The ongoing brand crisis involving Volkswagen and specifically its customers and franchised dealers over the diesel engine emissions alteration admission scandal that occurred over a year ago continues as it ever so slowly moves toward action plans and financial compensation.

Earlier this month, VW agreed to pay as much as $1.2 billion to its over 600 U.S. based dealers to compensate for the costs of the emissions scandal. In mid-July, The Wall Street Journal reported that VW dealers across the U.S. were fuming regarding any receipt of specific guidance regarding the estimated 12,000 diesel powered autos that they are not allowed to sell. These unsold and currently prohibited stop-sale vehicles had been sitting in lots for months while VW and U.S. regulators traversed an elongated legal process for determining next steps. According to the July report, U.S. VW dealers had already been sitting on approximately 107 days of finished goods inventory of which 12 percent represent currently non-saleable models.

Not wanting unsellable inventory to be clearly visible, many dealers reverted to moving stop-sale inventory onto adjacent or off-site storage lots. While VW was compensating dealers for additional financing and needs for periodic servicing of this large amount of unsold inventory, dealers were not apparently making up the difference in new sales volume because of a lack of new saleable inventory. The long awaited family-sized sport-utility vehicle is not expected to be introduced in the U.S. until early 2017 while anew Alltrack small station wagon is due to be introduced in the next several months adding to dealer frustrations for more models to sell. Plans are very unclear as to whether the new family-sized SUV model will be offered with any diesel powered options as previously planned.

According to business media reports, the new settlement with U.S. dealers could result an average payout of nearly $1.8 million per dealer.  This is to compensate dealers for the financial hardships of lost sales, damaged reputations and declines in dealership value that has been precipitated by the emissions scandal.

VW had previously agreed to pay as much as $15 billion to owners of 2.0-liter diesel powered vehicles in a direct settlement with consumers. Attorneys representing this class of consumers indicate that upwards of 65 percent of U.S. based 2.0-liter diesel engine owners want to take advantage of their settlement. Owners have a choice of selling back their diesel powered vehicle or having it modified by a yet as to be determined emissions repair procedure. Regardless of either choice, affected vehicle owners are entitled to additional compensation that equates to 113 percent of the retail value of their vehicle before the scandal occurred in September 2015. Final approval for the consumer settlement is scheduled for court review next week.

Owners of the larger 3.0-liter vehicles that were impacted by the emissions alternation are still waiting terms of a settlement.

A detailed timeline regarding the proposed buyback and repair program across the U.S. is expected to extend through the end of 2018.  According to reports, a software fix would be made available for third-generation diesels by this month, followed by a combination hardware and software fix for first-generation diesels beginning in January 2017, and a software update for second-generation diesel powered vehicles in February 2017. VW further indicated that it expects to have a hardware fix ready for third-generation diesels by October 2017.

As noted in our previous blog commentaries, VW continues to experience painful lessons regarding its ongoing emissions scandal. A company noted for a somewhat tops-down management style and an engineering-driven culture and among one of the two top global producers will learn some tough lessons as a result of this scandal. Further, the industry as a whole can adsorb some key learning regarding balancing the pressures to introduce market-leading innovative products on a timely basis with organizational tendencies to cover-up potential hardware or software design flaws.

The most important when all the dust settles, will be more sensitivity to customer, market and dealer network needs along with implications of being afoul to governmental emission standards.

Over a year ago we noted that the forthcoming weeks and months promise to provide Volkswagen with a leadership and response crisis with significant product development, product and service focused supply chain implications. Such challenges will continue to unfold for years to come, and represent critical learning for multi-industry supply chain and product management teams.

Bob Ferrari

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