There is an expression that is often cited in business and military situations: “We are so, so screwed”
That expression likely describes current conversations among the halls and facilities of Volkswagen.
The U.S. Justice Department has begun a wide ranging investigation into alleged use of software installed in nearly a half-million diesel powered cars that make these vehicles appear to have cleaner air emissions than they actually do in operation. The auto producer has now acknowledged that the vehicle software installed in some U.S. diesel powered passenger cars make it appear that the vehicles conform to U.S. emissions standards.
According to various media reports, the German automaker could be subject to fines and penalties amount to $18 billion. That of course, does not include the costs involved in mitigating and correcting the problem of non-conforming vehicles currently being driven by U.S. consumers.’
The Wall Street Journal reports that Volkswagen stock has declined nearly 35 percent since Friday, when word began to spread that the U.S. Environmental Protection Agency (EPA) would accuse the company of cheating. The publication is further reporting this evening that CEO Martin Winterkorn is literally fighting for his job. Today, Volkswagen indicated that it would take a $7.2 billion charge to earnings and cut its full-year outlook, with an indication that as much as 11 million vehicles could be affected by this development.
While business media continues to dive into the implications and consequences to Volkswagen, this blog commentary briefly dwells on the implications from our product design and supply chain management lens.
First and foremost, Volkswagen has the risk of losing the trust and loyalty of its U.S. and global customers if this crisis is not proactively managed. Thus far, it seems that Volkswagen senior management has been candid and forthcoming in issuing a public apology for violating consumer trust. That cannot be said about other automakers recently involved in government investigations alleging wrongdoing.
Beyond words, the automaker has to now expediciously develop a set of action plans to address several supply chain challenges. One relates to a growing inventory of unsold diesel cars that now have their U.S. sales suspended. The auto maker has made great strides in overcoming prior U.S. consumer pre-conceived impressions that diesel powered cars were noisy and dirty. About a year ago, this author test drove a new diesel powered Passat and I was impressed. Now, all of that market education effort could be compromised if proactive management of this crisis does not occur.
Another challenge relates to all of the sold vehicles currently in-service, that are probably now deemed as violating air emissions standards. Both a mechanical and software fix, if one can be economically developed, must be engineered and expeditiously deployed.
In past cases involving vehicles that do not meet air emissions standards, U.S. regulators have either ordered them off the roads or imposed stiff daily fines. The clock is now ticking.
It is no secret that Volkswagen has struggled with its vehicle line-up for the U.S. market. As noted, the U.S. designed Passat is an impressive vehicle but has failed to capture wider interest among buyers. Competitive models are laden with more on-board electronics and entertainment features. The automaker has further lacked any competitive mid-sized SUV model which is essential for competing in the U.S. market. In 2014, the automaker committed to produce a competitive 7 passenger SUV model by 2016 along with a $600 million investment in a new vehicle design research center. The design included fuel-efficient diesel powered models.
The coming weeks and months promise to provide Volkswagen with a leadership and response crisis with significant product development, product and service focused supply chain implications. These are significant challenges requiring proactive actions.
Similar to past consumer trust incidents involving Toyota and sudden unintended acceleration, we all get to observe and learn how a global automotive leader responds to brand, product design and consequent supply chain response crisis.