A few of us at Seamless Product Development have been following the Volkswagen scandal for the past 6 weeks. Projections for Volkswagen’s total expected cost range from “tens of billions” to $86B USD, and most of this capital will go litigation, damages, and fines. For perspective, the entire Apollo space program, including 5 successful moon landings, cost $20.4B USD ($130B adjusted for inflation to 2015 dollars)! Naturally, as innovators, we started wondering if there is a better option here – what if some of these resources could be directed into innovative solutions rather than fines and legal fees. So we did some thinking, and then some number crunching, and came up with some options for Volkswagen that create win-win-win-win outcomes for customers, regulators, the environment, and for their company.

Here is how we approached it…

If we were Volkswagen, we’d be asking: “How can we innovate to win back the good graces of our customers, protect our owners’ interests by way of vehicle value retention, repent to the environmental agencies while actually doing something meaningful to fix the environmental concerns, and start to repair our reputation with the public?”

Here is what we came up with, cast as a hypothetical address from VW’s CEO Matthias Müller:

“We want our users to be happy, we want our vehicles to comply with the most stringent environmental standards, and we want to establish a legitimate commitment to delivering great products that make the world a better place.

So we will be offering impacted customers what we believe are three great options for VW to do right by them. We hope customers will choose the option best suited to their individual needs, and we hope they will consider this action our first step toward rebuilding trust and earning back their respect.”

Customer Option 1: VW Will Buy Back Your Car

“VW will buy back your car for cash on-the-spot. Price will be calculated based on the August 2015 Kelley Blue Book Value. We sold our customers a product that is different than what we advertised, and we believe every customer should have the option to recoup their investment, and, should they choose, to leave the Volkswagen family.

We think very few customers will choose this option once they hear about the remaining two options, but we recognize some customers may not be able to forgive us, and we will respect that.”

Customer Option 2: VW Will Upgrade Your Car to True Clean Diesel

“The second option we are offering customers is to upgrade their vehicles to a true Clean Diesel system – the same system we use on the VW Touareg and similar to the Mercedes-Benz BlueTEC technology. This system uses a compound called Urea to separate harmful nitrogen oxide (NOx) emissions into water (H20) and Nitrogen (N2). This upgrade will bring vehicle NOx emissions to US-EPA Teir2-Bin5 standards (0.05 g/mi NOx maximum), and will retain the same lively performance and fuel economy you are currently used to with your TDI vehicles. We didn’t do this in the first place because the Urea system needs to to be periodically refreshed, but with this upgrade we will also provide our customers a zero-cost 10 yr/100,000 miles Urea top-off service. We expect this upgrade to maintain the original resale value curve of your vehicle, in-fact, we’ll guarantee that. Actually, VW will be in the same boat as our customers, as we plan to perform this same upgrade to the vehicles we purchase from those who choose the buy-back option. We will then sell those upgraded vehicles on our dealer lots through our certified pre-owned program.“

Customer Option 3: VW Will Upgrade Your Car to High Performance All-Electric Drive

“We are extremely excited about this third option. Today we are announcing a joint initiative with Tesla Motors, that will provide our affected customers with the option to have their vehicles retrofitted with a Tesla-designed fully electric drivetrain. This option will not only upgrade your existing vehicle to zero-emissions, but also significantly increase vehicle performance and driving fun with zero to 60 times of just over 4 seconds. The vehicle will get two battery packs, one under the hood above the electric motor, and the other will replace the fuel tank for a combined capacity of 29 KWh, enabling a true range of 100 miles.  This option isn’t for every owner, but data shows that 80% of U.S drivers drive less than this distance on a daily basis. For owners that require more range, we think the Clean Diesel upgrade is a great option. Customers who select the EV option will get a charger for their homes, and we will begin installing EV drivetrains in Q3 of 2016. Until then, we have a software upgrade to bring their TDI engines into EPA compliance.”

One more thing (yeah, that’s an Apple thing, but what the hey!)… because we care about reducing the emissions of all our vehicles, we will be making the Tesla EV option available as a paid upgrade to customers of many other VW models over the next 12 months, however TDI affected customers will be given priority.”

Now, here is why this plan could actually work.

This may all sound like blue-sky thinking, and relationship-wise it may be ambitious (although Tesla did collaborate with Toyota on the 2nd generation RAV4 EVs). Technically, however, we believe these solutions are sound, and the Seamless Product Development engineering team did some calculations and research to check.

With respect to the buy back scenario of Option 1, the capital risk is likely no greater than what analysts are already predicting VW will be liable for if required to compensate customers for loss in resale value of their vehicles. In fact, in addition to getting back in good graces with customers, this could also be a fiscal net gain for VW. By installing the Urea system in option 2, VW may even be able to turn a profit when reselling the upgraded vehicles through their pre-owned program. We believe people will buy the upgraded cars as they will meet the original product promise, and have the certified pre-owned warranty. Remember, TDI owners did rave about their cars until a few weeks ago.

The second option, the Urea clean diesel upgrade, could work because it is a proven technology that VW has experience with. VW reportedly didn’t add the system in the first place because of the cost and the user experience impact of having another fluid to maintain. We’ve done the math, and best as we can estimate, the cost for components and labor would be between $2,300 to $3,500 to VW.  Given that this upgrade would help secure the individual vehicle resale price that VW will likely have to compensate owners for otherwise, this cost of the upgrade could replace the estimated $3000 per vehicle resale-value liability VW is facing. Across 11M vehicles, that is a potential savings of $7.7B USD for a solution that brings emissions into compliance without compromising vehicle performance or MPG.

The third option, the Tesla-designed EV retrofit, is a bit of a moonshot, but we know from Tesla’s Gigafactory project that Elon Musk is deeply committed ($5B USD committed, to be specific) to creating an increased economy of scale around batteries – their single most expensive component. We also know through Tesla’s Model 3 project that the company is aiming to reach more customers at a lower price point (the Model 3 is targeted to cost $35,000 and start production in 2017).

From Volkswagen’s perspective, they could certainly use the positive PR generated from such a partnership, and disenfranchised VW customers would not have to fully reconcile their unease with VW to be retained as users. This would give VW a chance to rebuild relationships with customers over the remaining life of their vehicles. During that time, the customers who selected this option will be falling back in love with their upgraded, much more sporty vehicles that still bear VW’s name.

Seamless’ engineering team has analyzed performance data from the 8 most popular EVs on the market (including the VW e-Golf), and we believe that the performance and range claims are very feasible. We also did some calculations around cost, and this is definitely the most expensive option for VW at approximately $15,300 per car for components and labor (assuming no recovered value for the replaced components). However, we think such a bold plan as to convert to emissions-free would give VW grounds to negotiate down the potential fines with the EPA and other regulatory bodies, which could be as much as $37,500 per vehicle. Assuming this upgrade would also negate the $3000 estimated resale-value liability, the bet is that VW could find the other $12,300 in down-negotiated regulatory fines. This path would be a win for regulatory bodies as well, especially if a combination of upgrading TDI vehicles and converting other VW vehicles to electric could actually create a net reduction in emissions within the lives of the upgraded vehicles (even starting with the deficit of 6 years of greater-than-reported diesel emissions).

Conclusion

In conclusion, if Volkswagen were to apply a strategy like this, they could redirect a massive amount of capital from fines and litigation outcomes, and apply those resources toward innovation and lasting solutions to real problems at hand. The key is to create technical solutions that directly address the same issues that the impending legal and punitive solutions are intended to address, hence supplanting them. If Volkswagen is successful, they will recompense the same constituent groups, while simultaneously regaining the goodwill of customers, and developing technology and partnerships valuable to the future of the company. They will also lower the environmental impact of their current installed base as well as future vehicles,while saving jobs in Germany and the US. They may even lower their total financial liability.

Michael Rosenblatt is managing director of Seamless Product Development, a Boulder, CO based innovation management consulting firm. He is an alumnus of the MIT Media Lab, and led the iPod/iPhone New Technology Team at Apple, Inc. from 2006 to 2008.

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