Saturday, March 15, 2008

Creative Destruction — The All-Electric Car = The End Of Oil?

It’s been about two and a half years since I last wrote about the concept of Creative Destruction in these pages. That force does not occur too often, but when it does, the results can be revolutionary. Let me warn you beforehand that we are about to enter the realm of Economics, a field most consider about as exciting as watching paint dry. However, there are times when an event occurs that is so electrifying, and the potential for change so powerful, that a quick stroll through academic minutiae will eventually seem bearable.

So, allow me to remind you that while the most famous economist of the second half of the 20 th century was probably Alan Greenspan, the most respected was a man few ever heard of. Joseph Schumpeter was an Austrian Jew who fled the Nazi rise in Europe in 1932 to join the Harvard faculty as a professor of Economics, teaching there until he retired in 1949. Although he wrote several books, his most important contributions were collected in one titled, Capitalism, Socialism, and Democracy, published in 1942. It was here that he emphasized it was the entrepreneur who created new competition, new ideas, new technology, and new modes of organization. These innovations in turn upend the established order, unleashing a “gale of creative destruction” that forces incumbents to adapt or to die. It is this “process of industrial mutation [that] incessantly revolutionizes the economic structure from within, incessantly destroying the old one, incessantly creating a new one.”

A more recent version of the concept is known as “disruptive innovation” or “disruptive technology.” Unknowingly perhaps, we have all participated in the destruction or disruption of an existing dominant product. For example, do you use a digital camera; a wireless phone or cell phone; a PC or Mac computer; a broadband internet connection? What happened to the original products or industries? Okay! That’s the end of the Economics lesson, so what’s all the excitement about?

Initiating a Creative Destruction Process

What do you do if you developed a business model that you think could revolutionize the way the automobile industry works, and more importantly would eliminate not only the necessity to import oil but eliminate completely the need for gasoline? (Do you think that qualifies for the title of creative destruction?) If you are 39-year-old Shai Agassi, you would arrange a meeting with the president as well as the prime minister of a country, present the concept, get support in principle, and agree to raise a significant amount of money in order to proceed with the project.

It’s quite probable that the name Shai Agassi (no relation to Andre) is unfamiliar. He is an Israeli software entrepreneur who, after moving his company to the United States, sold it to the German software giant SAP where he became a member of the executive board and was rumored to be in line for the CEO job. However, after coming up with a concept he believed would disrupt the existing transportation model, he presented the plan over a year ago to both Shimon Peres, the President of Israel, and to its prime minister, Ehud Olmert.

More often than not, when creative destruction develops, it is due to a disruptive technology. Agassi’s plan however, is based on transforming the way the automobile industry has worked for the past 100 years. His plan is to sell clean all-electric car transportation the way cell phones are sold. Based on that model, purchasers would be charged a low price for the car and receive a tax incentive from the government, they would then pay a monthly fee based on mileage, like minutes on a cell phone.

But the plan is much more extensive and truly creative, since the lithium-ion battery providing the electricity would require charging after only 100-124 miles or so. Agassi’s plan includes creating a whole new infrastructure of convenient electric charging stations as well as battery exchange stations where batteries can be removed and replaced automatically in about the same time as it now takes to fill a car with gas. The cars could also be charged overnight using a house outlet.

Is the Plan Realistic?

As audacious and even unlikely as this plan might seem, Agassi has enlisted the enthusiastic support of the Israeli government. Israel has increased the tax on gas by 60% so the price is the equivalent of $6.30 a gallon, and greatly reduced import taxes on all- electric cars. Both actions provide a significant incentive to eliminate oil from the transportation equation. Not only has Agassi raised $200 million so far from large investors such as the Israel Company (ironically a large refiner of oil), investment bank Morgan Stanley, and the Canadian billionaire Charles Bronfman. As a further indication that the concept is sound, Agassi has gained the backing of Renault-Nissan’s Chief Executive, Carlos Ghosn whose company will produce the cars. Ghosn has been quoted as saying, “Zero emission, zero noise — it will be the most environmentally friendly mass produced car on the market.”

Agassi’s company, Project Better Place, located in Palo Alto, California, will provide the lithium-ion batteries, parking meter-like plugs on city streets, and the battery exchange stations. The cost of the batteries would be included in the monthly charges. As a result of the tax break, Agassi states, “You’ll be able to get a nice, high–end car at a price roughly half that of the gasoline model today.” Incidentally, a Renault converted to run on electricity by Agassi’s group attained a top speed of 139 miles per hour, and went from zero to 60 in eight seconds.

Agassi Speaks

Here, in Shai Agassi’s own words, is his description of the unique model that has the potential of creatively destroying a system that has existed for some 100 years: “…we propose the creation of a ubiquitous infrastructure that can enable a car to automatically charge up its battery when parked, and on the exceptionally long drive using an exchange station where an empty battery is replaced with a full one in automatic lanes resembling car-wash devices positioned in gas stations across the country. We for the first time look at the car battery as part of the infrastructure system, not part of the car, much like the SIM card inside a cell phone is part of the network infrastructure which is residing inside the phone. Since the car owners do not own the battery they can freely exchange it as needed, not fearing the issue of receiving an ‘older battery’ in exchange for a new one.”

But Agassi and his company has even more ambitious plans that extend far beyond just the effort in Israel. Aggasi is quoted, as follows: “Project Better Place will deploy and test this framework over the next 24 months in a variety of launch markets, after which it plans to deploy hundreds of thousands of vehicles annually, across multiple markets [a great number of additional countries]. The company anticipates achieving ‘tipping point’ saturation in early markets within 10 years.”

Although Agassi is fast approaching the point where at least the initial phase of his dream might well be initiated, he has no illusions as to the possibility of failure. An article in Business Week last month reads, “[Agassi is] optimistic that he’ll be able to beat the odds, but he’s also realistic enough to know there are many difficult days ahead. ‘There will be a very loud splat if I hit the ground’ he says, ‘or there’s going to be a revolution.’ ” A revolution, that if successful, unquestionably would be viewed by Professor Schumpeter as validating his concept of creative destruction — the end of oil, at least in Israel.


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