The introduction of the Chevy Volt and other electric vehicles will require a vast ecosystem of entrepreneurial businesses.
The introduction of the Chevy Volt and other electric vehicles will require a vast ecosystem of entrepreneurial businesses.
At ground level, electric cars like GM's Chevrolet Volt -- due to be launched in November 2010 -- are pretty much everything the U.S. economy is banking on. The cars promise innovative engineering and a resurgence of the American auto industry. They mean an America that is manufacturing things rather than just bundling financial instruments. Cosmically, electric cars mean green technologies that will migrate to China, India, and Brazil, where they will allow for Western styles of personal freedom yet not threaten to overheat the earth.
And you don't have to be George Clooney to want one. Electric cars may be vaguely cool, but GM executives are counting on drivers with nothing more than a householder's logic, something like the good sense to refinance a mortgage when the 30-year-fixed drops more than 2 percent. Jon Lauckner, GM's vice president of global product planning, tells me that his team set out to trump gas-powered cars as a matter of straightforward economics, especially as economic recovery pushes the price of gas back over $3 a gallon. "At that level," Lauckner says, "the cost of running a Volt in full electric mode will be about one-sixth that of a gas-driven car of the same size, 2 or 3 cents a mile rather than 12 to 15 cents a mile. We figured that, for most people, this means a savings of about $1,500 a year." Sticker prices will be high; the suggested price of the Volt will be about $40,000. But federal tax rebates are anticipated to be as much as $7,500, not to mention various state incentives. So the actual price will probably be closer to $30,000 -- not a bad deal, given that borrowing costs will be low for some time.
When he speaks of "full electric mode," Lauckner is acknowledging another barrier he expects the Volt to take down, namely range anxiety, the fear of getting stuck with rundown batteries while driving in a snowstorm, bumper to bumper, on a 150-mile trip to the in-laws'. The Volt will come equipped with a small gas engine, unlike its forthcoming competitors: the smaller Nissan Leaf, BMW's plug-in Mini Cooper E, and Ford's electric Focus. This engine will not drive the wheels, as with the hybrids now on the market (actually, GM likes to call the Volt an "extended range electric car," not a hybrid), but will act as a dynamo to supply the electricity for the car after 40 miles of running on stored power. The Volt's designers assumed, per Department of Transportation data, that nearly 80 percent of Americans drive 20 miles or less to work. This is why GM was able to make the technically true but sly announcement that the Volt earned a 230-mpg rating for city driving from the EPA. "Most drivers will hardly ever use this engine," says Tony Posawatz, the Volt's line director. "We may have to educate people to change their oil because it hasn't been used for a year! Anyway, when the range-extending engine kicks in, drivers can go up to 300 miles, like a conventional car. In a pinch, they can make use of the existing gas-station infrastructure."
And so, assuming these cars prove safe and reliable, American consumers will almost certainly consume them. U.S. auto companies will make them, and that's good for the planet, right? Yes, but.
The first obvious question to ask -- and because we all now own a piece of GM, we may be forgiven for asking it -- is whether the American car industry will really be able to compete in the manufacture of electric cars. Or any steel bending, for that matter. After all, the industry became uncompetitive at making conventional cars. GM lost $82 billion during the past four years. Emergent Chinese auto companies intend to be producing 500,000 hybrid or all-electric cars and buses by the end of 2011, by which time Japan and South Korea together will be producing about 1.1 million. America will be making a quarter of that number. In the past 30 years, GM's domestic market share has dropped from around 50 percent to less than 20 percent. What has changed to make us optimistic about American car companies?
Another thing: Are these cars really green? Let's assume that, 10 years from now, 250,000 electric cars will glide home every evening in, say, the Raleigh-Durham Triangle, and plug in. If Duke Energy did nothing from now till then to prepare, brownouts would be unavoidable, especially in the summer, when the air conditioners would be working hard. If Duke met the challenge in purely conventional ways, by burning more coal and gas, it would just be shifting the carbon footprint of drivers from vehicles to other, more concentrated generators. One recent analysis, by the Oak Ridge National Laboratory, assumed a scenario in which 25 percent of householders drove electric cars and plugged in at 5 p.m. Up to 160 large power plants would be needed nationwide to supply the added electricity. Ed Kjaer, director of the electric transportation advancement program at Southern California Edison, warns that electric vehicles, each equal in demand to about a third of a house, would particularly tax distribution transformers at the local level. (Each transformer handles the load for about 10 average-size homes.) "The worst imaginable situation you could have is your neighbor yelling at you because you blacked out the neighborhood," Kjaer told Scientific American.
Big power companies like Duke Energy and Southern California Edison are hardly complacent in the face of this danger. But Mike Rowand, Duke Energy's director of advanced customer technology, admits his company's answer is a work in progress. If every American home had a Volt, he says, total power usage in the country would increase only about 10 percent. But what's crucial is load distribution: where and in what order the cars' battery packs are recharged -- and from just where the power is taken. The maximum environmental benefits of these cars are realized only when they are charged with power taken during off-peak hours and from renewable sources -- for example, in the wee hours of the morning from hydroelectric plants in Quebec or the Tennessee Valley.
Cars can be made smart enough for this. Even first-generation electric vehicles will have the capacity to tell the grid to fill their batteries immediately or, say, after midnight; eventually, they will be able to sync to your schedule -- stay at home tonight, PTA meeting tomorrow. The question is, Can the power grid become smart enough in turn to syndicate demand from millions of electric cars and then transmit power back down to individual vehicles from available renewable sources? America has more than 3,200 electric utilities, relatively few of them with the resources of Duke.
Actually, here is where the dots connect and the news turns good. For the technical challenge of greening electric cars means entering a commercial landscape that mirrors the transformative industries of the 1980s and '90s: computers and software, switching and networking, consumer electronics converging with cellular technology. This landscape is full of start-ups and medium-size supplier businesses that play to American strengths: entrepreneurship, originality, comfort with the virtual. We ought to stop thinking about the auto industry as a handful of great manufacturing companies superintending large, dependent suppliers -- or, for that matter, cars as standalone objects. Rather, the electric car will be a kind of ultimate mobile device, produced in expanding networks for expanding networks; a piece of hardware manufactured by a burgeoning supplier grid and nested in an information grid interlacing the electrical grid. Building out these three networks will be more profitable, and a greater engine of economic growth, than building the cars themselves.
There's a lesson here for government, whose pedestrian duty, as Adam Smith wrote, is to "facilitate commerce in general." To facilitate the auto industry in particular, the federal government will need to anticipate a new division of labor among car companies, electric utilities, and, crucially, the layer of new companies that will tie the former two together. Smartening the grid will mean, collaterally, transforming energy infrastructure in virtually every neighborhood; as President Obama never tires of reminding us, green energy means businesses creating jobs here, not sending them overseas. So governments at all levels must get over what once seemed a clear distinction between manufacturing and information services, or automotive jobs and construction jobs. They must seek to expand employment less by helping original-equipment manufacturers, or OEMs, to grow and more by encouraging small software and components suppliers to launch.
Posawatz, who himself runs a kind of start-up within GM, puts the matter eagerly, if a little cryptically: "Our urgent challenge is to become the leading integrator of the sustainable transportation-energy ecosystem -- to control the intellectual property governing the integration of the battery to the car and the car to the grid." Translation: if GM plays its cards right, it could well incubate, and own, the new industry's crucial operating and telecommunications standards, the anchors for thousands of smaller technology companies supporting the electric car's components, information, and entertainment and charging needs. For his part, Duke's Rowand is sure that 10 years from now the dominant players in this new automotive ecosystem will be companies we have not yet heard of.
Let's start with the battery and work our way up to the grid. Battery development has often, and incorrectly, been lamented as an area ceded to Asian firms, a misconception that was strengthened when GM announced that it is initially leaving manufacture of the Volt's lithium-ion battery cells to LG Chem. It is true that LG Chem will be producing cells at its huge home facility in South Korea. But labor is such a trivial cost in making them that LG Chem's American subsidiary, Compact Power, is investing $300 million (including $151 million from the Department of Energy's stimulus funds) to set up a supplementary plant in Michigan. The Department of Energy has meanwhile granted $249 million to an MIT spinoff, Massachusetts-based A123, that will build a lithium-ion battery manufacturing facility to compete directly with Compact Power's facility.
At any rate, cells are to the battery pack what protoplasm is to an organ or transistors to a computer. To focus on cells is to miss the point. I am standing over the Volt's pack at GM's new $30 million testing facility in Warren, Michigan. It looks like a fat, vinyl-clad cross, meant to fill a slot cut out of the car's undercarriage. The pack contains roughly 300 cells. "The voltage of each cell has to be evenly calibrated to every other," the lab's recently departed director, Bob Kruse, tells me. "Like a chain, performance depends on the weakest link."
Kruse notes that his pack is in only its first generation. On the horizon -- "Gen-3," he thinks -- will be a solid-state battery pack that should achieve a 50 percent saving in size and cost, mainly by reducing the volume of liquid electrolytes. His team is working with the University of Michigan's Ann Marie Sastry and her start-up, Sakti3. Sastry has already raised $5 million from a private venture fund and the state of Michigan; all are counting on the Volt to bring scale to a burgeoning industry.
"Gen-1 technologies have sufficiently high rates of discharge, very suitable for getting us over the tipping point, you know, where a reasonable part of the vehicle portfolio goes electric," Sastry tells me. "But liquid electrolytes present integration limits -- also limits on energy density. We think that disruptive manufacturing techniques can improve performance dramatically, as in the chip industry." Does this not ultimately mean very costly fabrication facilities, as with chips? "We aim to create a cheap, scalable process. But government support and appropriate regulation may be needed for other elements of electrification -- and that's justified. Think of what we spend to secure oil. Think of the livability of cities and the dangers of climate change. But the changes have to be reinforced by companies making a profit."
By the way, one of the more compelling businesses to expect from the proliferation of battery packs will come into relief only after Gen-1 cells end their useful lives in cars. Lab tests show that, even after 10 years, Volt packs will still be capable of carrying 75 percent of their original charge -- not enough for the vehicle, but more than enough for utilities to use as storage for bulk renewable energy. Posawatz is excited: "It is easy to imagine warehouses full of used batteries sucking up wind energy and saving it for times the wind does not blow, or homeowners using the pack as backup," he says. "For recycling entrepreneurs, this means a whole new way of doing business."
Around the battery are novel hardware components. The pack has five connectors running from it -- one for cooling, one for heating, a third for charging, a fourth for monitoring the car's performance, and the last one for an onboard information and entertainment system. Each connector, cable, and component represents a race to create a cross-industry standard; each participant in each race has the potential to turn an innovation into a marketmaker.
Consider the lowly plug, the basic connection to the grid. A Japanese company called Yazaki developed a new design for recharging from virtually any wiring up to 240 volts. (The Volt will recharge in eight to 10 hours at 110 volts, in three hours at 220.) The design is now supported by all OEMs with electric cars in the pipeline, including Chrysler, Ford, Toyota, Honda, Nissan, Mercedes-Benz, and Tesla. It carries the name SAE J1772. This may seem a humdrum development, but it is hardly that: By comparison, cell-phone makers agreed only this past June, and under pressure from the European Union, to a standard for charging handsets through a micro-USB cable.
Ultimately, SAE J1772 will stimulate development of infrastructure companies of all shapes and sizes: installation of metered outlets in home garages, say, or even robotic solutions. Think of the way, back in 1993, the EPA mandated that the port -- the interface connector -- to the engine's main computer be of a standard size, so that every mechanic's scanner could be manufactured and programmed to handle all cars. The goal was to make it possible for local garages to check cars for a yearly roadworthiness sticker. But the standard also reinvigorated competition in after-warranty car repair, because it gave those local garages access to any car's digital systems. Today, 70 percent of such repairs are handled by independent shops.
More immediately, SAE J1772 is firming up the position of start-ups focusing on recharging stations in public areas such as apartment blocks, airports, and supermarket parking lots -- companies like Coulomb Technologies and AeroVironment, both based in California. "There are 247 million motor vehicles in the U.S. but only 54 million garages," Richard Lowenthal, CEO of Coulomb, tells me. "Fifty-one percent of all San Franciscans park their car on the street overnight. There are six times as many cars as there are home garages."
Lowenthal, a former Cisco executive, closed a first round of funding in January -- $3.75 million with a German venture fund -- and he has three term sheets for a $10 million second round. At this early stage, Coulomb claims 57 customers worldwide for its ChargePoint system, including the municipal governments in San Jose, California; Nashville; and Amsterdam; and companies like McDonald's. Business is doubling from quarter to quarter. "The key to our infrastructure and our venture funding is our network software applications," Lowenthal says. "Our chargers are smart enough to consolidate payment from subscribers to all the various power companies, or tell drivers over their phones where they can find incentive pricing, and so forth."
Finally, Volt-like cars will require a raft of components specific to the blend of engineering decisions embodied in range extension. Think of the onboard engine that will have to be monitored as the battery runs down or started in below-zero temperatures to warm the pack for a time. Or think of the sound it makes as the vehicle comes to a stop. If the engine is charging the battery, not powering the drivetrain, it could well be roaring uninterrupted, like a home generator, unless calibrated to the speed of the car. And there are going to be new components fit for all electric cars, even those without an onboard engine. "You want a new generation of regenerative brakes that capture energy when you apply the pedal," says Frank Weber, GM's global chief engineer for electric vehicles. "You want a sound system that worries about how much energy it is drawing. In conventional cars, air-conditioning systems were driven by belts. So were hydraulic brakes and steering mechanisms. Heaters borrowed from radiators. Now they all need new 'power dynamic' components -- electric motors for everything. None of these components can be developed by GM alone or will be for GM alone. We have to work closely with new, smart suppliers. As with ABS brakes, they'll start out with an add-on component, but they'll eventually turn to the integrations of chips, software, and new materials. Each generation will get cheaper and more robust."
Yet for all these innovations, the electric car's hardware will not really be where the action is. The Volt's most important new component will be a huge, evolving chunk of software, built up from federated sources, governing what Weber calls the car's "dialogue with the driver." Managing the cloud of information running in the car's digital circuits -- balancing the power for acceleration against the duration of charge, say, or locating traffic-free routes to inexpensive charging stations -- will be the Holy Grail. Posawatz anticipates the "connected car," beginning with an overarching operating system that monitors and communicates the car's charging needs, component faults, position, etc., to various service providers while simultaneously networking drivers to the Web. "Our car -- but I'm sure all electric cars -- will aim to create a seamless experience for the driver as he or she moves from the office or home to the road," says Posawatz. "We want charging, music, phone, GPS, and so forth to all appear in a kind of dynamic cockpit. The driver shouldn't have to fuss with the telecommunications platforms that provide the integration."
Seamlessness will require new communications standards. One, provisionally called SAE J2847, will shape communication between cars and the grid. Another, Smart Energy Profile, or SEP 2.0, will guide an application layer managing the efficiency, usage, and price of power. "We are focusing on the car and building in the capacity to roll up charging data, which can be placed at the door of the power company," Posawatz says. But GM is not committing to any communications standard just yet -- and for good reason. Volts are being designed to nest in GM's proprietary, satellite-based telecommunications platform, OnStar, which may prove GM's most underleveraged asset -- indeed, the company's chance to create a bundled operating and telecommunications system. OnStar already handles onboard monitoring of critical diagnostic codes and sends out 3.5 million e-mails a month to customers about the performance of their components. It responds to 2,000 collisions a month.
"We have 5.5 million subscribers already," OnStar's president, Walt Dorfstatter, tells me, "and we are about to establish a lab dedicated to vehicle connectivity, anticipating the Volt's rollout. Working with other OEMs to put some of our technology on their vehicles is still a definite possibility for us. OnStar is a proprietary technology, but when proprietary becomes prevalent enough, it becomes the de facto standard."
All of which portends the biggest, most contentious business space on the horizon, and for the widest array of start-ups: load distribution on the grid. Most important will be companies helping electric utilities digest what OnStar-like platforms place "at the door" and also help them route electricity from renewable sources back into individual cars. Think of the switching infrastructure that enables us to download a program from an "available" server. Something like this capability will have to be built in to the electric grid.
The most conspicuous start-up by far in this expanding space is GridPoint of Arlington, Virginia. The company has raised more than $220 million, with major investments from Goldman Sachs, among others. (GridPoint has just named Posawatz to its advisory board, which already includes networking guru Esther Dyson and energy expert Daniel Yergin.) GridPoint is working with a number of partners to build the nation's first smart grid, in Boulder, Colorado, a $100 million project. Its near-term ambition, according to its CEO, Peter L. Corsell, is to give utilities the means to aggregate and manage a network of distributed energy resources: controlling load, storing energy, and producing power. "There are perhaps 100 million electrical meters in this country," Corsell says. "We are working with companies that account for 40 million."
At the same time, GridPoint is in discussions with virtually all automotive companies with an electric car in the pipeline. When he dreams out loud, Corsell sees a GridPoint component loaded onto every electric car, the way every laptop contains a signal processor. "In order to balance the load of an electric utility -- predict load, shift the load out of peak periods, shape the load by integrating renewable energy, and so forth -- it would be ideal to have our software baked into the electric cars themselves, so that what gets reported from aggregations of cars will come to utilities in a format that integrates with how the grid is managed. The savings for consumers are not at all trivial when the software allows for real-time, dynamic balancing on the grid. The benchmark equivalent to a gallon of gas during peak hours is somewhere between 60 cents and a dollar. The cost from renewable in the middle of the night is more like 20 cents." Posawatz, for his part, sees a natural division of labor: "We see companies like GridPoint managing what utilities do with data behind the door, providing back to our drivers the charging, billing, and other services that will maximize the cost effectiveness and environment benefit of owning an electric vehicle."
That said, neither Posawatz nor Duke Energy's Rowand denies that partnership with GridPoint could eventually become rivalry -- that it matters greatly who determines the format and conveyance of the data placed at the door of power companies and, more important, what gets baked into the cars' consoles. I ask Dorfstatter if he can foresee, for example, GridPoint components preloaded onto all Volt-like vehicles in the future. "It is too early to say," he replies warily. For if OnStar will indeed control these standards early on, it might eventually wish to integrate forward to the management of grids, much as Duke Energy -- or makers of power switching equipment like GE or Siemens -- may wish to integrate backward into vehicles.
Corsell embraces the challenge: "We believe there is room for a layer of technology -- and business -- between the various automotive OEMs and the electric companies," he says. "A great many electric companies simply do not have the IT talent to manage end-to-end smart charging solutions. I think we represent a necessary firewall." But is this not something GM can do without you, I ask? "Do automobile companies really want to assume the liability that comes with mishandled load data?" he asks in response. "Just think of the implications for the warranty. And does Toyota really want to be dependent on a software environment owned by General Motors?" This firewall, Corsell knows, could prove thick enough to contain the most valuable and dynamic pieces of what we will mean by an auto industry in a few years, offering enormous opportunities for new entrants. "The horizons of companies like this will expand with each new generation of smart charging," Corsell says. "We could move into cross-power-company billing, so that what you use when you plug in at your office will appear on your home electricity bill. We could gather data valuable to strategic marketing, analyzing traffic and charging patterns the way Google analyzes surfing. I learn from everyone I talk to."
It is important to understand that electric cars like the Volt will benefit from a supplier base already structured like an ecosystem. Had the technologies of multilateral networking not already existed -- Web 2.0 and the like -- the connected car could never be entertained.
It may be hard to remember that, only a generation ago, big car groups like GM were still gargantuan pyramids of specialization, in which production facilities and critical components were controlled, if not owned, by vertically integrated companies: from metal stamping and engine manufacturing to assembly and distribution. Information was also assembled by a kind of pyramid, with marketing data flowing up to the peak and production decisions flowing down. Car companies competed on engineering platforms -- integrated powertrain, chassis, and suspension designs -- onto which they grafted comparatively less expensive bonnets: molded sheet metal, upholstery, and electronics. GM was the first to perfect this approach. When I sold auto parts as a college student in the late 1960s, a Chevy ball joint was a Pontiac ball joint. Marketing gurus focused on skins, manufacturing honchos on guts: You tried to tantalize with the former and reduce the cost of the latter.
Today, however, car companies look less like pyramids and more like hubs and spokes connecting product teams: teams networked across the globe to one another and to myriad suppliers, a little like open-source software designers. By 2000, the most advanced car companies -- Volkswagen Group, for example -- migrated to "modular" design strategies, mandating a sharing of underlying components. Imagine cars built up from so many Lego pieces, which could be shared across the group and much more spontaneously than platforms were. Imagine not having to settle for the prix fixe; rather, order à la carte yet pay the same price for the meal.
What Volkswagen Group put in place, in other words, was an organizational architecture that positioned designers across its brands to network freely with component suppliers working to group standards. It is at this level of the ecosystem -- that of first-tier suppliers and their suppliers -- where economies of scale make sense. The keys to making so much freedom work are brand focus and clarity. GM, alas, did not learn that lesson quickly enough to avoid bankruptcy. Forget health care costs and SUVs. GM simply stuck with too many platforms -- 15 by one count -- and distributed these over a dozen brands. Inevitably, most of its cars became undistinguished while the costs of complexity grew. The Volt portends a new approach. Virtually every component in the Volt not specifically reinvented for an electric powertrain was snatched from existing GM product programs.
GM will probably produce about 30,000 Volts in the first two years after launch. Nevertheless, the car is clearly energizing suppliers -- again, from battery makers to the managers of charging data. And given how many innovations boil down to code, the Volt is reviving opportunities, particularly for American suppliers.
This focus on suppliers, where the focus belongs, frames the role of government. Yes, the Obama administration has engineered a rise in CAFE standards -- targets for vehicle miles per gallon -- and the House has passed a cap-and-trade energy bill that, if passed by the Senate, will almost certainly pressure energy companies to increase renewable sources of energy. But I got the sense from talking to Posawatz that improving the mileage of internal combustion engines is like improving the storage capacity of tape cassettes. It is much more important, he thinks, that governments at all levels help the base technologies of batteries, components, and the smart grid get off the ground, and also help enforce technical standards, like SAE J1772, to engender a settled environment in which an array of supplier start-ups can compete.
The Obama administration would seem to agree. The stimulus package has made critical investments in all pieces of the ecosystem. This includes $500 million for producers of electric drive components, including electric motors, power electronics, and other drivetrain components; and also $400 million in grants for the purchase of thousands of plug-in hybrid and all-electric vehicles for test demonstrations in several dozen locations. The stimulus package also allocated more than $4 billion to the development of smart grid technology. In August, Duke Energy applied for $200 million in federal infrastructure funds to accelerate its $1 billion electric grid modernization project in Ohio, Indiana, and Kentucky. Note, however, that when Obama signed the stimulus package, he was introduced by Blake Jones, the CEO of Namasté Solar, a company of 60 employees. Obama appeared eager to stress that the energy sector will be driven by thousands of fast, smart start-ups growing bigger, not by a few established engineering giants getting a makeover.
The point is, there are far too many living things in the emerging ecosystem to be anticipated by any government or major OEM. It will take an implicit partnership of hundreds, perhaps thousands, of suppliers to fill out the technology. The key is to bring them into alignment. "If governments act to consolidate standards," Posawatz says, "they can really make a difference in catalyzing competition among suppliers." He would not want to impose standards prematurely and cut off promising avenues for innovation. (Presumably, OnStar's ambitions are also on his mind.) But when the catalyzers of the new auto industry are so entrepreneurial and distributed, technical standards hardened by government become virtual roads and bridges. They are more vital to electric cars than actual ones. The faster we get to standards, the better.
This principle, of catalyzing competition, is an endless subject I cannot do justice to here. To build out the grid Posawatz envisions, the government must help reduce other obvious barriers to entrepreneurial teams converging on a problem. The administration might look at an outdated patent office, which has been swamped by software developers in recent years -- filings mainly from big companies, whose fat patent portfolios needlessly block or intimidate entrepreneurs. It might look at facilitating the exchange, categorization, and monetizing of intellectual property, which cannot flow unless governments engender mutual trust.
Some will persist in calling such government socialist. But you listen to Posawatz and you know that there is no contradiction between a catalytic commonwealth and an ownership society. You also know that the old socialism is finished, not because of natural greed or the invisible hand or even because it required, as Oscar Wilde said, "too many evenings." Socialism is finished because the old machine-industrial capitalism against which it arose is finished, superseded by technologies so transformative that it seems a privilege to be alive just to witness their diffusion.
Bernard Avishai teaches business at the Hebrew University of Jerusalem and writes about business and politics.