Financial, reputation hits to Volkswagen hinge on top execs' culpability

“There’s still a bit more to discover before we’ll know” how the software cheating scandal plays out, one analyst said. (Photo by Alexander Koerner/Getty Images)

The stock is tanking, the CEO has resigned, and fines up to $18 billion could be slapped on Volkswagen for cheating on U.S. emissions tests of diesel-fueled cars. Add to that the possibility of criminal charges by the Department of Justice and class-action lawsuits from unhappy customers.

The troubles at Volkswagen are far from over. How devastating the financial blow and how quickly Europe's biggest automaker recovers may depend on whether top executives were responsible vs. a rogue engineer, some experts say.

Meanwhile, initial reaction from area Volkswagen diesel customers is split. Many say they love their cars, the fuel-efficiency and peppy pickup, and will keep driving them no matter what.

"When I look at the big picture of how much fuel I'm using in a diesel, it's so much less than the emissions that I'm putting out, and I'm all about sustainability," said Alice Dommert, 51, of Wynnewood, who owns a 2010 Golf diesel. "The safety, design, and how it runs is superior to any car that I've ever driven. I love driving this car."

Other loyal customers, such as Patrick Runyen, 32, of Bryn Mawr, feel misled and say that knowing what they know now, they would not have bought the car.

Runyen drives a 2012 Jetta diesel - his second VW diesel - because of its gas mileage and Volkswagen's advertising campaign of "clean" diesel technology. "I feel I bought it under false pretense," he said.

Runyen and other VW owners are concerned that any fix to meet Environmental Protection Agency standards will significantly affect gas mileage and car performance and hurt resale value. The EPA said almost half a million diesel Volkswagen vehicles in the United States emit nitrogen oxides at up to 40 times the U.S. standard.

A Kelley Blue Book analyst, corporate risk-management experts, and a Wharton professor say it is too early to predict the extent of the damage to the automaker's reputation and finances. "There's still a bit more to discover before we'll know for sure," said John Paul MacDuffie, a professor at the Wharton School of the University of Pennsylvania who focuses on the auto industry.

If regulators find other automakers "have done versions of the same thing" and the problem is broader, that could "change slightly how people view Volkswagen," MacDuffie said.

Volkswagen is a global company with strength in regions of the world "that are not likely to be affected by this news," MacDuffie said. Volkswagen has the No. 1 market share in China and large market shares in Latin America.

The emissions crisis hurts the carmaker's reputation where "the main marketing pitch has been about the superiority of clean diesel," including Germany, the United States, and Western Europe, he said.

Diesel cars account for a small percentage of U.S. car sales, just under 3 percent last year. Diesels are more popular in Europe, accounting for 40 percent of new-vehicle sales.

"My take is that Volkswagen will bounce back after appointing a new CEO, conducting an investigation, and being transparent about results," said Shannon Wilkinson, CEO of Reputation Communications, a New York City-based online reputation-management firm for Forbes and Fortune 500 companies.

"They've taken the first step," Wilkinson said. "They've admitted it and the CEO has resigned. That's the most important step that they could have taken. Now it's just a matter of the situation unfolding."

If the scheme was the action of some rogue employee who unilaterally tinkered with the software, Volkswagen stands a "good chance of not being severely crushed by fines and litigation," said Nir Kossovsky, CEO of Steel City Re, a Pittsburgh-based adviser on managing risks to brand reputation. But if the tampering was sanctioned at, or known to, high levels of management, the chances go way up for severe penalties by regulators and successful lawsuits, he said.

"Lawyers suing has nothing to do with customers," Kossovsky said. "There's money to be made by suing; that's one business. Then there's the 'I don't like this product. I'll never buy it again' issue. Some customers purchased with the expectation the vehicle was green. They will be disappointed. They may not return."

Local Volkswagen dealers say it's too early to know if their sales will decline. "People are certainly talking about it," said Mike Roy, sales manager at Chapman Volkswagen in Northeast Philadelphia. "As far as having impact, it's still pretty fresh. We haven't seen anything just yet. The majority of our sales are not diesel. We do a couple each month."

Meanwhile, Volkswagen's dealer advisory council for 652 U.S. dealers Thursday expressed "unconditional support" for Michael Horn, the CEO in North America, and said his removal would be "catastrophic."

The Pennsylvania Attorney General's Bureau of Consumer Protection said it would join 28 other state attorneys general in investigating reports about the diesel vehicles.

The scandal differs from other automaker recalls, such as General Motors' flawed ignition switches and Toyota's sudden-acceleration problems. The software tampering does not increase the risk of a fatal accident or serious injuries. But the cars do pollute the air, which affects everyone, experts say.

"Our experience at Kelley Blue Book is that consumers have pretty short memories," said Jack Nerad, executive editorial director and executive market analyst for Kelley Blue Book and "Some hold a grudge, but mostly they don't. And mostly they move on."

A bigger threat to the company's future will be if it has to clean out the research and development department "because all those folks were complicit in this ruse," he said.

"My basic take is unless Volkswagen totally messes up the cleanup and fix-up, it can move on," Nerad said. "Get the fix in place, bring the cars up to spec, and get it done. The quicker a car company can put this in its rearview mirror, the better off it is."