VW said today that embattled CEO Martin Winterkorn, shown here last week in Frankfurt, will resign. Source: Volkswagen Group.

Embattled Volkswagen Group (NASDAQOTH: VLKAY) CEO Martin Winterkorn resigned on Wednesday, the latest development in a scandal that has engulfed the giant German automaker.

"Volkswagen needs a fresh start," Winterkorn said in a statement. "I am clearing the way."

It's not a surprising development. VW's slumping growth had put Winterkorn under pressure even before the revelations that Volkswagen had used secret software to cheat on U.S. emissions tests. 

But the latest revelations, that millions of cars equipped with the software were sold all over the world, were clearly too much for Volkswagen's supervisory board.

A global scandal that will cost VW billions to resolve
Since last Friday, the world has learned that Volkswagen sold millions of cars -- about 11 million -- with diesel engines that didn't live up to the company's "clean diesel" claims. Worse, they didn't meet U.S. exhaust-emissions regulations, and they contained software that produced false results on emissions tests. 

In other words, it cheated.

VW executives admitted to U.S. regulators that 2009 and newer Volkswagen and Audi cars equipped with the popular 2.0 liter TDI diesel four-cylinder engine have software designed to cheat on emissions tests. When an emissions test is under way, the car's computers turn on the emissions-control equipment. But in ordinary driving, the equipment is made less effective, and the cars emit much dirtier exhaust.

VW sold 11 million vehicles with a 2.0 liter TDI diesel engine that didn't meet emissions standards. Source: Volkswagen Group.

Tests on the cars in regular driving have detected levels of nitrogen oxides up to 40 times the U.S. legal limit. U.S. law places tough limits on nitrogen oxides because they're very bad for the environment. They're the chief cause of smog and acid rain, and they are implicated in a number of respiratory illnesses. 

It's likely that Volkswagen engineers couldn't figure out how to make the diesel engines comply with environmental regulations while delivering the performance and fuel economy they wanted. So, a workaround was developed -- but that workaround is clearly illegal.

Under the Clean Air Act, an automaker that is found to be using a "defeat device" to evade emissions testing can be fined up to $37,500 per car. VW sold about 482,000 cars with the cheat software in the U.S., meaning that the EPA can -- theoretically, at least -- demand a fine of over $18 billion.

On Tuesday, VW admitted that all of the cars that have been sold with that engine since 2009, worldwide, contained the software. Now, investigations are under way in several countries, including Germany -- and criminal charges against Volkswagen or its employees are nearly certain to be filed in coming weeks.

VW's board will consider successors on Friday
VW didn't immediately name a successor to Winterkorn. The company's supervisory board (similar to a U.S. company's board of directors) will consider potential successors when it meets on Friday.

Among the likely candidates are Matthias Mueller, currently head of the Porsche brand, and Herbert Diess, a longtime BMW executive who joined the company to take charge of the Volkswagen brand in July.

Porsche chief Matthias Mueller is a leading candidate to replace Winterkorn. Source: Volkswagen Group.

Mueller is said to have the backing of the Porsche and Piech families, descendants of VW founder Ferdinand Porsche, who together control just over half of VW's stock. 

But whoever takes the top job will face massive challenges.

This is just the beginning of an extensive housecleaning at VW
The first priority for the new CEO will be to get to the bottom of the scheme to incorporate the software in millions of cars -- and to get all of those cars recalled and repaired.

The new chief will also have to confront the financial consequences, and they will be significant. VW said on Tuesday that it would set aside 6.5 billion euros, about $7.3 billion, to cover the costs of the recalls, the likely fines, and "other efforts to win back the trust of our customers." That's a huge sum for any automaker, but it may not be enough.

In the wake of Winterkorn's resignation, the board issued a statement saying that it will consider "further personnel consequences" over the next few days. Translation: This was just the beginning of what could be -- and probably should be -- a massive shake-up at Volkswagen.