VW could lose big around the world

FRANKFURT -- Volkswagen AG has been rattled to the core by a scandal that threatens to batter the VW brand around the world, hand a golden opportunity to its main rivals in Europe -- Ford and Opel -- and all but destroy a long, hard and so far fruitless effort to become a major player in the U.S.

The crisis also has left VW's stakeholders consumed with soul-searching, questioning the company's uniquely insular culture and an atmosphere that bred unaccountability.

Volkswagen admitted last week that elements within the company systematically rigged diesel cars with software to pass U.S. emissions tests. The news wiped out at one point a third of the company's value and toppled CEO Martin Winterkorn 48 hours before his planned contract extension.

"In a worst-case scenario, Volkswagen could face close to $50 billion in damage" resulting from EPA fines and investor lawsuits, said Ferdinand Dudenhoeffer, director of the Center for Automotive Research at the University of Duisburg-Essen, a German think tank.

"In addition," he said, "the VW brand can forget about selling cars in the U.S. market for the next five years."

VW may be forced to accelerate a cost-cutting program to offset billions it expects to lose, supervisory board member Bernd Osterloh wrote in a letter to employees.

The scandal could cost the group its industry leadership in the global sales race after it took the top spot from Toyota in the first half of the year. Analysts are calling on the company to focus on its core business, scrap prestige projects such as the next Bugatti supercar and VW Phaeton sedan and even abandon the U.S.

"An Armageddon scenario -- purely for illustrative purposes -- where we knock out VW's U.S. business, would take more than 20 percent of earnings away," wrote Bernstein analyst Max Warburton in a note to investors.

Warburton recommends VW abandon all efforts to sell diesels in the U.S. -- a "heart-wrenching decision" since the whole U.S. strategy was founded on diesel.

Others are calling on the brand to bow out of the U.S. entirely.

"The crisis lays bare the need to rethink whether the company really has to own noncore businesses like Bugatti and [motorcycle brand] Ducati, and most importantly whether the VW brand would be better advised exiting the U.S. market where it's lost billions," said NordLB auto analyst Frank Schwope.

In Europe, where VW is the market leader and where diesels are much more popular, VW diesels are likely to see their resale values drop. Analysts say some owners could defect to Ford and Opel, which next month will launch its next-generation Astra.

In his letter to employees, Osterloh, VW's senior labor leader and a key boardroom director in charge of oversight, called on management to support a new climate in which subordinates no longer hide problems from their superiors out of fear.

"Volkswagen needs a fundamental change in its corporate culture and we will make that very clear in the supervisory board," he wrote, while warning of a fresh round of cost cuts to offset the financial damages.

That would come on top of the 5 billion euros ($5.6 billion) in savings the VW brand already targeted by the end of 2017.

"The test manipulation is a moral and political disaster for Volkswagen," said interim Chairman Berthold Huber. "The illegal behavior of powertrain developers and engineers has shocked Volkswagen as much as it did the public."

VW appointed Winterkorn ally Matthias Mueller, head of the highly profitable Porsche brand, the new CEO, calling him "exactly the right man at the right time to make a fresh start and to drive clarification of the current crisis."

So far, the company said it identified worldwide 11 million diesel vehicles the group sold that could be in breach of regulations and will book a $7.3 billion provision in the third quarter to cover the costs.

But in Germany, some analysts last week called this a disproportionately high cost when compared with scandals in which automakers actually concealed lethal safety flaws.

"GM killed [about 120] people with their faulty ignitions and got off with a fine of only $900 million. That's a completely different dimension" of corporate malfeasance, said one German auto industry consultant, who declined to be named. "Yes, VW deceived the public, but the higher NOx emissions just cause a dog to cough."

The known financial toll to General Motors for hiding a deadly safety defect exceeds $2.3 billion, including a $900 million settlement with the U.S. Justice Department.

Some European analysts expect VW to weather the storm.

UBS analyst Philippe Houchois said: "While Volkswagen will have to spend a lot of money and management capacity to fix their products and limit the damage, evidence from previous scandals does not suggest there is a risk of the group materially losing market share."

Indeed, by quickly accepting blame and sacking senior executives most linked to the scandal, the group has even earned kudos from some.

"Toyota was much slower to react to allegations of unintended-acceleration problems and tell people why things went wrong as well as what they were going to do to fix them," said Manfred Abraham of U.K. consultancy BrandCap. "Volkswagen has surprised positively with its crisis management.

"Speed is key," he said. "The quicker they clean house, the less costly this will be for them."

Henning Krogh of Automobilwoche contributed to this report.