Reconfiguring the Ecosystem to Work for You
Every success story that we have encountered so far shares a common characteristic: each innovator, having taken a hard look at the ecosystem, found a way to eliminate all the red lights from their value blueprint before moving forward.
What is more intriguing is that these innovators also shared a common path to success. For digital cinema, Amazon’s Kindle, and Apple’s iPod, the shift from red to green was not just a matter of working harder, or of incentivizing and cajoling partners to ensure that each piece of the ecosystem puzzle fell into place. Rather, in each case, success came from first recognizing the key constraints that held back value creation and then taking bold steps to reconfigure the blueprint to work around those constraints.
Innovating in ecosystems demands not just innovation in the discrete elements but also innovation in the way in which the elements come together—innovation in the blueprint itself. The Hollywood studios added new elements into their ecosystem—the virtual print fee mechanism and the third-party integrator—that allowed them to share their benefits with the movie theater owners who were so critical to the success of the plan. Amazon bundled the previously separate elements of the e-book reader with an electronic bookstore and used ecosystem partners to relocate the task of connectivity from the consumer to the Kindle device. Apple combined hardware with music management software and then added the new element of simple, secure online music purchase.
This chapter is about how to change the structure of the ecosystem to work for you. We will identify the Five Levers of Ecosystem Reconfiguration and explore how they can be used to modify your value blueprint to eliminate the adoption and co-innovation bottlenecks to your value creation.
We will examine the case of the electric car, a transportation solution that has excited consumers, firms, and governments alike with its promise of energy independence, cleaner air, green jobs, and lower fuel costs. This will not be an analysis of a past example whose outcomes are already known; rather, we will be exploring a still-unfolding case that is being actively shaped as I write this book. We will start by identifying the major challenges in the current ecosystem—three that are clearly visible and three that are revealed when we use a wide lens. These are the red lights stopping electric vehicles (EVs) from breaking into the mainstream consumer market.
Seeing the bigger picture almost always exposes bigger problems. But it also gives rise to the possibility of finding more robust solutions. To this end, we will consider the approach being pursued by a promising EV start-up company, Better Place. Because the outcomes are not yet known, the analysis will be prospective. But, regardless of the outcome, we will find the company’s strategy highly instructive for the way in which it deploys a combination of all five reconfiguration levers to create a pathway to success.
The Early Days of the Electric Car
The electric car is an old proposition. At the turn of the twentieth century, the future of the automobile industry was anybody’s game as electric-, gas-, and steam-powered cars all vied for technological supremacy. In fact, the American Electric Vehicle Company, headed by financier William C. Whitney, was, at its height in 1899, the largest car manufacturer in the United States. The electric car was clean and quiet, compared to the more complex, loud and dirty gas-powered automobile. An 1897 editorial captured the sentiment when professing, “There is every reason to believe that the electric vehicle industry is well established on a sure foundation and that it will grow rapidly.”
Figure 7.1: An American Electric Vehicle Company electric car from 1900. (© Top Foto / The Image Works.)
But by the early 1900s, confronted by efficiency improvements in gasoline engines, the discovery of cheap oil in Texas, and Henry Ford’s mass-manufacturing triumph of the Model T, the electric vehicle had definitively lost the race. In 1914, there were 568,000 automobiles manufactured in the United States; 99 percent of these contained gasoline-burning internal combustion engines.
It wasn’t until the 1990s that the electric car enjoyed a small renaissance due to a combination of technology improvements and government mandates. This rebirth was centered in California—the largest car market in the United States—and home to both wealthy environmentally conscious consumers and aggressive state government policy makers. The effort began in 1990 with GM’s unveiling of the Impact, an all-electric concept car, at the Los Angeles Auto Show. The Impact was a catalyst for the California Air Resources Board (CARB) Zero Emission Vehicle (ZEV) Program, which mandated that, by 1998, 2 percent of vehicles produced for sale in California had to be zero-emission vehicles, increasing to 5 percent in 2001 and 10 percent in 2003. In response to CARB’s mandate, GM introduced the EV1, the world’s first commercially available all-electric vehicle. Other big automotive players soon joined in with their own all-electric offerings, including Nissan’s Altra EV, Honda’s EV Plus, and Toyota’s RAV4 EV. But all these programs were scrapped in the early 2000s due to a combination of legal challenges to the CARB mandate and unattractive consumer economics that stemmed from high leasing costs (the monthly lease rate for the EV1, a two-passenger subcompact coupe, was between $399 and $549 per month—comparable to a luxury sedan), constrained driving ranges, and limited charging infrastructure.
Today, we are witnessing the third wave in the attempted emergence of the electric car. And now the promise of the proposition is more urgent than ever. Greenhouse gas emissions are an important contributor to global warming. With approximately 1 billion vehicles already on the world’s roads churning out emissions, and rapid growth forecast for new economies, there is a pressing need for an alternative to gasoline. Beyond environmental cost, is the economic cost. The United States, for example, imported 61 percent of its oil in 2010, over 4 billion barrels. At the prevailing price of the time—$76 per barrel—this amounted to a transfer of $325 billion to foreign governments, or $619,225 per minute. With demand for oil increasing with the rise of new economies, and questions about the availability of future reserves, there is a general consensus that future oil prices are likely to be higher, and substantially so.
To date, the story of the electric car has been one of technology visionaries and environmental diehards. Yes, there is a small, but very visible, consumer segment for whom the benefit of saving the planet and/or showing off green credentials is worth the premium. But for the electric car to make an impact on energy independence and pollution, it must move beyond this niche market and appeal to mainstream buyers. How?
Challenges in the Electric Vehicle Ecosystem
From the start, the electric vehicle (EV) has been perceived as an ecosystem problem, in which multiple elements need to come together to enable the value proposition (see figure 7.2).
Figure 7.2: Value blueprint of the electric vehicle (EV) ecosystem including gasoline supply for plug-in hybrid.
Three clearly visible hurdles to the mass adoption of the EV proposition have garnered the attention of the media, policy makers, and entrepreneurs across the globe. First, electric vehicles are more expensive to purchase than comparable gas-powered cars. Second, the distance one can drive before exhausting the charge in the battery is inferior to that of gas-powered cars. Third, the infrastructure for recharging batteries in terms of both the availability of charge spots as well as the time required for charging, is vastly inferior to the infrastructure already in place for gas-powered cars. Interestingly, these are the same challenges that confronted the electric car back in 1908.
Problem A: Purchase Price Premium
The economic argument for buying an EV is based on the fact that electric miles are much cheaper than gasoline miles. At $4 per gallon and 25 miles per gallon, the cost of every gasoline mile is $0.16. In contrast, with electricity priced at $0.12 per kilowatt hour (kWh) and 4 miles per kWh, the cost of every electric mile is $0.03. Driving an EV is like getting your gasoline at $0.75 per gallon. This is certainly appealing.
However, while driving an EV may be cheap, actually buying one is not. Compare the new Nissan Leaf, launched in 2011 with a retail price of $33,000 (not including the $2,000 home charger installation fee), to the similarly sized Nissan Versa, which lists for $13,500. At the heart of this price difference is the cost of the Leaf’s 24 kWh battery, estimated at $15,600 for the early versions of the car. With the current $7,500 federal tax incentive for all EV purchases, that’s still a $12,000 difference. And $12,000 buys a lot of gas. Assuming you do save 13 cents on every mile you drive, in this scenario you’ll have to travel over 75,000 miles just to break even.
Problem B: Limited Driving Range
“Range anxiety” is the official industry term for the fear of running out of power mid-journey in an EV. As a representative EV, a fully charged Leaf can go approximately 100 miles before draining its battery, while the comparable gas-powered Versa can travel over 400 miles on a full tank of gas. Live in hilly terrain? Carrying a heavy load? Running the air conditioner? All these elements must be taken into consideration while planning a simple trip. Most drives are well within this range, but there is a lot of variance. Even if you take a 200-mile trip only once a month, the range limit would preclude the EV from becoming a complete driving solution.
An EV’s range limit is primarily determined by its battery. One approach to solving the range problem is to develop a better battery, and billions of dollars have been dedicated to this goal. While there is no doubt that these improvements will come about eventually, there is great uncertainty about how many years will pass before they will be achieved. A big question is how everyone else in the system is to sustain and motivate their own efforts while they wait.*
Problem C: Charging Infrastructure
Related to the question of driving range is the question of battery charging. Here, there are two hurdles: the availability of charge spots and the time it takes to charge. According to the U.S. Department of Energy’s National Renewable Energy Laboratory, there were 3,834 public charge stations deployed across 39 states as of September 30, 2011 (1,202 of which were in California). Compare this to 159,006 gasoline service stations, the vast majority of which have multiple pumps, and then assess convenience. EV drivers have little choice but to recharge their cars at home. But regardless of whether they recharge their batteries at home or in a public spot, fully recharging a spent battery takes time: eight hours with a 220-volt charger, twenty hours with a 110-volt charger. Level 3 chargers, which run at 500 volts, can recharge a battery in thirty minutes. But because they are far more expensive, and also have the potential to degrade the battery’s lifetime performance, they constitute only a tiny minority of installations. On a long trip, recharging the battery is a meaningful interruption to travel. Compared with the option of a five-minute fillup at the local gas station, the EV proposition again falls short for most drivers.
Charging infrastructure, of course, has all the classic characteristics of a chicken-and-egg problem: the private incentive to invest in infrastructure is low until there are enough EVs on the road, while the appeal of EVs remains stunted until there is an extensive charging infrastructure already deployed.
In the United States, the Department of Energy has allocated $400 million to EV infrastructure and is working with several private companies to install and manage the charge spots. A concern here, however, is that, because these are taxpayer funds, the deployment is disbursed across a vast number of cities and regions along politically influenced lines. While each additional charge spot is a contribution, it is unclear whether the network is being built along the most efficient lines.
An innovative alternative has been the introduction of plug-in hybrids like GM’s 2011 Chevy Volt, which combines a lithium-ion battery with an on-board gas-powered generator that engages only after the battery is depleted. The idea is to use the current gas station infrastructure to ease customer range anxiety while still enjoying the green benefits of an EV.
Drivers reaching the end of their battery power can simply fuel up at a gas station and rely on their gas generators to take them to their destination. But, given the necessity of both an electric and gas engine, the Volt is an expensive proposition at $41,000—more than twice as much as the comparably sized, similarly equipped Chevrolet Cruze, which landed in dealerships in 2011 at a base price of $16,275. Once again, that premium could buy a lot gas. And once again, leveraging existing technology seems to undermine the economic attractiveness of the offer. The Volt, according to IHS Automotive analyst George Magliano, is a “statement vehicle” for GM. “But do I think it’s going to be a volume seller? No.” Which leads to the major critique, “How can we save the planet if [companies] are pitching these products only to the rich?”
Taken together, the adoption and co-innovation challenges embedded in these three problems (purchase price premium, driving range, and charging infrastructure) paint a bleak picture. But like most technology obstacles, they are addressable. And indeed, around the globe, governments and companies are investing tremendous effort, resources, and time to overcome these challenges.
Hidden Threats to the Electric Vehicle
Value Proposition
Even if these first three problems were overcome, however, the electric car would remain a niche product. In order for the EV to make sense for the mainstream consumer, there are three additional hurdles that must also be cleared, challenges that are currently lurking in the blind spot of many of the organizations that are investing enormous amounts of money and talent in the EV effort.
Problem D: Battery Resale Value
As already discussed under problem A (Purchase Price Premium), battery costs constrain the economic viability of EVs. But there is an even bigger battery-related problem than the acquisition price of the electric car: the impact of the battery on the resale value of the car.
Thanks to substantial investment by both the public and private sectors, battery technology is constantly and rapidly improving, generation after generation. Battery performance (measured by ability to hold more energy in less space, temperature robustness, and production costs) is improving at a much faster rate than any other component of the car. Forecasts vary widely, but by some estimates the cost per kWh may drop from approximately $650 in 2011 to $350 by 2015. A 24 kWh battery would then cost $8,400 instead of $15,600.
This is great news—but only for those who don’t already own an EV. The battery is the most expensive part of an electric vehicle, and it is also the part that becomes obsolete the fastest.
Moreover, batteries have limited lives, measured in terms of the number of charging cycles they can sustain before their performance (ability to hold the charge) degrades below a reasonable level. According to Kiplinger, a key component of a new car’s value and attractiveness for a consumer is what it will be worth after three to five years of use. The estimated $15,600 battery in a 2011 EV has a range of a hundred miles. If by 2015 you can have an EV with a brand-new battery, presumably with greater range and longer cycle life, for $8,400, then how much would you be willing to pay for a used four-year-old EV? The inevitable battery improvements mean a four-year-old EV will be a relic. Suddenly, the calculation of an EV’s resale value starts to look more like reselling a used computer than a used car. Red light.
Problem E: Limited Driving Range Limits Savings
Limited driving range erodes not just the convenience but also the economic benefits of the electric car. EV enthusiasts hold to this incontrovertible fact: the real savings from purchasing an electric car comes from avoiding the gas pump. With every mile you drive, you save! But this matters only if you are traveling great distances. The reality of a limited charging infrastructure means that, for most adopters, the EV will be the “city car” that they drive to work and for local errands. But in limiting their driving range to short distances, the city car usage case also limits the potential for economic advantage. This is a big problem: yes, the more you drive, the more you save; but as long as the range of your EV is limited, so too will be the range of your savings. Red light.
Problem F: Electric Grid Capacity
Imagine that all the concerns raised above have been addressed. The policy makers have succeeded in prodding the different actors into action; the myriad car manufacturers have found a way to sell EVs at a price that competes with gas-fueled competitors; the battery makers have extended their driving range; and communities and infrastructure firms have cooperated to blanket the country in a dense web of charge spots. As mass-market buyers finally embrace the EV proposition, is success finally at hand?
No. The failure of the traditional electric car is embedded within its path to success. Car usage is as predictable as commuter rush hours. Approximately 90 percent of driving occurs as part of our daily commute as we drive from home to work and back again. This means that, since most of us are driving at the same time of day, we’re also not driving at the same times of day. And this means that the majority of EV drivers will plug in their EVs around 8:30 or 9:00 a.m. when arriving at work and then again in the early evening when returning home. As long as just a handful of drivers adopt EVs, this is not a problem (but remember: if it is relegated to just a handful of drivers, the EV is not a solution to oil dependence, environmental damage, and high fuel costs). What would happen if a substantial percentage of drivers adopted EVs?
There are over 5 million registered cars in Los Angeles County alone. If just 5 percent were electric (250,000 vehicles would be a great success, though still not nearly enough to make a meaningful dent in the environmental quality or the economics of oil imports), plugging them in to recharge simultaneously would place a 750-megawatt load on the electric grid, equivalent to the generating capacity of two midsize power plants. Having EV penetration of 25 percent would impose a 3,750-gigawatt load, which is over a third of L.A. County’s average electric load! If the EV was adopted by the mass of consumers, and everyone in a community were to plug in at the same time, the sudden surge in power demand would send a shock wave through the electric grid that could overwhelm the distribution and generation networks, causing a power blackout.
To be sure, achieving even 5 percent market adoption will take some time—forever, if the other red lights aren’t successfully addressed. But this final point highlights the need for a scalable solution to be in place on the power generation/distribution side of the ecosystem if successfully turning all those other red lights to green is to have a chance at enabling mass adoption. Thus, the final hurdle for the electric car could be electricity itself.
Paradoxically, as long as the electric car fails to break into the mainstream, the challenge of the electric grid can be ignored. But once it does succeed in attracting mainstream buyers, the inability of the grid to support demand will drive its failure. In contrast to the usual problems of emergence that we have examined, the problem here is one of scalability: the light is green as long as there is no traffic; but once traffic picks up, we have a flashing red light on our blueprint.
The good news here is that around the world governments and utilities are investing to deploy smart-grid technologies to help circumvent this problem. “Smart grid” is a catchall term for a host of technologies that can respond to, and even predict, the individual demands placed on the electric system and adjust load and distribution accordingly. These include smart meters that adjust the price charged for electricity in real time, smart automation that can turn electric equipment and appliances on or off depending on the load on the grid, and smart distribution that can help ensure that local power lines are not overloaded. The better news is that this technology is already available. But the harsh reality is that it is expensive to acquire and time intensive to deploy. The smart grid is coming but on its own schedule. Whether it will be ready in time for the mass adoption of electric vehicles is an open question.
Individual Execution vs. System Viability
Looking at the EV proposition through a wide lens reveals a list of challenges that goes far beyond simply building an electric car that goes the distance. The core hurdles have to do with the general problems surrounding electricity: generating it, storing it, delivering it, and—for drivers—paying for it. Until these concerns are successfully addressed, the sad history of the electric car will continue to repeat itself.
The broad array of players—public and private—that are devoting substantial resources to solving the EV dilemma along the traditional lines are focusing on their own narrow execution challenges while hoping that the system will somehow “find” a way of coming together. But while these efforts are improving the quality of every individual element of the system, there is a great deal of incoherence in the way that the system is developing as a collective. From the perspective of any given actor, the path to success is blocked by unresolved co-innovation risk and adoption chain risk. We’ve seen this before. Hope is not a strategy. Without leadership, the system could converge, but it is unlikely to converge along a path that is either timely or efficient. Is there a better way?
The Five Levers of Ecosystem Reconfiguration
Solving ecosystem problems requires an ecosystem approach: taking the existing pieces and finding a way to reconfigure the puzzle. We saw this approach used in chapter 3, as the Hollywood studios reconfigured the digital cinema blueprint, and again in chapter 4, as Amazon reconfigured the e-book blueprint. In both cases, success did not come from discrete technology improvements. And it did not come from vertical integration—bringing external activities inside the firm. Neither better technologies nor increased control were sufficient to unblock the bottlenecks to value creation. Instead, success came from accepting the limitations of the existing elements and then finding a new way to bring them together.
Reconfiguring an ecosystem entails changing the pattern of interaction among the elements in the system. Taking any value blueprint as a starting point and looking at the arrangement of activities, actors, and links, we can ask five fundamental questions to uncover a new configuration that can eliminate the problematic bottlenecks:
1. What can be separated?
Is there an opportunity to decouple elements that are currently bundled in a way that can create new value and move the value proposition forward?
2. What can be combined?
Is there an opportunity to bundle elements that are currently uncoupled in a way that can create new value and move the value proposition forward?
3. What can be relocated?
Is there an opportunity to shift existing elements to new positions in the ecosystem in a way that can create new value and move the value proposition forward?
4. What can be added?
Are there elements that are currently absent but whose introduction to the ecosystem can create new value and move the value proposition forward?
Are there existing elements whose elimination from the ecosystem could be accommodated in a way that would allow for the creation of new value and move the value proposition forward?
These questions are not simply about change. Recall that Sony added its own proprietary bookstore to its e-book initiative—to little avail. Sony failed to see the rest of the problem: that without a convenient way for consumers to have access to a lot of content, the market could not take off. Compare this to Amazon’s effort: the company did spot the real hurdle and asked itself: what can we combine? By incorporating a wireless link between the Kindle device to its already popular store, Amazon enabled users to effortlessly access content in seconds. And with this blueprint clearly in mind, the company shifted its position from device maker to ecosystem leader, enticing publishers and customers to embrace the value proposition.
Figure 7.3: The five levers of ecosystem reconfiguration.
Recall the red light that held back the promise of digital cinema. Theater owners could not see the relative benefit of going digital when the outlay was so high. Once they recognized this problem, the movie studios—for whom going digital promised tremendous cost savings—stepped in and asked a key question: what can we add? The digital cinema integrator and the virtual print fee link were added to the blueprint to enable a financing model that subsidized the exhibitors and moved digital cinema into the mainstream.
We witnessed a similar ecosystem reconfiguration in chapter 6. As various MP3 players vied for dominance, Apple made its move, asking, what can be combined? An elegant device merged with smart software meant that a key problem to the portable MP3 player proposition was solved: users now had an intuitive way to manage their music collection. Then, by adding the iTunes Music Store, Apple cemented its win.
Employing the levers, alone or in combination, can be helpful in revealing the path to a viable solution. Now consider the six EV problems:
Problem A: Purchase Price Premium
Problem B: Limited Driving Range
Problem C: Charging Infrastructure
Problem D: Battery Resale Value
Problem E: Limited Driving Range Limits Savings
Problem F: Electric Grid Capacity
How might reconfiguring the ecosystem help address each of these problems and unlock the EV value proposition?
Just such an approach to solving the EV problem—one that considers the ecosystem holistically rather than each piece individually—is being pursued by a fascinating new company named Better Place. At the time of this writing, Better Place is on the verge of its first commercial deployment: the company is planning a market launch in Israel for early 2012, followed by a launch in Denmark later that year, with additional countries and regions to come.
While Better Place’s outcomes are yet to be determined, the start-up’s approach offers an object lesson in how to think about ecosystem strategy.
Better Place: A Different Approach to EVs
Better Place was founded in 2007 by Shai Agassi, who turned down the opportunity to become CEO of software giant SAP in order to pursue an innovative vision for gasoline-free cars. “I’d rather fail at Better Place than succeed at SAP because no other job could compare to trying to save the world,” he explained. His strategy is as bold as his decision.
Better Place is attempting to reconfigure the EV ecosystem. Its strategy starts by embracing the problems we raised above as constraints on its blueprint design. The company’s starting premises are that:
Figure 7.4: The Better Place value blueprint.
The New Proposition for Consumers
Better Place’s approach is not to innovate the electric car but rather to innovate the ecosystem around the car. By reconfiguring this system, Better Place changes the nature of the value proposition for almost every actor in it, starting with the car buyer.
In this blueprint, the car and the battery are separated. Rather than buying a car that includes a battery, the driver purchases and owns the car, while Better Place purchases and owns the battery. In exchange for a mileage-based monthly fee, the company installs charge spots in the driver’s home and workplace, gives the driver use of the battery, offers free access to the charging infrastructure that Better Place itself builds out, and includes all the electricity required for battery charging. It also offers unlimited battery exchanges.
As a package, this solves the core problems that undermine the traditional EV value proposition for consumers. By excluding the battery from the car purchase (in the same way that gasoline is excluded from a traditional car purchase), the EV can be offered at a competitive price. For example, in the United States the acquisition cost of the Leaf without a battery would be $33,000 (retail price) minus $15,600 (cost of battery), for a total of $17,400. After applying the $7,500 government rebate for electric cars, you could potentially purchase a brand-new EV for less than $10,000! Problem A solved.
And because Better Place owns the battery, the question of its obsolescence and resale value disappears—at least for the consumer. As a for-profit company, Better Place is in a much better position to handle obsolescence because it can depreciate the value of the battery against company profits. Moreover, when the fully depreciated battery can no longer hold sufficient charge for automotive use, it can be resold to utility and industrial markets as a cheap power storage and power backup solution. Problem D solved.
By providing a home charging spot and proactively building out the public charging infrastructure, Better Place addresses the availability side of charging convenience in problem C. Here, the advantage of a tight geographic boundary becomes clear: by the time of its Israel launch, Better Place will have installed thousands of charge spots throughout the country (population 7.5 million, area 8,019 square miles). Compare this with the 1,202 public charge spots deployed (as of September 30, 2011) throughout the most EV friendly state in the United States, California (population 37 million, area 158,706 square miles).
To help manage charging needs, EVs that work with the Better Place network come equipped with an overarching software operating system, dubbed OScar. For the consumer, this onboard software is an interactive tool that anticipates the driver’s energy needs depending on destination and time of day and locates available charge spots. It also connects to roadside assistance in case of emergencies and serves as a navigation aid. And because Better Place—an industrial bulk buyer that can shed load on demand, and hence be the beneficiary of extremely low electricity rates—purchases the electricity that comes even from your home charger, this translates into much lower electricity cost per mile. Problem C addressed, at least in part, as well as some headway on problem E.
The battery exchange station is the EV equivalent of an automated gas station, with the promise that a battery change will take less time than filling up a gas tank. In a setup that evokes an automated car-wash line, the driver pulls onto a conveyor system where a robotic arm removes the old battery from beneath the car and replaces it with a fully charged one, all in a matter of minutes. With the switch station, the range of an EV is thus no longer limited by the hundred-mile range of its battery, but by the density of the switch station network: as long as you can get to a switch station, you can go another hundred miles.
Better Place promises to deploy these stations at regular intervals along all major routes—four stations along every hundred-mile stretch, guaranteeing complete coverage of a geographic location and ensuring that a fully charged battery will always be available. In advance of its Israel launch, it has deployed twenty switch stations across the country, with forty planned by the end of the first year. Within the geography, the driving range issue (problem B) is solved, as is the challenge that the economic advantage of cheaper fuel cost per mile only comes with distance (problem E).
It is interesting to note that the idea of the battery switch station can work only if batteries are not owned by individual drivers. Otherwise, drivers would be concerned with the potential of trading their precious battery for an inferior one. This benefit flows directly from the reconfiguration of the ecosystem.
Creating the Win-Win-Win for Ecosystem Partners
While all of this enhances the Better Place offering for customers, one critical limitation arises. For a car to work with the system, it must be designed and built to interface with Better Place’s service platform: battery bays that are compatible with the Better Place exchange station infrastructure, charging modules aligned with the charge spot standard to which Better Place has subscribed, and data interfaces compatible with Better Place’s operating system. This means that auto manufacturers need to design cars specifically for the Better Place system.
Remember the run-flat failure?
The good news is that Better Place did too—and has managed this dependence proactively. In 2008, Better Place partnered with Renault to jointly commercialize a mass-market EV. This was possible because of CEO Carlos Ghosn’s confidence in the future of electric cars (the Leaf is also his initiative through the Renault-Nissan Alliance). But a critical element was Agassi’s willingness to commit to a scale that made it worthwhile for the carmaker to design the zero-emission Fluence Z.E. around Better Place specifications. Unlike other EV pilot projects, Better Place guaranteed volume: the company placed an order for 100,000 Fluence Z.E. cars back in 2009—four years before it had a single customer.
The implication, however, is that, at launch, customers who want to partake of the Better Place offer can drive only a Renault Fluence Z.E. This is a real constraint but not necessarily a fatal flaw. Keep in mind Henry Ford’s policy on variety for the Model T: “You can have any color you want, as long as it’s black.”
The New Proposition for Utilities
Because Better Place owns the battery, buys the electricity, manages the charging infrastructure, and runs the operating system inside the car, it has a rare view into the charging needs of any EV in its network and a unique ability to manage the charging process. These combine to allow the company to deal with utility power load head-on. By balancing power demand from cars with grid capacity, the solution enables utilities to sell more energy with no need to upgrade their infrastructure, while at the same time keeping the customer happy.
The Better Place software blankets the entire system, allowing the company to monitor the charge status of each battery—whether it’s powering a car, plugged into a charge spot, or waiting at a switching station—and can anticipate when it will require more energy. It is also able to monitor the electric distribution network to know when it is approaching load capacity and when there is slack in the system. Using this information, Better Place can selectively charge different EVs on the system, delaying the power feed to those cars with batteries that are already quite full and which are going to be parked for a while, prioritizing charge to those cars whose batteries are low or whose drivers have signaled a desire for a full recharge. By exploiting the intelligence in the system and its visibility into the car, Better Place has provided a smart-grid solution for utilities without the need for utilities to deploy a smart grid.
Beyond intelligence in pulling power from the grid, the Better Place solution can use electricity stored in idle batteries to deliver power back to the grid when electricity demand threatens to exceed supply (for example, during peak hours on hot days when utilities are reaching their generation limits). While the idea of vehicle-to-grid (V2G) charging has been discussed for decades, two key obstacles stood in its way. First was the need for smart-grid technology that would allow for such signaling and two-way transfers. Second was the degradation in battery life that is caused by V2G charging. Despite the fact that utilities are willing to pay a big premium for kilowatts at times of peak load, expectations are that consumers will be unwilling to risk their investment in their battery. In the words of one potential buyer, “It’s MY car, MY battery, and MY time. No, thanks, you can keep your pittance—not worth my inconvenience.” Because Better Place owns the battery and has added intelligence into the charging network that it manages, both these constraints disappear. Problem F solved.
The Profit Proposition for Better Place
As deep-pocketed firms and governments around the world scramble to make the EV proposition a go, this new entrant has, at least on paper, solved all six of the EV constraints. How can Better Place afford such a radical proposition? While the vision seems radical in the context of cars, it is well established elsewhere. How can a mobile phone operator afford to “give” you a $300 phone for $50 while also deploying an infrastructure of base stations and antennas? The answer, as every cell phone user knows, is a multiyear service contract. Agassi’s first insight was to find an analog in mobile operators, which subsidize the acquisition of the cell phone (battery), and then make money over the life of the contract in which the customer pays a subscription fee that includes a certain number of minutes (miles) each month.
But his second insight, no less crucial, was to identify the right target markets in which to deploy his novel proposition. Here, rather than setting his sights on the obvious prize of California and the U.S. market, Agassi fixated on markets whose structure would best offset his constraints of capital and existing technologies.
The profitability of the Better Place proposition hinges on the relative attractiveness of EVs over traditional gas-powered cars. This attractiveness depends on the combination of two elements: the relative price of electric miles compared to gasoline miles, and the relative price of electric cars compared to gasoline cars. (Note: A more detailed analysis appears in the endnotes.)
The first requirement is that the cost of electric miles (e-miles) is much cheaper than gasoline miles (g-miles). So much cheaper that Better Place can pay for the battery, pay for the electricity, pay for the infrastructure, capture a healthy margin for itself, and still be able to sell the miles to consumers at a price that roundly beats gasoline miles. This varies by country. In fact, other than in the United States, where the gasoline tax is far below the average of other Western countries (a realization that often surprises Americans), the gap between the cost of e-miles and g-miles is already substantial. In Denmark, where the average price of gasoline in July 2011 was $8.87 per gallon, and in Israel, where the price was $8.33, the price difference can be over $0.20 per mile. Driv-ing 15,000 miles a year for four years amounts to a difference of $12,000. This disparity is expected to grow substantially as battery costs continue to decrease and gas prices rise.
The second determinant of attractiveness is the price of acquiring an EV compared to a gasoline car. This also varies by country. In Israel the purchase tax on conventional cars is 85 percent—nearly doubling the cost of the car before you drive it off the lot. But for electric cars the tax is a “mere” 10 percent (increasing to 30 percent in 2015). Denmark offers its citizens even greater motivation to go electric: conventional cars are taxed at 180 percent, EVs at 0 percent.
Denmark has a population of 5.5 million people and is one of the most environmentally conscious countries in the world—its EV tax exemption has been on the books for over a quarter of a century. Still, by 2010, there were fewer than 500 registered EVs in the entire country. Why? Because subsidies solve only the acquisition price issue (problem A). An EV that is less expensive but not functional is not a viable solution. If you are looking for a vehicle that is constrained to short-range travel, for most Danes the dominant choice is a bicycle.
But with the range constraint removed, the tax incentive gives Danish car buyers a viable choice: purchase a Fluence Z.E. at $37,962, with no added tax, or buy a comparable yet gas-powered car such as the Toyota Avensis, which has a pretax price of around $32,000, for up to $89,600, after tax. And while the 85 percent tax in Israel might now seem like a relative bargain, the tax exemption there similarly guarantees that buyers will see real, significant savings up front.
Limitations of the Approach
The Better Place offer will surely not appeal to everyone. The absence of initial choice in cars, the still unproven reliability of both the car and the network, the need for a dedicated parking location to allow for charging at home—these objections and others will limit the appeal of the proposition. The relevant question is not whether there will be customers who reject the offer but whether there will be enough customers who accept it. And a new car at 50 percent off is likely to hold at least a little appeal. One group for whom this offer seems especially attractive is cor-porate fleet managers who, in addition to appreciating lower acquisition prices, also regard the elimination of fuel price fluctuations for four years in their budgeting cycle as uniquely attractive. Indeed, this segment is a key focus for Better Place.
Better Place has harnessed a potent combination: focus and scale. Its novelty comes from its innovative approach to reconfiguring the ecosystem. But its effectiveness comes from combining this with an intelligent selection of target markets. It is precisely because the Israeli and Danish markets are so small—in terms of both geography and population—and so bounded that Better Place can afford to deploy a comprehensive infrastructure of charge spots and switch stations in advance of selling cars. These are ideal traffic islands in a way that Los Angeles County cannot be. And it is precisely because the tax regimes in these countries were so compelling that the company can find the confidence (and instill this confidence in the investors who have entrusted over $700 million to them before their launch) that its offer will be attractive to a meaningful number of buyers and, in turn, subsidize the participation of all the other players through purchase contracts that commit to both volumes and dates. This combination of focus and scale is the key that enables Better Place to accept the up-front costs of ecosystem leadership and break the chicken-and-egg cycle we have seen stymie firms time and again.
In a world obsessed with globalization, size, and interconnectedness, it becomes ever more critical to know where to draw the boundaries. In this regard, Better Place is following the very same strategy of localized deployments that characterized the successful network technologies of yesteryear—the telegraph, the telephone, and the electric network itself were all initially deployed as local, isolated networks that were economically viable within their initial bounds, and were patched and linked together into broader networks only much later in their development. The first objective in an ecosystem is to put together the right pieces in the right place for enough customers to come on board and make the venture sustainable. The national and global network might come. But it will come later, after multiple successful deployments that gradually increase in scope, size, and ambition.
In this regard, Better Place’s model does not preclude the rise of alternative approaches to commercializing EVs that might address problems A through F in a different way, relying on leasing arrangements and open systems. Success does not require or imply monopolization of a market. Just as we have multiple cell phone operators in the same geographies, nothing precludes multiple EV operators from sharing markets and even, through mechanisms analogous to cell phone roaming protocols, sharing infrastructure.
Reconfiguring Ecosystems for Success
The EV proposition is not a car problem, it is an ecosystem problem. And just like every success story we’ve encountered thus far, it needs an ecosystem solution. Sometimes this might be a matter of doing the same things better. But more often, it seems, success hinges on finding a way to do things differently by asking how we can modify a value blueprint: What can be separated? What can be combined? What can be relocated? What can be added? What can be subtracted?
Today, Better Place is taking its best shot at reconfiguring the electric car ecosystem. I find the company’s example particularly instructive because it has used all five levers in combination to redraw the EV blueprint.
1. Separate. The central modification of the Better Place offer is the separation of the car from the battery, a move that goes far in solving the stubborn problem of battery economics from the consumer’s perspective.
2. Combine. By linking the battery, charging infrastructure, and the purchase of the electricity through the grid, Better Place gives the utilities the opportunity to serve more demand (and sell more power) without the need for new investment in capacity or distribution.
3. Relocate. In the traditional EV model, the burden of paying for electricity falls on the consumer. In the Better Place model, it is the company that manages the transaction with the power providers, allowing the consumer transaction to shift from kilowatt hours to miles driven.
4. Add. With its overarching operating system, Better Place adds a key component that facilitates energy management throughout the ecosystem. And because it has relieved the consumer from ownership of a specific battery, Better Place is able to introduce the battery switch station as a solution to the problem of driving range.
5. Subtract. With its operating system tying together the electric distribution system, the charging infrastructure, and the actual charging schedule of the batteries, Better Place is able to eliminate the need for a smart-grid infrastructure to solve the grid overload problem.
A Great Strategy Is a Good Start
Success, of course, is not guaranteed. Having a great value blueprint eliminates important sources of failure, but it does not, alas, ensure victory. In a world of ecosystems, great execution is no longer sufficient for success, but it remains a necessary condition. Macroeconomic and geopolitical shocks pose existential risks to every enterprise. Moreover, although ecosystem problems A through F are solved “on paper,” whether the solution will transfer to the harsh reality of the market will depend on Better Place’s ability to manage a host of factors: getting the financial models right; managing its funding needs; setting the right price points; delivering the promised quality of service; overcoming the inevitable operational glitches and operational complexity, which is sure to accompany additional partners and service extensions; managing the organizational challenges that come with geographic expansions . . . the list goes on. But note that these factors are execution challenges. They are important concerns that will without doubt require excellent management and organization to successfully navigate. These are significant execution challenges. But, as such, their resolution falls largely, though not entirely, within Better Place’s control.
At the very least, Better Place’s efforts will be instructive. At the most, they will be truly transformative. But regardless of their specific outcome, one thing is clear: the success of electric cars hinges on the successful alignment of the entire electric-car ecosystem. Investing in the individual pieces without accounting for how they fit together in the bigger picture is a recipe for failure.
A great blueprint structures the ecosystem in a way that minimizes co-innovation and adoption chain risk. The goal of ecosystem reconfiguration is not to eliminate all risk—uncertainty is inherent in any innovation attempt. Rather, the goal is to shift risk to locations where it can be managed most effectively. Success is never certain, but a well-crafted strategy makes it much more likely.*
