Diesel Deception Sets Up a New Challenge for VW's CEO

Volkswagen Admits Cheating U.S. Diesel Emissions Tests
  • Supervisory board meets Friday on CEO's contract extension
  • German carmaker admitted to cheating on U.S. emissions tests

Volkswagen AG Chief Executive Officer Martin Winterkorn, fresh from winning a power struggle with his former mentor and chairman, Ferdinand Piech, has been thrust into his next battle. Only this time he faces a far greater adversary: the U.S. consumer.

Two days after the company was faulted by U.S. authorities for outfitting nearly half a million diesel VW and Audi vehicles with software that turns on full pollution controls only during official tests, Winterkorn said he’s “deeply sorry” for the manipulation. The company will do “everything necessary in order to reverse the damage this has caused,” he said. “This matter has first priority for me, personally.”

The revelation of deliberate deception, carrying the risk of as much as $18 billion in fines and potential criminal charges for executives, hit just days before Volkswagen’s board meets to renew Winterkorn’s contract through 2018. As investigators seek to establish complicity within the company, the CEO will need to walk a fine line to shield himself and VW from a backlash in the U.S., a market where Volkswagen, despite being the world’s biggest carmaker, has struggled for decades.

“Winterkorn is responsible for development,” said Ferdinand Dudenhoeffer, director of the Center for Automotive Research at the University of Duisburg-Essen. “That means Winterkorn either knew about it, or he didn’t know what his department was doing. For every politician in the world that would be grounds for resignation.”

The VW brand’s struggle to compete with Ford, GM and Toyota was one issue former Chairman Piech cited in his failed attempt to oust Winterkorn earlier this year. Clean, powerful diesel vehicles were supposed to be VW’s ticket to growth, and the company has big plans for the U.S. It spent $1 billion on a factory in Tennessee in 2011, then said it would invest an additional $7 billion in North America by 2018.

‘Profoundly Serious’

Trying to pin the blame on rogue engineers probably won’t appease U.S. regulators, Max Warburton, an analyst at Sanford C. Bernstein Ltd., said in a note on Sunday. The best-case scenario is a multi-billion-dollar fine, damage to its diesel market share and “pariah status in the U.S. with government, and possibly consumers,” he said.

“There is no way to put an optimistic spin on this,” Warburton said. The issue is “profoundly serious.”

The board’s meeting Friday to discuss Winterkorn’s contract was scheduled earlier this month, before the U.S. diesel issue emerged. The 20-person group was also expected to consider Winterkorn’s restructuring plans, meant to loosen up the company’s centralized decision-making. With vehicle development channeled through Volkswagen’s headquarters in Wolfsburg, Germany, the CEO will still have to answer what he knew about the diesel deception and when.

Martin Winterkorn, chief executive officer of Volkswagen AG.
Martin Winterkorn, chief executive officer of Volkswagen AG.
Photographer: Simon Dawson/Bloomberg

The company said it’s cooperating with regulatory investigators and ordered an external investigation of its own. A Volkswagen spokesman declined to comment beyond Winterkorn’s statement.

The automaker has halted the sale of 2015 diesel models and certified pre-owned ones in the U.S., said Jeannine Ginivan, a spokeswoman for the company.

In the U.S., Volkswagen is working on a bigger SUV to appeal to consumers, which is supposed to roll out next year. The model is a key part of plans to almost double annual Audi and VW brand sales to 1 million vehicles by 2018, which would put it above such producers as Hyundai and Jeep.

Legal Risks

Now the company faces billions in fines. Volkswagen is accused of defrauding customers in a complaint by law firm Hagens Berman Sobol Shapiro LLP, which filed a suit seeking class-action status in San Francisco federal court.

It’s unclear “whether this is forgivable by American consumers,” said Eric Lyman, vice president of industry insights at TrueCar Inc., which provides vehicle-pricing data that consumers use when shopping for a car. “We’re sort of in uncharted waters in terms of a PR issue.”

What makes Volkswagen issues different from other recalls, which have had a limited impact on sales, is that the company appears to have sidestepped regulation on purpose, said Neil Steinkamp, a managing director at consulting firm Stout Risius Ross Inc.

“Who knew and when? How high in the organization does this go?” said Steinkamp, who studies warranty and recall issues. “There are a lot of chapters of the story left to be written.”

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