For new VW chief, trust must come before profits

As the new head of Volkswagen, Matthias Mueller will be overseeing the largest automaker in the world, a sprawling empire of brands and manufacturing facilities stretching from China to North America. But that empire is also facing the biggest crisis in its 78-year history, one that some observers have said could destroy it.

The veteran Volkswagen executive, who until Friday morning was in charge of its Porsche brand, will now run the entire company, replacing Martin Winterkorn as CEO in wake of the diesel emissions scandal.

Even as the automaker’s board met to approve the 62-year-old Mueller’s promotion, authorities said the company had rigged tests on 2.8 million diesel vehicles sold in Germany, roughly six times as many as have been impacted in the U.S.

RELATED: Volkswagen CEO Martin Winterkorn resigns amid scandal

“He’s walking into a firestorm,” said analyst Joe Phillippi, of AutoTrends Consulting. But Phillippi stressed that even if Mueller can come up with a “fix-it plan,” VW’s troubles are far from over, “and are going to take years to resolve.”

There’s no question that the German automaker—which operates a dozen brands, ranging from entry-level Seat and Skoda to high-line marques Audi, Bentley and Bugatti—has some desperate and immediate challenges.

VW officials this week acknowledged the company used special software code, dubbed a “defeat device,” to get its diesel models to recognize when they were undergoing emissions tests. Otherwise, the engine control system would be relaxed, allowing the vehicles to produce up to 40 times the legal limit in the U.S. of noxious emissions.

The carmaker has ordered a stop-sale for those vehicles in the U.S. while it works up a solution. It’s unclear if software updates alone can fix things. If not, VW might have to compensate owners for reduced performance and mileage, perhaps even buy back some vehicles.

Meanwhile, it is facing a potential $18 billion fine for violating the U.S. Clean Air Act, a criminal investigation by the Justice Department, and numerous class-action suits. Similar challenges could follow around the world.

The new CEO “has to put the emphasis on VW customers, whatever the cost,” said Mike Jackson, CEO of the largest U.S. auto retail chain, Florida-based AutoNation.

That would be just the first step in rebuilding trust in the brand. Phillippi said the test rigging only worsens one of Volkswagen’s longer-term challenges, noting that the automaker has been struggling for decades to catch up to the Asian marques that long ago pushed past VW as the dominant imports in the U.S.

RELATED: Volkswagen: 11 million vehicles could have suspect software in emissions scandal

Even as the overall market was recovering from the Great Recession, Volkswagen brand sales have steadily fallen over the last four years.

The situation is compounded by the fact that the overall automotive market in China, where VW is the dominant manufacturer, has been slowing rapidly in recent months.

As a result, VW could very well lose the king-of-the-hill status it obtained during the first half of this year, when it pushed past Toyota to become the world’s best-selling automaker.

Even as its status in the automotive hierarchy has grown, however, VW has struggled to turn record sales into record profits. While most of the world’s major makers reported gains during a generally strong second quarter, Volkswagen saw a 16 percent drop in its after-tax profit during the second quarter, to 2.73 billion euros.

That led former CEO Winterkorn to enact a number of cost-cutting steps over the past year. But one key measure meant to put the automaker on track hasn’t paid off as anticipated.

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Volkswagen reeling after worldwide deception

Under pressure from the EPA, Volkswagen has admitted that their clean diesel cars have been systematically, proactively engineered to deceive emissions testing, involving 11 million vehicles worldwide.
Like key competitors such as Toyota and General Motors, VW has developed a handful of so-called vehicle “architectures” that can be shared by a wide range of models and brands. But instead of yielding major savings from improved economies of scale, “they are far more expensive to produce,” noted Phillippi.

Another long-term challenge for Mueller will be to decide whether to continue VW’s strong dependence on diesels—which, of late, had accounted for a quarter of its sales in the U.S. and nearly half in Europe.

But the automaker was already putting more and more emphasis on battery technology to meet emissions and mileage targets. At the Frankfurt Motor Show, several executives said hybrids, plug-ins and pure electric models would likely begin to replace some high-mileage diesel options.

For the moment, Mueller will have to pick up where Winterkorn left off, by sounding a strong note of contrition. He will have to put profits aside to fix the more immediate challenge—regaining the trust of both the public and regulators around the world.

This article first appeared at CNBC.com

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For new VW chief, trust must come before profits