VW scandal could keep it from reaching No. 1

VW runs afoul of EPA, shares hammered

This is not just another recall where an automaker will have to weather a few days of negative headlines before the matter fades from the public's attention.

Over the weekend, Volkswagen took the highly unusual step of suspending sales of certain 2015 clean diesel models, while it figures out how to fix cars with software designed to cheat clean air standards.

It is still unclear how long the stop sale order will last for a number of Passat, Jetta, Golf, Beetle and Audi A3 models—vehicles that collectively account for about a quarter of Volkswagen's U.S. sales, according to the company.

But this scandal goes beyond a temporary sales halt.

Bernstein analyst Max Warburton, who has covered Volkswagen for years, said the automaker's diesel deception is likely to damage its business beyond a major fine—it could also cause serious injury to its reputation.

"The best case for VW is probably still a multibillion-dollar fine (the potential [$18 billion] reported may prove excessive, but a large penalty looks likely), pariah status in the U.S. with government (and possibly consumers), damage to its leading position in diesel in the U.S. and a slower path to improvement in its far-from-perfect North American business," Warburton said.

A Volkswagen Passat is offered for sale at a dealership on Sept. 18, 2015, in Chicago. The Environmental Protection Agency has accused Volkswagen of installing software on nearly 500,000 diesel cars in the U.S. to evade federal emission regulations.
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According to the Environmental Protection Agency, VW had software built into 482,000 cars (model years 2009 to 2015) that could determine when the vehicles were going through clean air tests, and modify the emissions to meet federal and state levels.

The EPA said the software would trick engines into limiting emissions during testing; otherwise, the cars put out about 40 times more nitrogen oxide than legally allowed. Federal investigators said the automaker has admitted to the cars being rigged.

Over the weekend, Volkswagen CEO Martin Winterkorn apologized, saying, "I personally am deeply sorry that we have broken the trust of our customers and the public." The company also launched an external investigation into the matter.

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The scandal comes as VW fights to topple Toyota and become the top-selling automaker in the world, something analysts said could happen in 2015. Through the first half of the year, VW had sold 5.04 million vehicles worldwide compared to 5.02 million by Toyota. While the U.S. made up just a small percentage of those sales—roughly 3.5 percent—Volkswagen cannot afford a pullback in any market if it's going to catch Toyota.

Historically, consumers in America have shown a great willingness to forgive automakers after a high-profile recall or scandal. The ignition switch recalls did not hurt General Motors sales over the last year and a half, with the company posting its second straight year of record global sales in 2014. Toyota also recovered relatively quickly after the scandal involving unintended acceleration.

Volkswagen shares fell nearly 20 percent on Monday.

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