How should Volkswagen deal with its diesel problems?

The hounds of hell are bearing down on Volkswagen in the wake of allegations of cheating on diesel emissions testing. In just a single day, Volkswagen's stock has dropped 23 percent and the German government has announced that it is going to investigate a far larger number of vehicles over emissions violations.

The American storm is quickly becoming a global one. Volkswagen sells over a million diesel vehicles a year and also has more than 13 percent of the automotive market overall – it was the number one automaker in the world up until the scandal. Yet in a matter of hours, Volkswagen has also become a pariah with potential fines and recalls that may be dwarfed by how the alleged lies and deceit change how governments and consumers view the company.

Consumers are really going to be the key to the company's survival.

It's those consumers who are really going to be the key to the company's survival. Every single one of them now finds themselves with a product that was sold illegally and may not be registered until recall work is done. What's worse is that Volkswagen doesn't yet have a solution for the emissions issue to offer these customers. It should also be noted that this is not the first time Volkswagen has found itself in violation of EPA emission regulations.

Volkswagen is in a world of trouble, so what now? As a car dealer and former financial analyst who took several companies public, I believe Volkswagen can and should consider three points of action that would make an enduring difference in the times to come.

1. Offer affected TDI owners a compelling reason to stay with the brand.

Recall work and a cup of coffee at the dealership are not going to be enough to placate current owners. Volkswagen should provide compensation for customers at the earliest opportunity and offer some type of inducement that keeps them within the fold.

This shouldn't be the industry's version of a Chuck E. Cheese coupon - a small discount on a new vehicle. Volkswagen needs to offer something along the lines of a strong warranty extension of the entire powertrain (not just the emissions system) or some type of valuable feature upgrade for these vehicles so that owners feel that they have been treated fairly. Perhaps a combination of a brand new navigation system, software upgrades for the infotainment components, or some type of basic free WiFi service would be a healthy act of generosity.

Volkswagen needs to offer its customers something that is rare, valuable, and difficult to imitate. The question is what that should be.

2. Support the dealerships by investing in personnel and equipment.

This sounds obvious, but every manufacturer struggles with training technicians on complicated recall-related issues and offering the communication needed to make that recall work successful.

This particular recall likely will not be limited to a software update and a few bolt-on components from the parts bin. It's new territory - in diesel emissions and the expected drop offs in performance and fuel economy.

Once Volkswagen figures out how to bring these vehicles into the realm of legality it will still have an incredibly long road ahead. If no fix exists for the non-compliant engines, the EPA may require that brand new engines be put into all these vehicles. If that happens, Volkswagen will have to broaden the recall work to certain independent shops, and that will be a far more complex enterprise to organize and manage.

3. Don't belabor the inevitable when it comes to management.

Martin Wintkerkorn, the current Chairman and CEO of Volkswagen AG, will likely be taking the fall for this, as will a lot of other senior executives within the company. Guilt or innocence will not be an issue.

The sad fact is that when you're in charge of a large automaker, people look squarely at you as the culprit. Volkswagen's management doesn't have the luxury of a recent financial debacle that helps put the blame squarely in the past, as was the case with GM and its ignition switch recall. The successes of its current leaders will make the recent behavior of the company that much more contemptible. The Volkswagen board will have to make several extraordinarily painful decisions within a matter of days, and a succession plan must give investors and other stakeholders the confidence they need to continue with the company. For his part, Winterkorn has already announced an external investigation into the matter.

Volkswagen is about to experience hundreds of challenges and perhaps a few opportunities in the near future. I have offered three recommendations on how to deal with the fallout. Do you have any ideas or insights? What would you consider to be a fair trade for all the hassle and lowering of value that's about to take place for Volkswagen owners?

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