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It's Going to Be a Long Road to Recovery for Volkswagen

Despite the resignation of embattled CEO Martin Winterkorn, auto industry experts say the company faces daunting prospects for winning back public trust and avoiding potentially enormous legal costs.
September 23, 2015, 3:44pm
Photo by Karl-Josef Hilendbrand/EPA

Despite the resignation of embattled Volkswagen CEO Martin Winterkorn on Wednesday, industry experts and former auto executives predict a long road to recovery for the German automaker.

"I would guess a good many heads are going to roll at VW," Marina Whitman, former vice president and chief economist for General Motors, said.

At 80 years old, she is no stranger to trouble in the auto industry. Last year, more than 20 years after her departure, GM was embroiled in a case of faulty ignition switches that killed at least 124 people. As damaging as that was, she believes that recovery for Volkswagen will prove more difficult.

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"The outcome in the GM case was worse, because lives were lost. But no one has ever shown that there was a deliberate attempt to cheat," she said. "In the VW case, it's so clear and it's so intentional and so sophisticated. There is simply no doubt that some very smart people set out to side step the law."

Related: Volkswagen CEO Resigns in the Wake of an Escalating Emissions Scandal

Volkswagen has admitted to using "defeat devices" since at least as early as 2009 in diesel engines that were able to detect when the vehicle was undergoing an official emissions test. The software was programmed to limit car emissions for the duration of the test, and upon conclusion the car would return to emitting nitrogen oxides, linked to asthma and respiratory illness, at levels up to 40 times the legal limit. In response, Volkswagen halted sales of its diesel cars in the United States and issued a recall of all affected vehicles.

The fact that such deliberate, systematic deception came from Volkswagen, a company that has enjoyed a positive and green public image, likely caught consumers by surprise, said Nejat Seyhun, professor of finance at the University of Michigan.

"It is as though they thought they would never get caught, so they cheated in an explicit manner," he said. "It is something you would expect for China, but it is very out of character for a German automaker. Now, people will ask, what else did they cheat on?"

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As its stock price and reputation suffers, the company faces mounting legal challenges. In addition to the DOJ criminal probe, a lawyer representing investors in Germany told Bloomberg that VW may have to pay damages to country's shareholders if the allegations prove to be true.

Whitman warned that managers involved in the emissions-evasion scheme could also be the targets of criminal cases.

The $7.3 billion that VW has put aside to pay for the anticipated legal fallout likely only reflects a portion of the total cost of litigation, according to Dan Bailey, a member of Bailey Cavalieri LLC who specializes in professional liability.

"The fact that you see a big reserve being posted by the company, arising out of disclosure event, may reflect their estimate of those non-insured, corporate expenses," he said.

Most public companies, he explained, have an insurance policy that would cover directors and officers in the case they are accused of wrongful doing. But those policies typically would not cover legal costs if the employees were found to have intentionally broken the law.

Related: Volkswagen Now Faces Possible Criminal Charges for Allegedly Cheating on Emissions Tests

Canadian firm Sutts, Strosberg LLP, based in Ontario, announced on Tuesday that they intend to file a class-action lawsuit seeking $1 billion in damages and an additional $100 million in punitive damages. The firm indicated that there were a handful of Volkswagen employees that were responsible for the cheating software, and invited any Canadian with a Volkswagen model made before September, 2015 to join the suit.

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The Canadian suit is just one among an avalanche of class-action suits that have been filed against the German automaker, including in Illinois, Ohio, Washington, Pennsylvania, and California.

"The half-a-million people who own these cars are furious, and with good reason," Steve Burman, managing partner at Seattle-based Hagens Berman, said in a statement. His firm estimates that consumers in the state paid anywhere from $1,000 to $7,000 more for vehicles with diesel engines, as opposed to the same models with standard gas engines.

But the biggest challenge that will face Volkswagen is neither legal nor financial, according to Martin Zimmerman, the former chief economist at Ford Motor Co. and a business professor at the University of Michigan. It will be rebuilding the integrity of its brand.

"Companies overcome this — GM had a particularly difficult problem with their ignition switches, and that's not even completely over," he said. "The key in this event will be the transparency with which VW approaches it, and how they assure the regulators and the public that this won't happen again."

And that consumer trust, he added, will have little to do with the fact that the cars may have been emitting nitrogen oxides at up to 40 times the legal limit.

"Emissions do not feature prominently when most consumers go into a dealership," Zimmerman said. "What consumers are concerned about is whether they can rely on VW's word, and that is what they will have to get at."

Follow Eva Hershaw on Twitter: @beets4eva