolved not through public statements and branding exercises as much as they are by operational considerations such as actually fixing the problem, purging bad actors and processes, ensuring that mechanisms are in place to prevent relapses of bad behavior, and offering incentives to loyal customers to stay with the brand. In other words, they aren't going to apologize and advertise their way out of this," Dezenhall says.

New leadership

Porsche's Mueller has led the brand since 2010 and is a favorite of former supervisory board chairman Ferdinand Piech. Mueller was promoted to Volkswagen's executive board on March 1 and previously led product strategy across all its brands, from Skoda to Bugatti.

While many may see Mueller as being far enough removed from the scandal to take the company forward, he will have to answer questions about whether he had any knowledge of the software manipulation. He will have to identify where in the chain of command decisions were made to deceive regulators and consumers.

This is not just a U.S. problem. VW will have to fix cars in Europe, South Korea, and elsewhere. The company is going to have to apologize in many languages.

As tough as the scandal is in the United States, it could become worse in Europe, where policies across the EU promote purchase of "clean" diesel at refueling stations.

Complicating matters for Volkswagen is that the company is historically not very good at managing its image through a crisis. The U.S. communications and public relations apparatus has had a lot of turnover in the last five years. The team largely serves at the pleasure of the German staff, which for a long time has poorly understood U.S. media. One former VW executive says it is not uncommon for communications leaders in Germany to tell U.S. PR employees: "Do not say anything about this publicly or you will lose your job."

Mueller is not viewed as a maverick leader, so it remains to be seen how much he can, or wants to, change the culture at Volkswagen that has led to such blatant disregard for government regulation and is now costing billions in lost shareholder value and potential fines.

Ellinghorst, the Evercore ISI analyst, is rooting for all-new management: "A new CEO, a new chairman, new CFO and VW brand CEO could all turn VW into an interesting turnaround candidate. …VW remains the global OEM with the most earnings upside if the company was managed properly."

AUTOMOBILE Magazine contributor David Kiley is author of "Getting The Bugs Out: The Rise, Fall and Comeback of Volkswagen in America. "