Does the error exist because the altimeter and instrument manufacturers cannot handle large ISA DEV?
No. It exists because we define (indicated) altitude in terms of air pressure. The altimeter, if properly calibrated and using the correct datum is
indicating the correct altitude according to the definition.
The issue is that unless the atmosphere at that moment is identical to the ISA one, that
indicated altitude will be different from the
true altitude or
elevation. The magnitude and direction of that difference will depend on the constitution of the part of the atmosphere that’s below you.
To put it another way, an
indicated foot (or a metre) on a pressure altimeter does not automatically correspond 1:1 to an actual physical foot or metre, unless the atmospheric conditions are exactly the same as the model. This rarely (if ever) happens...