Guest Post: I’ll Have the Filet Mignon, Please

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    [Editor’s note: This guest post, originally published on the Triad Strategies blog, looks at the impact of VW’s $14 billion U.S. owner compensation agreement, and what it may mean to the company if similar amends are to be expected overseas where nearly 20x the number of vehicles have been affected. Although VW’s annual revenue is about $236b, we’re looking at the potential for a devastating $300b payout if the EU deal looks similar to the one here in the States.]

    A few months back, we posted a couple of items regarding Volkswagen’s diesel emission test cheating scandal. We opined that by blatantly violating the law, Corporate logosthe company’s brand had been severely tarnished, and the Road to Brand Redemption would be exceptionally long and hard.

    That ka-boom you may have heard a few days ago, even above the din of “The Brexit,” was another shoe falling on Volkswagen. U.S. government lawyers announced a proposed settlement with the company, totaling $14.7 billion for compensation to owners of the 475,000 emission cheating Volkswagens and Audis sold in this country, for buybacks of the vast majority of them and, essentially, in fines.

    The size of that settlement, still subject to federal court approval, would be second only to that reached last year with BP for the 2010 Gulf of Mexico oil spill, which began at $18.7 billion and grew with additional claims. Until now, the largest class-action settlements against automakers were the $2 billion agreement with GM over faulty ignition switches and $1.4 billion with Toyota over flawed accelerators.

    When last we examined the Volkswagen fiasco, we laid out the steps that the company had taken as it began its journey to redemption. To review, Volkswagen almost immediately admitted its transgressions, accepted responsibility, apologized, promised full cooperation with regulators and investigators, assured customers it would “make it right” with them, and replaced the company’s leadership.

    The company completed those steps in the first two weeks after the scandal broke. It has taken nine months to reach the next milestone, which we’ll call “facing the music.” So far, so good.

    But there are still a few worms under the rock. One is the question of how the affected customers will feel about the fairness of the settlement. Customers will receive cash compensation of $5,100 to $10,000 for the diminished value of their vehicles, plus buyback prices of between $12,500 and $44,000 based on the used car market prices before the scandal. For those who would rather keep their vehicles instead of selling them back, Volkswagen will repair the emission system, although the repairs will likely result in diminished performance and decreased fuel mileage.

    We suspect that most Volkswagen customers will find the settlement terms pretty attractive, but there will also be a hassle factor affecting their satisfaction with the process.

    Another worm under the rock is the possibility – let’s call it a probability – of criminal charges against the company and individuals who carried out the emission cheating scheme. Volkswagen faces a criminal inquiry by the Department of Justice and an investigation by attorneys general in 42 states, the District of Columbia and Puerto Rico, according to the New York Times. Whether accomplished via criminal trials or plea bargains, disposing of these matters will keep the company in a perpetual negative light for some time.

    The largest worm, however, is that the settlement covers only the 475,000 cars sold in the U.S., and more than 10.5 million diesel vehicles with the same emission test cheating software were sold in Europe. However, the company is not offering European owners any compensation, because limits on nitrogen oxide are less stringent, and it’s easier to simply fix the emission control systems. The squawking among car owners and political leaders already has begun.

    It’s hard to imagine Volkswagen or any company being able to withstand a financial hit some 20 times greater than $14.7 billion (it’s about 20 times the number of vehicles, so that should put us into the ballpark of the cost to give Europeans the same deal as U.S. car owners got). It’s equally hard to imagine that the Volkswagen brand can withstand the anger of 10.5 million Europeans who watch their U.S. brethren being treated to a steak dinner while they’re stuck with porridge and turnips.

    For Volkswagen, there’s still a very long way to go on the Road to Brand Redemption. We’ll be back when we reach the next waypoint.

    Rick Kelly is VP of Strategic Communications and directs Triad’s crisis management practice. For more information, click here.