The electric car is likely to emerge as one of the most transformational products of the current era, as important, perhaps, as the personal computer and the Internet. Given the effect of the auto industry on the rest of the economy, mass commercialization of the electric car will fundamentally transform not just that industry but others such as petroleum, electricity generation and distribution, steel, nonferrous materials, and chemicals. By reducing the world's dependence on crude oil, the electric car will reshape the structure of global trade. Importantly too, because electric cars have zero emissions, they also could dramatically reset the debate on global warming.
It's no wonder, then, that observers and analysts are caught up in frenzied discussions about who will win the great green-car race. What makes the contest particularly interesting is the fact that an all-electric car will be the first major new product in which, right from the start, the contestants include companies from not just the developed but also the developing economies. PCs, mobile telecommunications, and Internet services were invented and launched in the West. It was only later that Asian companies such as Lenovo, Bharti Airtel, and Alibaba jumped into these markets.
But this time, Asian companies are among the leaders in the electric-car race. The Chinese company BYD, for instance, is determined to roll out its all-electric E3 and E6 models this year and has announced plans to bring the E6 to the U.S. in 2010. Japan's Mitsubishi Motors has already launched its electric car, the i MiEV. The boss of another Japanese automaker, Nissan's (NSANY) Carlos Ghosn, is, through Nissan's alliance with Renault, the boldest promoter of electric cars. Tata Motors (TAMO) in India has announced that it will introduce its all-electric Indica Vista EV in Norway this year.
In predicting the future of this emerging industry, it is critically important to guard against two fallacious assumptions. No. 1: Leadership in battery technology will be the primary determinant of who emerges as the leading electric-car maker of tomorrow. No. 1: Being the first company to launch an electric car will bestow a strategically important first-mover advantage on the pioneer.
A Car Is More Than A Stack of BatteriesBYD's ambitions to beat Toyota and become the world's largest car company by 2025 appear to rest on the core premise that leadership in battery technology will automatically or easily translate into leadership in the car business. If so, this is a very precarious assumption. In fact, we deem it all too likely that Warren Buffett, who has made a big investment in BYD, may actually be betting on BYD's future as a leading battery supplier than as a leading car company. Consider a few examples:
Intel (INTC) dominates the world of microprocessors, the brains of PCs. Yet Intel is not a player in the PC industry. If Intel had chosen to play in both markets—microprocessors and PCs—it would probably have lost in both, since the core capabilities required to win are different across the two businesses. Also, as a PC company, Intel would have found it difficult to sell microprocessors to other PC companies, its direct competitors.
Along with fellow chipmaker Texas Instruments (TXN), Intel was once an early entrant in a very different industry: electronic wrist watches. Like the car industry today, the watch industry went through a profound technological change in the 1970s, from watches powered by mechanical movements to those powered by a battery and integrated circuits. Intel and TI briefly attempted to be players in watches but realized rather quickly that, while semiconductors and wristwatches had now become related businesses, they are very different.
Consider now the case of Toyota (TM). Within a few decades, Toyota has emerged as the undisputed leader in the global auto industry. People who have analyzed Toyota give many explanations as to why it has achieved this dominance—a long-term orientation, world-class operating systems and processes, a culture of continuous improvement, partner-like rather than adversarial relationships with suppliers, and so forth. However, no serious observer has argued that either Toyota's dominance—or GM's weakening position—in the car business has much to do with those companies' global positions in engine technology.
Simply put, a car is much more than just an engine or a stack of batteries. Winning or losing in the car business depends on many factors—performance, safety, reliability, comfort, styling, dealership network, service quality, and price, to name just a few. Yes, engine (or battery) technology is important, but it's just one of many factors.
The Limits of the First-Mover AdvantageToyota was not the first company to introduce an automobile. IBM (IBM), Dell (DELL), and HP (HPQ) were not the first companies to launch a PC. Microsoft (MSFT) did not launch the first Internet browser. Neither Sony (SNE) nor Matsushita was the first to introduce the compact disk. And Google (GOOG) was not the first company to bring forth an algorithm-based search technology. Yet, over various time periods, these companies became the global leaders in their respective industries. Clearly, there are severe limits to the universal salience of a first-mover advantage.
Yes, a first-mover advantage can sometimes play a deciding role. However, for this to happen, the industry needs to exhibit at least two properties. First, it must be susceptible to rapid scale-up so that later entrants do not have the luxury of time to play catch-up. Second, other complementary features, components, products, and services must play a relatively insignificant role in the customer's buying decision for this particular product. As Intel and TI learned, most customers view a wristwatch as not just a time-telling instrument but also as a piece of jewelry. Similarly, a PC is much more than a piece of plastic wrapped around a microprocessor.
Even the most optimistic projections indicate that electric cars may constitute just 20% of all auto sales by 2020. This will give almost every car company plenty of time to catch up. Equally important, the great battery race will make sure that there will be several large companies that specialize in the design and manufacture of batteries for cars. Thus, in-house leadership in battery technology will become increasingly unimportant for leadership in the car business. Just as a car is much more than an engine, it will remain much more than a stack of batteries. Thus, winning or losing the electric-car race will depend on many factors besides battery technology.