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Disrupt the G20 Summit With This Technology

Author: Amity Shlaes, Former Hayek Senior Fellow for Political Economy
June 23, 2010
Bloomberg.com

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What do screaming protesters at the G-8 and G-20 summits in Canada this week have to do with a battery service start-up that has received $700 million in investment capital from Morgan Stanley and Lazard Ltd.? And what do they have to do with this month's planned initial public offering by Tesla Motors Inc., an electric-car company?

The answer has to do with hopes for an oil-free future that was building even before Deepwater Horizon became a household word. Now many innovative companies are counting on anti-BP fury to take consumers over the edge and adopt alternate energy projects that were already in progress.

Consumers may even embrace the product they have famously rejected, the electric car. Better Place LLC, a car battery service start-up, begins with the wager that the old problem of recharging batteries is the big obstacle that stopped consumers from buying electric vehicles before. Using Israel as a test site, Better Place in the next year or so will open 75 stations where electric cars can simply swap an exhausted battery for a new one in the same time it takes to refuel.

There's an old business theory that suggests the electric car may indeed zoom ahead this time. That theory, called disruptive innovation, was developed by Clayton Christensen, a guru at Harvard Business School back in the 1990s when BP Plc was still British Petroleum.

When Innovation Disrupts

Christensen and colleagues have published thousands of pages on disruptive innovation. But it boils down to this: A big company makes something that consumers buy en masse, a group to which it is beholden. Paradoxically, the company emphasizing good service can be an error. When management caters too extensively to extant clients, it forgets to develop new markets.

Meanwhile a smaller group has an alternate idea. But that alternate idea has serious flaws, and no one even knows if a market for it exists. Over time, the quality of this marginal product improves. Next, the new product finds a crowd that is willing to accept imperfect technology because it likes the item for other reasons. These are the legendary first adopters, the MP3 crowd. Suddenly the alternate product is spreading like oil in the Gulf. The big company product seems as irrelevant as a cassette tape recorder.

In the 1990s, long before Better Place and others like it had formed, Christensen laid out the reasons the electric car was failing, using as evidence the old Chrysler electric minivan. The vehicle required 1,600 pounds of batteries, which slowed acceleration. It cost five times as much as a comparable gas-powered model. It traveled less than 100 miles before needing to refuel, creating so-called range anxiety for drivers, and recharging required hours.

Changing Landscape

Others noted that the viability of the electric car concept seemed fatally linked to the price of gas at the pump. Hence the timorous retreat to the hybrid. The question is whether all the current events of recent years, from two wars to multiple oil price spikes to, now, the BP spill, constitute a permanent change.

The Tesla Motors public offering will test this idea. So will the success or failure of Think, a Norwegian carmaker that is building an electric car plant in Elkhart, Indiana. Nissan Motor Co. is coming out with the Leaf, an all-electric car. The idea led Carlos Ghosn, who runs Renault SA and Nissan, to develop electric models such as the Fluence Z.E. and the Kangoo Z.E.

Passing Lane

All these vehicles already feature the requisite technology improvements: lighter, stronger, greener batteries, acceleration from 0-to-60 faster than gas-powered cars, and the ability to pass cars at highway speed.

Under the Better Place business plan customers buy electric cars from Renault, then sign up for a subscription battery swapping network, just as they now sign up for cellular service. A navigation system will help drivers find a charging station that's part of the Better Place network. Robotic tools swap an empty battery for a fresh one in minutes.

A company Christensen founded, Innosight, has publicly praised Better Place. There is indeed something especially Christensenian about the devotion of Better Place to finding or creating that minimarket.

Shai Agassi, Better Place's chief executive, is partnering with DONG Energy in Denmark and Japanese government officials to test his product on taxis in Tokyo.

Israeli Test

Agassi's big test group are Israelis, who fit the textbook when it comes to their willingness to overlook disadvantages that might deter other markets. Many Israelis already spend the equivalent of thousands of dollars to retrofit their vehicles for natural gas. To them energy independence is both a public and a private cause.

What's interesting here is that while governments and their tax codes loom in the background, capital is playing a star role: Consider Tesla's planned IPO and the private companies that have invested in Better Place.

In addition, this time is different because the BP disaster will loom for a generation ahead, however oil prices fluctuate. Already many voters, in the U.S. and elsewhere, trust brands as much as governments. And already, many brand companies promote political causes. As they watch the protesters in Canada and live video of the Gulf spill, many voters are considering going green more seriously than they ever did before.

This article appears in full on CFR.org by permission of its original publisher. It was originally available here.

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