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As Diesel Scandal Winds Down, Volkswagen Aims to Change the Conversation

With the filing of a criminal guilty plea in U.S. District Court in Detroit on Friday, Volkswagen moves a big step closer to wrapping up one of the most serious challenges it has faced since federal regulators revealed it had rigged about 11 million diesel vehicles to illegally pass emissions tests.

There are still more challenges ahead — including a lawsuit by investors, criminal indictments in the U.S. against six employees, and an ongoing criminal probe in Germany. Nonetheless, after paying more than $20 billion in fines and settlements, the world's largest automaker is finally able to look ahead and plot out a strategy that will help rebuild its tarnished image, especially in the United States, where it has been struggling for years.

Volkswagen Emissions Settlement to Reach Nearly $15 Billion 2:10

"The guilty plea itself is a formality, but having worked out an agreement with the U.S. Justice Department does settle one element of the diesel scandal fallout," and starts positioning VW to move forward once more, said Stephanie Brinley, a senior analyst with IHS Automotive.

Ditching the Diesel

A key step, senior VW officials emphasized, during interviews at this week's Geneva Motor Show, will be moving away from the diesel engines that once dominated the company's product line-up, especially those sold by the flagship Volkswagen brand.

"We will do everything in our power to honor the confidence" of those who own or will buy VW products, Matthias Mueller, CEO of the Volkswagen Group, declared during a preview marking the opening of the Geneva show, a media event that, appropriately enough, was titled, "Volkswagen: Shaping the Future."

VW isn't abandoning diesels entirely, but plans to scale back on all forms of internal combustion, both gas and diesel. In Geneva, Mueller outlined plans to bring 30 battery-electric vehicles to market by 2025, many through the new Volkswagen I.D. sub-brand. A modern EV interpretation of the iconic VW Microbus made its debut at the North American International Auto Show in Detroit two months ago.

Related: Volkswagen to Launch More Electric Cars After Diesel Scandal

In Geneva, the star of the VW preview was a toaster-shaped, fully driverless car, dubbed Sedric. Designed to be used by ride-sharing services like Uber or Gett — in which VW is a major investor — Sedric would be summoned by a tap on a keyfob-like device, riders then able to not only speak their destination but tell the vehicle whether to take the shortest route or one more scenic.

VW's fully driverless car, dubbed Sedric, is designed to be used by ride-sharing services. Paul A. Eisenstein

"The first highly automated vehicles," predicted Mueller, will be on the road within a few years."

Volkswagen's image has long centered around technical prowess, something sullied by the diesel scandal. It was triggered when company engineers couldn't meet top management's goal of delivering engines that were not only fuel-efficient and quick, but which also could meet tough U.S. emissions standards.

Instead, they created a so-called "defeat device" smart enough to detect when a vehicle was undergoing emissions tests and then reduce the output of noxious gases like smog-causing oxides of nitrogen. In real-world conditions, however, those same engines could produce up to 40 times the legal limit.

Reputation Defender

The scandal has been a costly one. There was the criminal settlement, and a series of civil ones requiring VW to buy back nearly 500,000 vehicles sold in the U.S. using both 2.0 and 3.0-liter diesel engines. Costs already have topped $20 billion, forcing frantic corporate cost-cutting.

Yet, in some ways, it is the blow to German pride most readily apparent whenever talking to VW officials — who tend to rely on genteel euphemisms. "This disappointment," is how Hinrich Woebcken, the new head of Volkswagen Group's North American operations refers to the scandal.

Even so, "At heart I am an optimist," he said during an interview in Geneva, when asked if the carmaker can regain momentum in the U.S.

There was a time, back in the 1960s, when Volkswagen was the single-largest automotive importer, due to the cult following for the original Beetle. When that went away in the early 1970s, the brand lost its grip and only began regaining traction a decade ago — largely due to its array of supposedly clean, fun-to-drive diesels which, at peak, made up nearly a quarter of its U.S. volume.

Woebcken may have some reason to be optimistic. North American sales, having collapsed after the diesel scandal broke, have regained momentum, climbing 15 percent in January and February, even as the overall U.S. market began to slide.

"That was a pretty remarkable achievement," said Woebcken, considering VW is still barred by the EPA from selling its so-called "oil-burners" in the U.S. "That shows the brand is more than a diesel brand."

The Future Is Electric

The German maker is now confident it can come up with a fix for its diesels, especially the more upscale, 3.0-liter version also used by Audi and Porsche. But except for one possible Audi model, VW CEO Mueller has ruled that there will be no more diesels sold in North America.

Instead, "We intend to be the leader of electric mobility in the U.S.," said Woebcken.

From a technical standpoint, that could shine up the Volkswagen halo, but whether it will translate into any real volume is a question mark. All electrified vehicles — including hybrids, plug-in hybrids and pure battery-electric vehicles — accounted for barely 3 percent of the U.S. market in 2016. Many experts, including research firms Boston Consulting and IHS Automotive, anticipate significant growth by 2025, as that may be the only way to meet the stiff new 54.5 mpg Corporate Average Fuel Economy mandate.

Related: Feds May Soon Roll Back Fuel Economy Standards

But the Trump administration may not only roll back CAFE, but possibly even end the waiver that lets California set emissions standards tougher than the rest of the country. The state's latest target, which includes a minimum share of plug-based models, was expected to drive American demand.

In reality, what is more likely to rebuild Volkswagen's once-lofty position in the U.S. is a shift away from passenger cars to the SUVs that have become the fastest-growing market segment. Where light trucks — including pickups and vans, as well as SUVs — account for almost two-thirds of U.S. new vehicle sales, they make up only 12 percent of the Volkswagen model mix.

At the Los Angeles Auto Show last November, VW introduced the all-new Atlas ute, and in Geneva, Woebcken revealed the company will now offer two different versions — including an all-new long-wheelbase model — of its Tiguan model. Without a van or pickup in the line-up, the North American chief believes SUVs will soon account for 40 percent of U.S. sales.

As for those electric vehicles, whether or not VW can get Americans to plug in, they're likely to play a key role in other markets. That's especially the case in China, now VW's largest single market. Chinese regulators are steadily tightening regulations meant to shift buyers from gas to battery.

The same is the case in Europe, where even Germany, home of the Autobahn, is considering phasing out all internal combustion engine sales over the next several decades. And cities like Paris, Hamburg and London could move in that direction even sooner.

Staying Ahead of Toyota

"There are huge changes to come," said Frank Welch, global head of Passenger Car Development for the Volkswagen brand, during another interview, and the German automaker believes its fate depends on staying ahead of the competition.

Spearheading those changes will be critical for VW. The maker delivered 10.3 million vehicles in 2016, letting it nudge past arch-rival Toyota — traditionally billed as the industry's green tech leader — to capture the global sales crown for the first time.

The maker meanwhile delivered a 5.1 billion euro, or $5.4 billion profit, for 2016, a sharp turnaround from the 1.6 billion euro loss of the year before. That said, both numbers were distorted by the diesel scandal, and CEO Mueller cautioned in February that the impact will still be felt on the 2017 bottom line.

"Among the long-term effects for VW is the financial costs, which are not yet fully realized," said analyst Brinley.

But Brinley sees some good signs, particularly in the U.S., where rising sales suggest "consumers might be forgiving." Shifting the focus from diesels to SUVs and EVs, she said, "will benefit the company and help change the conversation."