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Tesla approaches a moment of truth

The month of September will mark a turning point as to whether Tesla Motors will be just another overhyped technology stock or whether it is truly about to lead a revolution in the auto industry.

The month will mark the introduction of Tesla’s Model X, a $90,000 crossover SUV that will test the company’s ability to compete against the other automobile giants. If it passes this test, Tesla will be in a great position to mass-market the $35,000 Model 3 sedan when it goes on sale in late 2017. If the Model X turns out to be a dud, however, Tesla will face a much tougher climb in trying to break into the mainstream with the Model 3 two years from now. At stake will be Tesla’s market capitalization of $31 billion – higher than Chrysler’s – plus that $1 billion “gigafactory” the company is building in the Nevada desert to supply batteries for the anticipated sales of the mid-range Model 3. Plus the home -energy storage market.

The possible success of Models X and 3 is so unprecedented that it has caused economists to revise one of the most cherished theories of economic change, the idea of “disruptive technology.”

The idea of disruptive technology comes from the 1997 book by Harvard Business School economist Clayton Christensen and has made the phrase one of the most popular buzzwords in the field of economic progress. The title of Christensen’s book, “The Innovator’s Dilemma,” described how well-established companies often miss important transitions when newcomers break into the market with simplified products targeted at the bottom end. Christensen used the success of personal computers and steel mini-mills to illustrate how newcomers entered the field with cheaper and more convenient products targeted well below those segments claimed by leaders such as IBM or U.S. Steel. Eventually the upstarts toppled the giant.

There’s just one problem in positing Tesla as a disruptive technology: It has been overwhelmingly aimed at the richest auto customers, rather than the poorest. This prompted another Harvard B-School professor, Thomas Bartman, to write an article in the May issue of the Harvard Business Review arguing that Tesla is not disruptive but just another high-priced item aimed at biting off a luxury end of the market. Bartman argued that Tesla is too expensive to be disruptive, but that golf carts and those minimalist electric vehicles being produced in China were the true disrupters of automobile technology. They would catch on as courtesy vehicles for motoring around senior citizens’ centers and eventually upgrade to an urban vehicle convenient for making short shopping trips and finding a place to park.

This challenge has prompted other economists to revise the theory of disruptive technology and to create a new category into which Tesla easily fits. This is known as “high-end disruptors.” Jeff Dyer and Hal Gregersen make the elaborate case, in Forbes, that Tesla is only one of many new high-end disruptors whose chances for success are just as likely as those disruptors coming in from the low end of the market:

Unlike classic disruptive innovations such as steel mini-mills, personal computers and, in the car business, cheap Japanese imports, Tesla never pursued the classic route of going after low-end, price-sensitive customers first with cheaper, inferior technology. It doesn’t pursue nonconsumption, or customers who don’t currently drive cars. Tesla automobiles look and drive much like other cars, use established infrastructure like roads and confine much of their product innovation to only one aspect: the power system.

… Tesla has instead proved to be a different kind of disruptor, a high-end version that can be just as troublesome for the incumbents …

High-end disruptors produce innovations that are leapfrog in nature, making them difficult to imitate rapidly. They outperform existing products on critical attributes on their debut; they sell for a premium price rather than a discount; and they target incumbents’ most profitable customers, going after the most discriminating and least price-sensitive buyers before spreading to the mainstream. If you look within some large companies, you can flesh out previous examples: Apple’s iPod outplayed the Sony Walkman; Starbucks’ high-end coffee drinks and atmosphere drowned out local coffee shops; Dyson’s vacuum cleaners now have solid market share; Garmin’s GPS golf watches have taken much of the business from range finders. The incumbents didn’t react fast enough, and the high-end disruptors took over their market.

So it may be with Tesla. The company may not just disrupt the auto market but may force a revision of one of the most cherished new economic theories — that disruptions must always come from the bottom. Once again, Elon Musk may have outfoxed the experts. But it will all depend on how automobile consumers start responding to the new models targeting the mainstream.

By next month we should start to find out.

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What caused EV sales to go off a cliff in July?

So, is everybody out there waiting for the spiffy new editions of the Nissan Leaf and Chevy Volt? If EV-makers and proponents are waiting for those holdouts to show up, it could be a very long few months.

The website Inside EVs, which keeps track of monthly sales for all-electrics and plug-in hybrids in the U.S. and globally, has published its July numbers, and they’re abysmal: Only 7,102 were sold during the month, compared with 11,242 in July 2014. There are still six models for which numbers are not available — Ford’s Fusion Energi, C-Max Energi and Focus Electric; Porsche Cayenne S-E and Panamera S-E; and the Kia Soul EV — but even if  those cars come in at the same level as this June, the overall sales tally will still be well under last year’s pace.

For the first six months of 2015, a total of 61,449 EVs have been sold domestically, compared with 123,049 during the same period last year. Meantime, the rest of the world continues to outsell the U.S., thanks in part to generous subsidies in many European countries.

This marks the third straight month that U.S. EV sales have lagged the same month in 2014, and there’s a running debate about why. The dominant argument is that consumers are waiting to push their hard-earned money toward the next-generation Leaf and Volt, both of which are due out in 2017.

According to Inside EVs, the 2016 model year of the Leaf will have a 30 kilowatt-hour (kWh) battery, compared with the 24 kWh currently out there, giving the 2016 version an estimated range of 105-110 miles, up from the current 84. The range for the redesigned (and much more stylish) 2017 Leaf should be even better, and Nissan is testing battery technology it hopes will allow a future version of the Leaf to get 250 miles on a full charge.

Chevy Volt_20166The current iteration of the Volt can travel only 38 miles without recharging, but the 2016 model of the hybrid will be able to go 53 miles before the gasoline-engine kicks in, The Los Angeles Times reported Tuesday. On a full charge and full tank of gas, the range is 420 miles. Details about the redesigned 2017 Volt are sketchy.

The Times notes that the all-electric Tesla Model S has a range of 265 miles, but it costs $100,000. The cheaper EVs are, the generally shorter their battery ranges are. The 2016 Volt’s MSRP is $33,170 (without incentives), and the last iteration of the Leaf, the 2014, starts at $28,980.

Tesla’s upcoming Model 3, which is supposed to retail at $35,000 and is slated to be released in early 2016, is expected to have a battery range of about 200 miles. Tesla expects big things from its first “mainstream” EV. The Model S already is the hottest-selling EV in the nation so far this year, with 13,200 units sold, although only 1,600 were sold in July, compared with 2,800 in June and 2,400 in May.

The other splashy new release is the $30,000 Chevy Bolt, an all-electric that’s supposed to go on sale in 2017 and also has a range of about 200 miles.

So there’s a bounty of high-tech, much-improved EVs and hybrids hitting the market in the next year or so. But if sales remain flat even then, the depressive effect of low gasoline prices could emerge as the true motivator.

With the 2014 gas-price spike long in the distance (a gallon of regular was $2.64 Tuesday, compared with $3.50 a year ago), there’s little incentive for consumers to buy or lease a new electric car now, especially if they’re not sure they’ll have a battery strong enough to get them to work and back.

Sales of conventional vehicles are going in the opposite direction as EVs: The big automakers are on track for their first year of 17 million units sold since before the Great Recession. SUVs, crossovers and pickups led a strong sales month in July. “That segment of vehicles continues to be smoking hot,” Mark LaNeve, Ford’s vice president of sales and marketing, told the Detroit Free Press.

For perspective, more Chevy Silverados were sold in July (56,380) than the eight top-selling EVs combined that were sold from January through July (55,365).

If you’re shopping for a new or used car and want the benefits of cleaner-burning, cheaper, American-made fuels, consider buying a flex-fuel vehicle that can use E85. Check out E85Vehicles.com to see which models are FFVs.

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U.S. is trailing the rest of the world on EVs

As oil prices have tumbled, one thing has become clear: Electric vehicles are making much greater headway in the rest of the world than they are in the United States.

U.S. sales have remained flat over the past year after increasing steadily over the last decade. But sales have actually accelerated in some European countries, and several now have a larger percentage of their fleet in EVs than America does.

The website InsideEVs estimated that 160,670 EVs were sold around the world through the month of May, 34 percent ahead of last year during the same period. But U.S. global market share is declining: Domestic sales totaled 43,973 through May, a fraction ahead of last year’s pace. But when the June numbers came out, the U.S. had sold only 10,365, off 16.2 percent from the same month in 2014.

Norway is emerging as the world leader in making the transition from gasoline to electric vehicles. An incredible 33 percent of new-car registrations in the first quarter of 2015 were for EVs. Volkswagen’s e-Golf, the electric model, now sells 71 percent of its cars worldwide in Norway, giving it 40 percent of the Norwegian market. Tesla is not far behind with 16 percent of the market. Oddly, the Toyota Prius, the pioneer in the hybrid field, is seeing almost no sales now. People are beginning to opt for all-electric rather than the halfway point of gas-electric hybrids.

The Norwegian government has given EVs a raft of advantages over traditional gasoline-powered engines. Here’s a brief list:

• EVs get access to bus lanes
• The government has provided free charging stations
• EVs get free access to all toll roads
• EVs get free rides on ferries
• EVs get free parking in municipal parking spaces
• EVs carry a low annual road fee
• EV buyers pay no tax on purchase

Some of these advantages will eventually have to be cut back as the number of EVs on the road grows. But for now the incentives are huge and are not costing the government a great deal of money.

Other European countries have also been successful in promoting the purchase of electric vehicles. EVs now make up 5.7 percent of new car registrations in the Netherlands and 1.2 percent in the United Kingdom. The U.S. counts only 0.8 percent of new registrants as EVs, a figure that is matched by France. Germany and Japan counted only 0.6 percent of new registrations during the first quarter.

The reason EVs are doing so well in Europe is easy to identify: Europe imports nearly all its oil, and gasoline prices are much higher, mainly because of the imposition of heavy taxes. Gasoline sells for $8 a gallon in much of Europe, while prices are generally below $3 per gallon in this country. But air pollution is also playing a role. Pollution in some European cities has gotten as bad as it is in China and other parts of Asia. Paris shut down all auto traffic for three days last year when air pollution reached the same levels of Beijing and Shanghai. Sales of the Nissan Leaf – now the best-selling electric vehicle in the world – skyrocketed during this period. It’s expected that if emergencies like the one in Paris become commonplace, electric vehicles will be exempted from the ban.

Meanwhile, it appears that electric vehicles are finally taking off in China, which is now the world’s largest auto market. Back in the early 2000s, the Chinese government promised it would have 500,000 EVs on the road by 2011. Officials publicly announced they would be challenging the American industry by then. But as late as 2014, China was selling only 600 EVs a month, at the same time the U.S. was selling 6,000.
All that has reversed over the past year. In December, China sold 27,000 electric vehicles, almost 30 times the number as the previous January, and surpassed the U.S. in monthly sales for the first time. In 2015 China will probably become the world’s largest buyer of EVs.

All this has happened while Tesla was failing in its attempt to break into the Chinese market. The reason is plain: Tesla is marketing a luxury vehicle, something that few Chinese can afford. Meanwhile, the Chinese manufacturers, BYD, Kandi, Chery Zotye and BAIC, are selling no-frills vehicles that can only reach about 35 miles per hour. But such utilitarian vehicles are perfect for Chinese families to buzz around their cities for shopping and short commutes. There is even speculation that the Chinese manufacturers may start marketing their vehicles in the United States, where they would compete with entries such as the Chevy Volt and the Ford Focus. There is even talk that such vehicles may be able to feed off the rise of Uber for short-term ride-sharing in an urban setting.

Tesla’s moment of truth will come with the expected 2017 release of its Model 3, the $35,000 version of its EV, aimed at the average car-buyer. Then we will see if Tesla can really meet its deadlines, and if it can sell its highly stylized car on the mid-market. If it can, Tesla will probably have oodles of customers in both Europe and America, giving it a shot at the 500,000 sales Elon Musk has declared as his 2020 goal.

Tesla continues to walk the tightrope

One simple slide in a PowerPoint presentation by a Tesla official at an auto convention in Washington this month did almost as much damage as Elon Musk’s rocket blowing up soon after liftoff.

JB Straubel, chief technological officer and co-founder of Tesla Motors, put up a slide on June 15 indicating that Tesla’s Model 3 would not “begin production until 2018.” This apparent delay set the new vehicle back from the previously announced deadline of 2017 and almost knocked the company for a loop. The website Inside EVs broke the story, as it were, and word of the PPT slide was repeated in countless news stories. The interpretation was clear: Once again, Tesla had been forced to postpone key product rollout.

Within hours, Tesla had assured investors and analysts that it was not changing its schedule. The $35,000 Model 3 will be available in 2017, as previously planned. “Contrary to speculative blogger reports, we still plan to show Model 3 in 2016 and begin production in 2017,” Ricardo Reyes, vice president of communications, tweeted. The statement about production in 2018 was said to refer to “full production,” an attempt at back-filling that many analysts viewed with a grain of salt.

Whether the reference to 2018 was just a typographical error or an inadvertent peek under the kimono, the controversy showed how delicately balanced Tesla’s position is, both in terms of meeting customer expectations and in raising money to continue its projects.

Missing deadlines would certainly be nothing new for Tesla. In February 2012 the company said its crossover Model X would be available by the end of 2013. In February 2013, it said it would be late 2014. In November 2013 the company announced that a small number would be available by the end of 2014, but actual deliveries would not begin until the third quarter of 2015. Everyone is waiting to see if this deadline will be kept. Meanwhile, speculation has increased that any delay in the debut of the Model 3 may be due to the resources that have been spent trying to get the Model X out the door.

The Model 3 is Tesla’s bid for the big time. The car is projected to have a range of 500 miles and would be priced at the aforementioned $35K, less than half of the $79,570 MSRP of the 2015 Tesla Model S. The Model 3 is intended to be a mass-market sedan that’s well within the reach of the average car buyer. Musk, Tesla’s flamboyant co-founder and CEO, hopes to sell 500,000 versions of the Model 3 by 2020, a feat that could put Tesla on a firm financial footing.

But there are pending obstacles. One is the Chevrolet Bolt, a plug-in all-electric that is the successor to the Volt, a plug-in hybrid. GM demonstrated the Bolt in a sample model this month and will also be priced in the $35,000 range. GM promised to have the Bolt on the market by early 2017, which would beat Tesla’s Model 3 out of the gate.

Whether electric-car buyers will be attracted to the Bolt – or whether they will wait for what will almost certainly be a superior product from Tesla – is a hotly debated question. “GM is ramping up to make 20,000 Bolts. Tesla is ramping up to make 500,000,” said one commenter to a Wall Street Journal story. “When a company names its new car the ‘Bolt,’ Tesla has little to worry about,” said another. But other readers cited GM’s superior service network, and the company’s long history of making money, while Tesla has only lost money.

One thing is certain: Tesla is building brand loyalty. A survey of 145 Tesla owners by automotive analyst Dan Dolev of Jeffries found that 85 percent said their next car would also be a Tesla, and 25 percent wouldn’t even consider another brand. Eighty-three percent said they would recommend Tesla to their friends, and a remarkable 89 percent said they would still buy a Tesla without the $7,500 federal government tax break. The owners also turned out to be not nearly as rich as expected. Almost 70 percent had previously owned cars that cost less than $60,000, including ones as modest as a $15,000 Toyota Highlander. They paid an average premium of 80 percent over their previous car when they bought a Tesla. As a result of the survey, Jeffries raised its target price for Tesla stock to $350 from its current $265.

The battery-producing Gigafactory outside Reno is moving ahead on schedule, with the first phase of the structure near completion and machinery is about to be moved in. The current phase represents only 14 percent of the planned layout. Once completed, the Gigafactory will be the largest building in the world, with a footprint of 5.8 million square feet and two stories of manufacturing totaling 10 million square feet. Panasonic, Tesla’s battery partner, is expected to send hundreds of workers to the site this fall to prepare for full-scale production. The factory will also employ hundreds of local workers.

Wall Street Journal columnist Charley Grant threw a wrench into the works recently when he wrote that Tesla is still burning through cash and probably will run out of money if the Model X does not sell as expected. He says the company should sell another issue of stock while the price is still high. He suggested that a price of $200, 25 percent below the current market rate, could raise $750 million and carry the company over to the introduction of the Model 3.

Whether the company will dilute ownership or take a chance that Model X sales will reverse its cash flow is just one of the many decisions Musk will be facing in the near future. One thing is certain: He will be balancing atop that high wire for several years to come.

Is Elon Musk a welfare king?

Elon Musk is a darling of libertarians and free-market advocates because he is proposing to change the way Americans drive their cars through purely private effort. But he is now coming under fire for accepting gobs of government assistance in the process.

Critics charge that he has already accepted $4.9 billion in federal and state assistance and is angling for more. One article even asks if Musk has not become a “welfare king.”

Well, let’s take a look at the charges and see how they stack up:

The original article appeared in Mother Jones and was not entirely unfavorable. Staff reporter Josh Harkinson thinks the Tesla is a marvelous car and quotes all the accolades from Consumer Reports and Motor Trend. He even thinks Musk may be the next Steve Jobs and quotes New York Times blogger Jim Motavalli to that effect: “Individuals come along very rarely that are both as creative and driven as that. Musk is not going to settle for a product that is good enough for the marketplace. He wants something that is insanely great.”

What Harkinson objects to is simply that Musk hasn’t given the government enough credit for helping him on his way. He quotes Fred Turner, a Stanford professor and author of From Counterculture to Cyberculture, as saying: “It is not quite self-delusion, but there is a habit of thinking of oneself as a free-standing, independent agent, and of not acknowledging the subsidies that one received. And this goes on all the time in the Valley (i.e., Silicon Valley).”

It’s important to note that Harkinson is not just talking about Tesla. Musk’s other enterprise, SolarCity, which is installing rooftop panels on private homes, actually gets more federal and state subsidies than Tesla. And SpaceX, Musk’s venture into space travel, has a $4.2 billion contract with NASA to build a launching pad in Texas, which does not count as a subsidy but still comes from the government.

As far as Tesla is concerned, here’s what Harkinson counts as government assistance:

• Everyone who buys a Tesla gets a $7,500 tax credit from the federal government. Buyers in California get an additional $2,500 tax credit. Tesla buyers have an average income of $320,000. The federal tax credit will go to the first 200,000 customers. So far, Tesla has sold only one-quarter of that.

• The state of Nevada gave Tesla $1.2 billion in tax benefits to build its Gigafactory outside Reno. The offer came as Nevada was in competition with seven other states for the siting. The factory is expected to produce 6,000 jobs.

• Tesla’s principal source of income in recent years has come from selling Zero Emission Vehicles credits to other manufacturers in a program particular to the state of California. All auto manufacturers are required to produce ZEVs. When they can’t meet their quota, they can buy credits from other manufacturers. Tesla has pocketed $517 million in recent years. Harkinson counts this as a government subsidy, although Musk points out that the money comes from other car companies, not the government.

Musk has been quick to fire back: “If I cared about subsidies, I would have entered the oil and gas industry,” he told the media after The Los Angeles Times ran a story repeating the Mother Jones charges.

He points out that the$1.2 billion from Nevada will be spaced out over a period of two decades. It will also be contingent on the factory having an output of $5 billion every year for the 20-year period. He notes that hiring and other aspects of the Gigafactory will make it a profitable venture for the state of Nevada. And of course he notes that the fossil-fuel industry has received huge subsidies over the decades.

It really isn’t fair to say that Musk is “living off welfare.” His original entrepreneurial success, PayPal, rose to a valuation of $1.5 billion without the slightest assistance from the government. Tesla did receive a $465 million loan guarantee from the Department of Energy under the same program that funded the ill-fated Solyndra. But Musk made a grand gesture by paying back the loan ahead of time.

The fact is, it’s almost impossible to start a business these days without becoming involved at some level with the government. If Nevada hadn’t offered tax abatements, some other state would have – and did in fact. Many other factors were involved in the selection of Nevada, and states obviously benefit from such facilities.

Musk is a unique visionary whose reach extends far beyond making money. His ambition is to completely remake America’s automobile system and end the dominance of fossil fuels. He also wants to see America succeed at space travel. He plans to build a colony on Mars and has said he hopes to die on the Red Planet.

“Just not on impact, he added.

(Photo credit: J.D. Lasica, posted to Flickr)

4 Non Blondes, The King and I and alternative fuels

4-non-blondes-650-430“Twenty-five years [lots more years for me] and my life is still
Trying to get up that great big hill of hope
For a destination”

Combine the lyrics from 4 Non Blondes with the personal frustration suggested by the “it’s a puzzlement” comment from the King of Siam in “The King and I,” expressed when he was perplexed by a changing world, and you will understand why many are confused by three relatively recent actions that limit or impede the growth of alternative fuels.

Most advocates of consumer choice at the pump and the end of Big Oil’s near-monopoly concerning transportation fuel praised the president’s State of the Union address a couple of years ago. He proposed that the nation wean itself off of oil. Wow, some fuel choice advocates were thrilled, almost orgiastic. Just think, in a couple of years customers might search for fuel stations selling a range of lower-cost alternative fuels, instead of only gasoline. Environmentalists welcomed the president’s comments. Less pollution and fewer GHG emissions! Most economists were pleased. They saw more jobs and further GNP growth. Servicemen were happy. They would be asked to fight fewer wars for oil.

In this context, there was hope that the cheaper cost of oil, and its derivative, gasoline — both of which are now rising in cost — juxtaposed with the regulations resulting from the BP Deepwater Horizon oil spill, Shell’s failure to use its original drilling permit to drill successfully and the availability of less expensive competitive fuels, would end the prospect of drilling in the pristine Arctic Circle off of Alaska’s coast. It would be just too costly. Good news! We can dream, can’t we!?

Similarly, some of my colleagues and friends who support fuel choice and a better shake for consumers than gasoline (concerning costs and GHG emissions), were hoping that improved technology, lower prices, and inventions like Elon Musk’s just-announced solar storage unit, could soon generate an increased ability for solar energy to power many coal-fired utilities, homes and even vehicles. In the aggregate, the U.S. would produce significantly fewer emissions and pollutants. What a welcome, possible, short-term happening! Musk for president!

The increased popularity of battery electric vehicles (BEVs) from Tesla (among those who can afford them) and the emergence of cheaper battery-powered vehicles from Detroit have also lent hope to those who are fuel agnostic or favor a long-term, robust renewable fuel market and more consumer choices at the pump. While electric cars offer a vision of the future, their broad acceptance by the public depends on design and technology improvements to both end the fear of running out of battery power while on the road, and provide more internal space — both at costs most Americans can afford. Both problems seem to be on the way to resolution, based on the pronouncements from Tesla and Detroit. We can only hope!

But despite the optimism gene internal to most Americans, the great “big hill of hope” has recently become even bigger to climb. While alternative fuel advocates remain relatively quiet and often unable to speak with one effective voice, federal and state policies and regulations have been changed to limit the ability of alternative fuels to secure significant market penetration. Despite large subsidies to the oil industry, neither the administration nor Congress has been willing to seriously try to weaken the ability of Big Oil to restrict alternative fuel sales at local gas stations. Indeed, several attempts to enact open fuels legislation have failed to even get out of Congressional committees.

Although the country seems awash in oil, just this week, the president gave conditional approval to Shell to drill in the Chukchi Sea off of Alaska, despite the company’s mismanagement of earlier attempts to do the same, and despite the objections of many environmental groups and Alaskan natives. Both industry and critics of the permits note that drilling will be risky, given very high waves, icy seas, strong winds, bitter cold weather and the need to protect the routes of migration and feeding areas for marine mammals. As The New York Times indicated this week, the permit is a “major victory for the petroleum industry and a devastating blow to environmentalists,” and for consumers, I would add. Estimates of the oil in the Chukchi Sea range all over the place. However, if oil companies are able to overcome high drilling costs and secure a significant flow of oil, even for a relatively short time, they will increase their ability to limit sales of alternative fuels among their franchises and through differential pricing, the sales of alternative fuels by independent retailers.

It doesn’t get any better. Just as opportunities to secure and store solar power — power that could be used to power homes, autos and utilities — seem almost ready for prime time, many of America’s utility companies — another great supporter of competition (excuse the cynicism) — have begun to seek legislative relief to impede solar’s growth. Their argument deserves discussion. If solar power grows, it could well be at the expense of improvements in the grid. But the use of their political power with state legislatures to seek ad-hoc remedies, different in each state, is not in the public interest. Legislative efforts to lower the price solar users secure from utilities when they put excess power on the grid may or may not be good policy or practice. Shouldn’t we know before such policies are enacted by states? Similarly, putting up regulatory impediments impeding the sale of solar units, including storage units, would likely really hurt what is now a risky start-up industry. The net result of poorly conceived state-by-state initiatives to protect the utility industry would be to limit the capacity of solar energy to substitute for coal in powering utilities and to reduce options to produce cleaner electric cars with almost zero GHG emissions. Similarly, restricting the storage of solar energy would end up slowing down the development of another alternative fuel — one based on solar-derived power.

Finally, the continuing efforts by several states to change Tesla’s business model have and will reduce competition for fuels and the use of electricity as a fuel. Why? Several state legislatures, under political pressure from auto dealers, have banned its direct-sales approach. If Tesla wants to sell its electric-powered cars in Texas, for example, it must sell through an auto dealer. Remember, some Texans recently wanted to secede from the union in order to free the state from “federal dictatorship” and, ostensibly, extend personal freedom and its corollary market competition! (I thought of signing the petition that was floating around to let Texas go.) Passing laws to protect one kind of business from another is un-American…almost like sending the Texas National Guard to monitor the training of U.S. soldiers to be sure they are not digging tunnels under Walmart and engaging in other nefarious activities contrary to the interest of the good citizens of Texas. Davy Crockett would be offended. The bottom line is that Texas and other states with similar regulations are limiting fuel choice by placing a Berlin Wall around their boundaries and not letting Tesla and its electric vehicles in. Ah. Freedom!

So, supporters have some big hills to climb and sometimes it may be a puzzlement to the climbers. But, as the singer Billy Ocean once vocalized, “When the going gets tough, the tough get going.” Building a coalition among the willing supporters of alternative fuels should not be difficult. They share goals concerning the need for increased consumer choices and the value of open fuel markets. If they reach out to include, rather than define boundaries to exclude; if they acknowledge that absolute wisdom concerning strategies does not exist; if they are willing to work toward consensus and bring their respective constituencies along with them; and if they recognize that time is of the essence concerning achievement of key public interest and quality of American life objectives, following Robert Frost, they will travel the road less traveled, and will likely soon begin to see light at the end of their travails and travels.

 

Photo Credit: Getty Images

Is this golf cart more ‘disruptive’ than Teslas?

In the May issue of the Harvard Business Review, Clayton Christensen and Tom Bartman tackle the question, “Is the Tesla a truly disruptive innovation?” The answer they come up with is “no,” but they have some interesting things to say in the process.

Christensen is the author of The Innovator’s Dilemma, one of the most highly regarded business books in recent memory. It originated as an article in the HBR exactly twenty years ago, and was published as a book in 1997. Christensen pointed out that established companies were often beaten at their own game by cheaper imitations that performed the same service at a much better price. He cited steel mini-mills and personal computers as examples of innovations that created whole new markets and ended up displacing previous technologies. The “innovator’s dilemma” is that established companies cannot compete at first without undercutting their own products. By the time they make the shift, however, they might be left behind.

An investor challenged Christensen as to whether Tesla was truly disruptive. (“Game-changer” is another popular term for the electric-car company.) Christensen has been feeling defensive about his work recently after a critical 2014 article in The New Yorker, and so he decided to take up the challenge. He assigned the task to Bartman, one of his assistants.

Bartman posed five questions: 1) Does the product target overserved customers by offering lower service at a lower price? 2) Does it create “asymmetric motivation” in that existing competitors aren’t motivated to initiate change? 3) Can it improve performance fast enough to keep pace with customers’ expectations? 4) Does it create new value networks, including sale channels? And 5) Does it disrupt all incumbents, or can an existing player exploit the opportunity?

“As Bartman worked through the questions,” says the article on HBR’s website, “it became clear that Tesla is not a disrupter. It’s a classic ‘sustaining innovation’—a product that, according to Christensen’s definition, offers incrementally better performance at a higher price. There’s nothing rudimentary about Teslas, which compete on price against cars by BMW and Mercedes.”

Truly disruptive technologies, so Christensen’s theory goes, start from the bottom up. They offer a cheap substitute, then grab a market and gradually improve until they have become a full competitor to the existing players. At that point, it might be too late for established companies to adopt the innovations.

Tesla is doing the opposite: It is starting at the high end of the market, competing only with luxury cars, and working its way down. The Model X, a family SUV scheduled to sell for $60,000, is due out this year; and the Model 3, which has a target price of $35,000 is scheduled to be showcased next year for 2018 sale.

It makes a big difference. “If Tesla is following a disruptive innovation strategy, theory predicts that it will continue to see no strong competitive response,” Bartman told HBR. “However, because it’s a sustaining innovation, theory predicts that competitors will emerge. Our analysis concludes that a competitive response won’t happen until Tesla expands outside its current niche of people who prefer electric vehicles to gas-powered cars—but if it expands by creating more variety (such as SUVs) and more-affordable vehicles, competition will be fierce.”

This seems like a pretty good assessment. Right now, Tesla is welcoming competitors. Musk even invited Apple to join him in the automobile business last week. There have been persistent rumors of Apple and Tesla joining forces in automobile manufacture, although Apple seems content to stick with personal electronic devices. But if Tesla succeeds in selling a $35,000 electric vehicle, it is certain it will face competition from GM, Nissan, BMW Volkswagen and the entire established industry.

So is there a vehicle out there that would be truly disruptive to the auto industry? In fact, there is. Bateman and Christensen identify it as the “neighborhood electric vehicle” – the NEV – and say there are already signs of it bubbling up from the bottom.

“In 2011, Polaris, the Minnesota-based manufacturer of snowmobiles and all-terrain vehicles, bought Global Electric Motorcars, a small division of Chrysler that makes battery-powered neighborhood electric vehicles,” writes the HBR. “Although NEVs cannot exceed 35 miles per hour and lack many features of cars, they could eventually steal enough market share to disrupt the automobile industry.”

Polaris CEO Scott Wine told HBR that his company has tightened up the braking system and added heaters and stereos in an attempt to upgrade toward regular automobiles. But the modified golf carts remain extraordinarily cheap –$2,000 to $12,000 — and are now being used in retirement communities. Bateman also points out that 200,000 of these vehicles are being sold in China each year. “When we launch our new model, in the not-too-distant future, it will be an opportunity to do exactly what Clay Christensen’s work says,” Wine says. “It’s going to be a significant disruption.”

So will the modified electric golf cart turn out to be the truly disruptive innovation that upends the internal combustion engine? We’ll soon see.

(Photo credit: Polaris.com)

Can energy storage assure Tesla’s survival?

Elon Musk’s bet that he can sell 50,000 versions of the Model 3, the $35,000 version of the Tesla, due out in 2017, still seems like a long shot, given the somewhat limited market for electric cars.

But he might have one more card up his sleeve. The development of solar energy for home use offers an alternative market for his batteries that could be enough to save Tesla from a market collapse.

Musk is unveiling a new home storage unit that will allow homeowners to move their electrical consumption from expensive peak rates to the rock-bottom rates of overnight power. If nothing else, this will create a secondary market for the millions of lithium-ion batteries that Tesla will be cranking out from its $5 billion Gigafactory in Nevada, which is scheduled to be operational in 2017.

Early indications are that the demand for batteries to power the mid-priced roadster might be thinner than anticipated. Musk was counting on big demand from China, and already there are indications that it’s a much tougher market than he realized. As reported here last week, China already has 100 manufacturers turning out 400,000 undersized vehicles a year that can reach 48 miles an hour. They certainly wouldn’t sell in the United States, but for a million Chinese, it’s just what they need to putter around their small villages and cities. China also has 90 million electric scooters on the road and 120 million electric bicycles — an entire electric-vehicle market that doesn’t exist in this country. Making a dent in this market with a $35,000 scaled-down version of a luxury vehicle is not going to be easy, which is why Musk cut his China effort in half only a few weeks ago.

But there’s an out here in the burgeoning market for home electric storage that is taking shape in the United States, particularly in California. The Golden State has established a goal of getting 33 percent of its electricity from renewable resources by 2020, and 50 percent by 2030. Now powering with renewables isn’t just a matter of putting up solar collectors and windmills. You have to store that electricity for a time when it’s needed. Otherwise, most of it is wasted. And that’s where Musk’s plan to power electric vehicles with large complements of relatively small lithium-ion batteries enters in, because such a system also will be ideal for storing electricity in household-sized units.

Without any fanfare, Tesla already has installed such a system in more than 100 homes in California. It also has a deal with Walmart to install it on a commercial scale. “Tesla has been able to install more than 100 projects, really without anyone noticing,” Andrea James, a Dougherty & Co. analyst, told Bloomberg. She also estimated that the home-storage business could add $70 to Tesla’s stock, about one-third of its current value.

The effort already has paid off for Tesla in that it has collected $65 million in state incentives under the advanced storage technology portion of California’s Self-Generation Incentive Program (SGIP), which rewards users for coming up with ways of generating their own power. With household units running anywhere from $2,000 to $10,000, they’re going to need plenty of help from the government.

Tesla is not the only company working on battery storage. Bosch, General Electric and Samsung all have experimental systems going. There are also research projects being conducted at Harvard, MIT and other universities.

In Notrees, Texas, Duke Energy Renewables, with the help of the Department of Energy, has built a project that is using thousands of lead-acid batteries to store the electricity from a large wind farm. The lead-acid batteries are more expensive, however, and require frequent repair. Also, Duke has found that there is not as much of a market for their product as it had anticipated, mainly due to the costs. “There was little interest from customers willing to pay for that,” said Greg Wolf, president of Duke Energy Renewables, according to The New York Times. “That has not evolved as much as some folks, including ourselves, thought.”

But there are other opportunities that could enhance Tesla’s overall business model. One is that when lithium-ion batteries begin to lose their power so that they are no longer capable of driving a car, they still remain strong enough to power a home storage system. That could mean there will be a secondary market for Tesla’s car batteries.

Another dream that has always been in the back of people’s minds is that the electric vehicles themselves could serve as storage for utility power, drawing on cheap nighttime power and then reselling it to utilities during the day. This would involve an elaborate infrastructure, however, and this would mean the cars would not be available for a good part of the day if their stored power was being fed to the grid.

Altogether, however, the storage potential of the batteries means that Tesla will have an alternative means of income in addition to the electric cars. This means the company could diversify enough so that it will not depend entirely on the success of the Model 3. In the long run, this might mean that the company can survive long enough to make the electric vehicle a standard item for the American consumer.

Car buyers go shopping for better mileage

With the price of oil down from about $115 to $63 since last June, the impression has been created that the auto world is once again in the hands of the oil industry, and that the gasoline engine is here to stay.

But this week at the Bloomberg New Energy Finance Conference, there was the distinct impression that alternatives to the gasoline engine are moving up so fast that within another five years we may see big changes. Bloomberg Business wrote that the result is “Future transport is likely to look a lot different than what the major oil companies are fueling now. Instead of biofuels such as ethanol and green diesel making the internal-combustion engine fit into a world with greenhouse gas limits, wholesale new solutions are coming fast.”

“Where we are is in an age of plenty,” Michael Liebreich, BNEF’s founder, told Bloomberg. “We have cheap oil, cheap gas, cheap renewables. You do have an abundance of supply in a way you haven’t had for decades. We also are in an age of competition.”

The biggest piece of news is that gasoline consumption has leveled off over the last decade and now is lower than it was in 2006. This is a remarkable development that no one knows quite how to explain. Part of it may be the lingering recession. Fleet mileage improvement has definitely made a difference, improving from 24.5 in 2001 to 31.6 today, a dramatic surge of 29 percent in 13 years. The Age of the Hummer is over, and people are being more selective in shopping for better mileage, even as the vehicles improve.

But Bloomberg Energy sees alternatively fueled vehicles also making headway in a way that is just becoming visible. Electric car sales have quintupled over the last four years, although they did start at a very low base. But battery prices are coming down as rapidly as solar-panel prices, which means that they soon will be in a range where the average American can afford them. Tesla’s 2017 debut of the Model 3, priced in the $35,000 range, is going to be a real turning point, if everything goes right.

Also coming along rapidly is the hydrogen car, which the Japanese auto industry has chosen as its alternative to gasoline. Toyota and Honda are just beginning to market their models in Japan, and BNEF anticipates there will be 4,200 on the road in Japan by 2018. But California is another big potential market, and sales are scheduled to begin there sometime late this year. The California Legislature has responded by expanding the Hydrogen Highway initiated by former government Arnold Schwarzenegger, making it easier for drivers to refuel.

Of course, all these predictions are taking place on a world scale, and there the progress may be even more rapid than in the United States. One thing Tesla discovered in its relatively abortive attempt to crack the Chinese market is that China already has a thriving electric-car industry. The cars, moreover, are not scaled-down versions of powerful sports cars but slow-moving vehicles that have been designed from the ground up.

In an article in Forbes last week, Jack Perkowski outlined what he called “China’s other electric vehicle industry:”

While the global automotive giants struggle to find a winning formula for electric vehicles, approximately 100 manufacturers in China have already identified a large potential market undiscovered by the traditional players. The common problems faced by EV automakers — high cost, driving range, and the availability of charging stations — are not issues for these manufacturers because their target customers are satisfied with low-speed and limited range EVs, as long as they provide affordable transportation. In 2014, 400,000 so-called ‘low-speed’ EVs were sold in China, compared to only 84,000 conventional all electric and hybrid electric vehicles.

To get a glimpse of the size of China’s potential market, consider this: China is already the world’s largest vehicle market, accounting for 25 percent of all vehicles manufactured globally. Yet there is only 1 vehicle per 10 people in China, whereas in the United States there are 8 for every 10 – more than one vehicle for every person of driving age. China also has another huge market for other electric vehicles. It has sold 90 million motorcycles and 120 million electric bicycles.

Estimates are that China now has a million such low-speed EVs on the road now and might reach 3 million by 2020. These cars can do about 48 miles per hour and are used for short runs around town in smaller cities, so range is not a problem. They are doing wonders for air pollution. Manufacture only began in 2006, and already some provincial governments are starting to write requirements that they be preferred to the older gasoline types.
Surprisingly, the only government entity that has been slow to embrace the low-speed EVs is the national government in Beijing. The Central Government has not counted these EVs is their official automotive statistics and is only now starting to write regulations on how crash-worthy they must be and on what roads they will be allowed to travel.

Perkowski concludes: “Low-speed EVs may not fit the stereotype of today’s modern passenger car, but in China, where incomes remain low for a large part of the country’s population, affordability often trumps those values held dear in more developed countries.”

Could China’s low-speed EVs find a market in the United States? It’s certainly possible. In any case, the anti-gasoline revolution may be coming in ways we did not anticipate.

Alternative fuels and vehicles: Good news on all fronts

If we’re going to replace the gasoline in our tanks, we’re going to need help from all kinds of directions. None of the alternatives is likely to do the whole job by itself, but every little bit helps.

That’s why it’s so encouraging that there was good news on all fronts this week, and why each little success gets us closer to having legitimate alternatives to take the place of gasoline.

Here’s a sampling of some of the news:

Batteries. A team at Stanford University announced it had developed a high-performance battery out of aluminum. This is important because aluminum is much cheaper than lithium, the current favorite among battery-makers. Aluminum has been used to make batteries, but the problem has always been keeping the voltage high after repeated charging and recharging. Now the Stanford team believes is has found the answer.

“We have developed a rechargeable aluminum battery that may replace existing storage devices, such as alkaline batteries, which are bad for the environment, and lithium-ion batteries, which occasionally burst into flames,” said Hongjie Dai, professor of chemistry who headed the team. “People have tried different kinds of materials for the cathode. We accidentally discovered that a simple solution is to use graphite, which is basically carbon. In our study, we identified a few types of graphite material that give us very good performance.”

This raises the question of whether Elon Musk can substitute aluminum batteries in his Gigafactory, a work in progress that is set to build lithium batteries for the new Tesla.

Hydrogen. Hydrogen cars are clean, producing only warm water for exhaust. But the problem is getting the hydrogen. The only known methods to date have been electrolysis of water, which is expensive and energy intensive, and “reforming” natural gas, which produces carbon dioxide and makes hydrogen just another fossil fuel. But now a team of scientists at Virginia Tech has come up with a catalyst the can make hydrogen quickly and cheaply from biomass.

“Researchers from Virginia Tech have developed a way to drastically cut the time and money necessary to produce hydrogen fuel,” reports The Christian Science Monitor. “By using discarded corn cobs, stalks, and husks, they have improved on previous methods deemed too inefficient by energy experts. Their research, which was funded in part by Shell, was published today in Proceedings of the National Academy of Sciences.”

Using genetic algorithms, Percival Zhang and Joe Rollin developed an “enzymatic pathway” that speeds up the reduction of hydrogen from biomass. By including two simple plant sugars, glucose and xylose, they were able to increase the rate of hydrogen production while emitting an “extremely low amount” of carbon dioxide.

“Cost effective and productive in volume, this method could breathe new life into the hydrogen car,” says the CSM.

Biofuels. And speaking of enzymes, another team of researchers working for the Department of Energy has come up with a bacterium that efficiently breaks down biomass without pretreatment. The team has been using the system to extract ethanol from switchgrass, a fast-growing weed that has long been a favorite of biofuels enthusiasts. The strategy, called consolidated bioprocessing, uses the Caldicullulosiruptor beseii bacteria to split cellulose and then ferments it into ethanol. The strategy eliminates the very expensive pretreatment that requires heat and more enzymes. Several facilities are now trying to break down cellulose and convert it into ethanol, but this one-stop process would be a huge saving.

EVs. A study at the Stockholm Environment Institute says that electric vehicles may be coming into their own much faster than everyone thought. This is because the price of batteries is coming down faster than anticipated. EV batteries now cost approximately $300 per kilowatt-hour. They weren’t expected to fall much lower than that over the next five years. But the authors Bjorn Nykvist and Mans Nilsson say that recent developments have brought the price down as low as $150 per kilowatt-hour, which could make electric vehicles appealing for a much wider range of customers. Since the batteries normally make up at least half the price of the vehicle, it could reduce costs significantly. Or manufacturers might use the new low price to load up on batteries, increasing the range of the electric vehicle. Either way, the package becomes more attractive.

And that doesn’t even include the possibility that the aluminum battery developed at Stanford could be making batteries more efficient and lowering prices even further.

There’s a tremendous synergy going on in these fields, as researchers pursue numerous pathways in exploring alternative vehicles. One way or another, it means that alternatives to foreign oil are soon going to be making their way into the customer’s field of vision very soon.