The new Volkswagen CEO will have to deal with a nightmare situation

Volkswagen’s board meets on Friday to name a new CEO after Martin Winterkorn stepped down on Wednesday over an emissions-cheating scandal.

Porsche CEO Matthias Müller, 62, has been tipped to be
Winterkorn’s replacement and while nothing has been confirmed, it’s clear that whoever takes the job will have an
unenviable task.

The company has been in full-blown crisis mode since the US Environmental Protection Agency revealed that VW had used a prohibited device to cheat on emissions tests.

First, the new CEO will have to deal with a major fine that could total an eye-watering $US18 billion (£11.85 billion), based on the number of vehicles affected. Though it’s unlikely to reach that level, it will likely be in the billions and impose a significant financial cost on the business.

That’s part of the reason that VW’s shares collapsed earlier this week, falling by more than a third on Monday and Tuesday:

Fines are one problem — but those can be paid. The bigger issue will be repairing the automaker’s reputation, which was relatively solid before the emissions scandal.

HSBC analysts Horst Schneider and Mattias Schafer make this argument in a note today:

We think the emissions scandal will lead short-term to some loss of image. Hyundai and Toyota proved that even that can be managed, and that a company’s reputation might be restored after a few quarters, but we cannot be sure of this. VW’s mass market brands (Skoda, Seat, VW passenger cars) are cheaper than the other German premium brands, but more expensive than their French and Korean peers. Given the ongoing investigation, consumers could say, “Well, why should I still pay a premium for a VW?”

There’s a good example of that. Earlier this year, Volkswagen’s US site had a “clean diesel” feature, advertising the brand’s “new era of diesel.”

Now it’s been replaced by a 404 error page:

The Jalopnik blog says the company has gone further — all of VW’s clean diesel videos have been deleted from YouTube.

This sort of damage control might be done to prevent embarrassment, but trying to erase the evidence is bound to provoke even more of it.

The increasingly environmentally-friendly image that VW and other car brands have tried to create for themselves is undoubtedly going to be looked at with a lot more scepticism from now on.

The company is facing other challenges that were brewing even before this emissions scandal. On September 18, before the scandal was reported and before this week’s collapse in share prices, shares sat at €162.40, their lowest since a weeks-long period of weakness in autumn last year, and 36% down from their peak last year.

That’s even weaker when you consider the depreciation of the euro that’s occurred over the period. One euro was worth over $US1.25 all through October last year, while it’s now sitting at more like $US1.12.

Part of that is down to Volkswagen’s exposure to China. German car companies and other European brands with a reputation for quality have managed to offset the eurozone’s weakness in recent years by extending into China, where a growing middle class is hungry for their goods. 35% of Volkswagen’s unit sales are now in the country.

That was a good bet over recent years, and it’s likely that Chinese consumption growth will continue, but perhaps not as quickly as previously expected. Some economists, like Peking University professor Michael Pettis, think growth should be more like 3-4% in China even if the country’s rebalancing (away from heavy investment) is successful.

Additional regulation around the world is now likely to bear down on diesel producers in a potentially unbearable way, too.

Here’s what auto analysts from Bernstein had to say about it earlier this week:

Diesel has been under growing pressure in recent years, as regulators recognise that it is still not as clean as gasoline, despite meeting official tests. The EU’s promotion of diesel in the 1990s was surprising — and seemed to be driven by a focus on CO2 and global warming ahead of local air quality and, cynics have argued, a desire to promote the European auto industry (US and Japanese OEMs did not have similar diesel technology at the time). But EU regulators have begun to backtrack and express greater concern in recent years. Future emissions standards in Europe were already set to tighten the rules on NOx and particulate emissions and even though diesel could theoretically hit these standards, the costs of compliance (due to additional hardware and tech) was going to make diesel uncompetitive in small cars with low price points.

Finding growth markets and the impact of new regulation aren’t crises that are unique to Volkswagen, but the combination of fines, reputational damage, and those industry-wide headwinds are going to make Matthias Müller’s job unenviable over the next few years.

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