Supply Chain Matters provides a further reader update regarding the financial and other effects of the ongoing Volkswagen brand crisis concerning the diesel engine emissions alteration admission scandal that occurred over a year ago.

In late October, the global auto maker was granted final court approval to a $14.7 billion settlement with U.S. based consumers, dealers and government agencies specifically related to two-liter diesel engines that did not meet emissions standards. This week, in a U.S. Federal Court hearing, the global automaker agreed to pay an additional $1 billion to repurchase or fix upwards of 83,000 affected three-liter diesel powered vehicles.

The agreement calls for VW of offer a buyback program that covers 20,000 Audi, Porsche and VW branded vehicles while coming up with a plan to repair the remaining 63,000 vehicles to restore emission conformance. If VW cannot come up with a fix approved by U.S. regulators, the automaker would offer to buy back these vehicles as well. Further included in this added $1 billion settlement is a $225 million to be channeled toward environmental remediation efforts and $25 million to support the use of zero-emissions vehicles in California.

Everything told, the financial cost of ill-advised product design management decision is nearing $16 billion for the U.S. market. That does not count any other subsequent lawsuits that may come from U.S. vehicle owners who feel disgruntled by the existing settlements. Criminal investigations remain ongoing in both the U.S. and in Germany. There are additional logistics and handling costs that will stretch out over the coming months to manage the buyback and disposition of unsold and non-conforming vehicles.

As the New York Times reported in August, Volkswagen owners in the United States will receive an average $20,000 per car as compensation for the company’s diesel deception. VW owners in Europe, however, at most get a software update and a short length of plastic tubing to adjust emissions. That is because European laws shield corporations from class-action suits brought by unhappy consumers. A group of online legal start-ups has been working to change the status quo and has been supporting a campaign to recruit clients en masse and attempt to get around the usual restrictions for consumer lawsuits. If they are successful, the cost to Volkswagen will dwarf the company’s $16 billion settlement in the United States.

This whole affair raises an even more provocative learning regarding a product design management decision.  Consider what $16 billion in investment could have created in an alternative energy powered automobile, be that diesel, electric or hybrid in design.

Instead, difficult financial decisions are being made to offset these unplanned expenses, and thousands of VW focused employees may suffer the consequences in job losses. The damage to VW brand and perhaps customer loyalty, is even more troublesome. Now the global automaker must scramble to develop new models of more fuel-efficient vehicles to remain competitive in the industry.

As noted in our prior blog commentaries, a company noted for a somewhat tops-down management style, an engineering-driven culture and among one of the two top global producers continues to absorb some tough lessons because of this scandal. Further, the industry will adsorb some key learning regarding the need for 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. This is quite an expensive lesson.

Bob Ferrari

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