Coming Mass Arrival of Electric Vehicles and Consequences
I believe the case for electric vehicles (EVs) is very strong, and in less than a decade they will arrive in large numbers, providing great benefits and opportunities but also triggering large disruptions.
Before its arrival, a disruptive technology often either seems unbelievable or is relegated to a distant future. When it does arrive, not only is it widely accepted, but pundits behave as though they always knew it would be so.
Recent decades are full of jarring examples. In the early 90s, e-commerce was viewed that way. Then it arrived with a vengeance. Only two decades later, according to US Department of Commerce reports, e-commerce now accounts for nearly 10% of ALL retail sales and is growing at about 15% annually, as opposed to the 2-3% growth of total retail sales. Amazon alone might account for as much as 50% of e-commerce.
It would have seemed unthinkable in 2000 that Google, a company founded in 1996 and still small in 2000, would become the premier interface to the global recorded knowledge base in just a decade. It is now used by about 1.2 billion people, constituting about 15% of humanity or about 25% of all adults in the world. And that is just Google.
Facebook was unknown in 2000. In March 2017, there were 1.9 billion active users. That is approaching half of the world adult population. What is also remarkable that people who in earlier times were so guarded about personal information broadcast it on Facebook or similar social media. Smartphones were barely on the horizon in the 90s. Now global annual shipments have reached about 1.5 billion units. On and on it goes for LinkedIn, Uber, Airbnb, etc.
Right now, the prospect of EVs accounting for half of global production of vehicles by 2030 or even earlier seems like wild speculation, but the forces to make it so are all in place. Let me elaborate.
Acceptance: Against all early predictions, the world has accepted Tesla, a company founded in 2003 to compete in one of the most established and closed industries. Its electric vehicle Model S was introduced in 2012 and would soon sell in 30 countries. When in 2016, Tesla opened the gates for preorders of its Model 3 without giving a firm delivery date and requiring a significant deposit, in a matter of months it received orders approaching half a million.
More remarkably, in 2016 Tesla topped the Consumer Report’s customer satisfaction survey. And now the market cap of Tesla has exceeded that of GM. Unimaginable in 2005 but now the reality.
Cost: There is the misperception that EVs are just too expensive to make, and if they are to survive they will need massive subsidies. While subsidies do exist now and do help with the sales, the cost structure is changing rapidly, and the key to that change is the continuing reduction in lithium-ion battery cost. In an incisive analysis embedded in a report by Bloomberg, the cost switchover year is predicted to be 2022. In my company, we had come to the same conclusion some years ago. In informal conversations abroad, I had learned that the relevant industrialists in Korea had reached the same conclusion an even longer time ago. Here is the link to the Bloomberg report.
The implications are profound. 2022 is just around the corner. Presumably beyond that, internal combustion engine (ICE)-powered cars might need subsidies to remain competitive!!! Wouldn’t that be an ironic twist. But more seriously, beyond 2022 there will be no need for subsidies, and given the amazing acceptance of at least the Tesla vehicles, there is every reason to expect the mass arrival of EVs during the next 10 years driven only by cost.
CO2 Emissions: According to the recently released data from the US Energy Information, over the period January 2016 to Sept 2016, domestic CO2 emissions from vehicles for the first time exceeded emissions from the generation of electricity. Unfortunately, transportation emissions are trending up, whereas electricity generation emissions are trending down. As the use of substitutes for coal or oil to drive power plants increases, the emissions will decline even further. However, transportation emissions can decrease only if EVs substitute for ICE-powered cars. Furthermore, while CO2 spewing out of the tailpipes of ICE-powered cars cannot be captured, it can potentially be captured at power plants. Better yet, when energy source for transportation shifts from oil to electricity coming from the power plants, renewable energy sources could serve as the primary energy source for transportation: a huge boost for wind and solar power which would make them even more available and cheaper.
Indeed, electrification of the vehicle drive train is the low-hanging fruit for reducing CO2 emissions. Washington is at best neutral, and is actually now discouraging this most promising pathway.
Regrettably, the US is no longer the key actor as the US is no longer the leading vehicle manufacturer and driver of the global vehicle market. According to statistics compiled by OICA, 2016 global motor vehicle production reached 95 million. Production by country was China (28 million), Japan (9 Million), Germany (6 million), India (5 million), and South Korea (4 million). Just these 5 countries totaled 52 million vehicles and accounted for 55% of global vehicle production. In contrast, 12 million vehicles were manufactured in the US, accounting for only 13% of global production.
Compared to the US, China is still an emerging market: while the US has 80 vehicles per 100 people, China has only 20 vehicles per 100 people, and has faster economic growth than the US and a much newer infrastructure to support the auto industry. Furthermore, China has substantial new automotive infrastructure yet to be built, providing vital opportunities to make it fully supportive of EVs.
In order to deal with its pollution problem, but probably also to accelerate its emergence as the key player in the globally vast auto industry with EVs leading the charge, China has recently announced that car companies selling into China by 2020 must have 20% of their sales be EVs. Suddenly Toyota (sales of 10 million vehicles in 2016), VW (10 million vehicles), GM with SAIC in China (10 million) and Hyundai/Kia (8 million) etc. are taking notice and gearing up.
Magnitude by the Numbers: Let’s project to 2030. Vehicle production then will have to accommodate the vast Chinese demand and potentially even bigger demand in India which now has only 5 vehicles per hundred in a population of 1.3 billion. In addition, the production in 2030 will have to provide for the partial replacement of the vehicles on the road which by then will have easily doubled. With all of these demands, let us assume that annual production is only 50% more than what it is now or roughly 150 million vehicles and let us further assume that half is EVs or 75 million electric vehicles being produced annually.
If the average selling price in today’s dollars is $30,000 per car, that is $1.5 trillion. Battery costs by then might be 20% down from the current 35% or so. That means battery sales of $300 billion. The cathode is the most expensive part of a battery which by then might be also 20% down from a third today making just the cathode market around $60 billion. These numbers do not include capital sales, ancillary businesses, maintenance and repair and of course the infrastructure sales like charging stations. All told the EV industry by 2030 might be globally approaching $3 trillion in today's dollars. No matter how one looks at it, it is massive. The numbers will still be into trillions of dollars even if one assumes that in 2030 only 25% of production will be EVs.
With EVs already having strong acceptance and excellent customer satisfaction (at least in the case of Tesla), with EV cost advantage over ICE-powered vehicles coming as soon as 2022, and with China, now the giant in manufacturing and consumption of vehicles, mandating EV policies driven by environmental imperatives, there is no way of stopping the mass arrival of EVs in the near future.
Almost certainly, the disruption in this industry, one of the largest in the world, will be substantial. Just think of the disruption to gas stations, repair shops and parts suppliers. The new opportunities can be gargantuan. Just think of lithium-ion batteries, electric motors, charging equipment, charging stations, new parts and new repair stations, to say the least.
In the US, if the established auto industry and the US Government accepts the mass arrival of EVs, anticipates and prepares for the subsequent large-scale dislocations, and becomes a driver of it, the US economy could be a major beneficiary, and the US auto industry could be even a bigger part of the US economy. On the other hand, resistance and being a laggard could be a much bigger threat than what happened in the 90s when the US auto industry ignored the shift to small cars leaving that to Asia.
I spent a lifetime in academia where it is routine for a small group of people armed with deep knowledge to make a huge impact and difference. For instance, my alma mater MIT has only about one thousand faculty members. Any one department, e.g., Materials Science, might have fifty faculty or even fewer. Yet such a small group can lead the world in so many ways.
How can academia achieve such feats, even though its “business model” is scorned by many in industry where just one company might have tens of thousands of workers? In another blog, I will address my observations across many decades that included both academia and industry.
With this “audacity”, we at CAMX Power aspire to be an enabling company in the vein of a small academic department and to have an impact far greater than our size would indicate.
Alarming Failure Rate of Innovation-Seeded Startups. Why? And Why the TIAX / CAMX Power Technology / Business Model Helps
I want to highlight why in 2002 I positioned TIAX and later CAMX Power to be a way station to take early stage technologies and mature them to be IP-protected, derisked, and scaled-up or scale-up ready, for established companies to acquire/license to produce and sell.
Innovation Backlog Growing
In 2004, I published an article in the MIT Technology Review asserting a contrarian view that in the US the glaring issue was not lack of innovation, but lack of implementation. Indeed, the innovation engines in the US such as universities, research hospitals, startups and national labs were churning out innovations and inventions at an ever accelerating pace. Yet the pathways to conversion into sustainable products and services seemed clogged then, and are even more clogged now, with first the dot.com bust and then the Great Recession shrinking conversion channels. Worse, the “conversion capacity” of the system arguably was and continues to be too small a fraction of the “inflow” from the engines of innovation and invention.
The result is a surplus of innovations, with vast numbers of potentially important advances being warehoused or shelved. This situation is alarming enough in itself, but even more worrisome is the fact that innovations don’t have an unlimited shelf life: they are perishable and risk becoming unusable when the people associated with them move on to other endeavors. Another reason for concern is that warehoused innovations remain untested and deprived of the iterative improvements so critical to their journey from inception to implementation.
In the decades following WWII, big companies took on massive research and development (R&D) and the Federal government sponsored extensive R&D through its national labs and through universities. A plethora of amazing products emerged that continue to shape our lives today including the computer, the Internet and GPS. Since the late 70’s however, in the era of so-called “rightsizing” (i.e., downsizing), corporate R&D has been hit hard. Instead, small companies took up the task of R&D, with the rapid emergence of venture capital as well as innovative government programs like the Small Business Innovation Research (SBIR) grants that funded R&D and left the IP with the small company to commercialize. Many small companies so sponsored grew into giants. When the Telecommunications Act of 1995 was passed breaking the hold of big companies, suddenly a huge number of small companies found markets, which ultimately led to the dot.com boom. Despite the subsequent dot.com bust, many technologies that emerged in the 90’s carried on to this century, leading to such giants as Google, Facebook, Uber, etc.
Has the blooming of the 90’s come back? There might be the impression that it is, given the huge successes and “unicorns” in the IT domain. Innovation and entrepreneurship are still in great vogue especially with research universities really pushing both aggressively.
Unfortunately, the numbers tell a different and a disconcerting story. Let’s first examine the assertion that the innovation engines are churning out more then ever. One proxy of that is the number of patent applications -- which is a better measure of innovations/inventions activity than the actual patents granted. According to the US Patent and Trademark Office, in 1996 there were 106,000 applications of US origin, in 2000 the count was 165,000, and by 2015 it had increased to 288,000. That is very good. By rough modeling, it appears that about half the applications are from small businesses and research universities—supportive of our assertions.
Small companies are viewed as the carriers of innovations into markets, and rightly so. What is happening to them? What is their success rate?
There are many assertions or myths. One is that 1 out of 10 succeeds. While good numbers are a little hard to find, one can glean some trends from macro data. According to Kaiser Foundation reports, in 2012 there were about 5 million firms with 50 or fewer employees and 1.7 million firms with 50 or more employees. According to Kaufman Foundation reports, about 500,000 companies with employees are founded each year. If the success rate were 10%, one would expect the under-50-employee company count to grow, and then about 10% of the base of 5 million companies to “graduate” to the next bracket. But then the next bracket (50 employees and above) should grow substantially.
According to the Kaiser Foundation report, however, in 2015 the below-50 and above-50 counts were about the same as they were in 2012, meaning almost no change over that time period. The implications are disconcerting, namely that as many small companies fail as there are new companies founded. Small Business Administration data support this. One conclusion is that the success rate might be far, far less than 10%, maybe 1% and maybe even 0.1%.
Is there another way of assessing the picture? Let’s look at a key metric of presumed success of innovative companies, which presumably attract venture or outside capital. An important aspiration and path to success is an IPO. Let’s make a rough estimate that only 10% of start-ups get outside capital. Given the Kaufman Foundation finding that there are about 500,000 start-ups each year, then every year 50,000 companies would be funded. Over the period 1990 to 2000, there were an average of 300 IPOs a year in all fields (not just technology) again according to Kaufman Foundation reports. That is less than 0.1% for a presumed base of 50,000. Unfortunately, small as that number is, in the period 2001 to 2011 the average IPO count dropped to 90 per year.
Even with this small number of IPOs, over a 20 year period from 1990 to 2010 one would expect the number of listed companies to grow. If one assumes a blended average of 200 per year, there should have been around 4,000 additions to listed companies over two decades. Not so. In fact, according to National Bureau of Economic Research, the number of listed companies (NASDAQ plus NYSE) declined from 8,000 in 1996 to about 4,000 in 2012—a net loss of 4,000 instead of a net gain of 4,000. Some of this decrease would be explainable by mergers and acquisitions, but there were not 8,000 of them.
Another path of success is acquisition of small companies by big companies. My rough examination of that path is not very encouraging either. My overall conclusion is that the success rate of start ups best described as joining the ranks of mid-sized companies in 5 to 10 years, and with their founders being financially rewarded, is probably less than 0.1% or less than 1 out of 1000.
An important question is: what happens to the companies that don’t make it? In another blog I will address that, but here I want to move to my key points.
The Innovation to Implementation Pipeline
The above suggests that the innovation backlog is growing, leading many innovations to be “warehoused” and doomed to slowly perish. What a huge waste.
More alarmingly, of those inventions/innovations that do receive funding and enter the pipeline, vast numbers perish along the way. In fact, it is not a pipeline of the ordinary kind. It is a huge funnel that is very leaky. As the innovations pulled in move along, a lot of them are just leaked or pushed out with only a small fraction making it to the other end – an even a greater waste of innovations but now also a waste of vast sums of capital as well as vast amount of human capital. Unlike the myth in Silicon Valley, failures do scar people and some never recover.
Valley of Death and Green Valleys
There is much talk of the “valley of death” where many start-ups perish. There is much truth to that. Taking a raw innovation all the way to implementation is worse than crossing a vast desert with no water.
Unfortunately, even when the crossing is achieved, success can still be very elusive. I call that “death in the Green Valley.” Let me highlight two big dangers. First is the way potential buyers of innovations at the end of the journey talk: with mixed messages. They praise innovative products but they really want implemented products that are substantially derisked, e.g. with clearly visible revenue potential such as paying customers. That is a tough order.
There is even a bigger danger lurking in the Green Valley: the natives. Those who have reached success early on, often do not welcome the newcomers. For instance, the once-small technology companies who made it (Facebook, Apple, Google, etc.) do not necessarily tolerate small innovative companies and sometimes just extinguish them if there is any threat. Those who were once the challengers now become fierce defenders of their ever-growing turf.
The situation is vastly exacerbated since 2000 because almost in every industry segment there is consolidation – or the market leaders never let competition in in the first place. In many sectors, two to four companies account for maybe 80% of revenues.
The shrinkage of listed companies from 8,000 to 4,000 is a stark indicator of this concentration. Even more telling is the oligopolistic increase in corporate profits. In 2000 they totaled $400 billion. In 2007, just before the Great Recession the number reached $1.3 trillion. In 2009, during the Great Recession they dropped to $700 billion but quickly recovered. Now corporate profits are at an all time high of $1.8 trillion, or almost five times the level in 2000. That is 500% growth in total profit in just 15 years – with half as many companies.
So the natives, using their vast financial resources have now erected huge barriers to entry. Crossing the Valley of Death is dangerous. But the Green Valley yonder might be even more so.
The TIAX/CAMX Power Technology/Business Model
Based on several decades of business experience in technology and my prior academic experience, I had pretty much reached the conclusions above in 2002. When I started TIAX and had the good fortune of rapidly hiring extraordinarily talented staff with deep technological knowledge, I wanted to do my share in helping to deal with the innovation backlog and death in the green valleys. Hence the model to take early stage technologies, maturing them to be production ready and, taking advantage of my extensive network of executives, introducing these almost production ready implementations to them. The work is still going with partial success. Much more lies ahead. My expanding mission is to encourage the formation of more companies like TIAX, but with different financing models.
In a subsequent blog I will discuss why I focused on electric vehicles and in particular lithium ion batteries, and hence CAMX Power.