Episode 2

Episode no. 2
Title: Is Tesla Disruptive?  Also Segway, Multair, Winglet, Organ Donors, and Regulation Über Alles
Date: July 30, 2013
Hosts: Horace Dediu, Jim Zellmer
Episode summary: Horace Dediu and Jim Zellmer discuss the odds of disrupting the present automotive club via Tesla.  We further dive into the regulatory and cultural environment that sustains the current players, while reflecting a bit on Segway, Toyota’s Winglet, organ donors and the Fiat “multair” engine.  Finally, we preview a larger discussion on apps in and around the car.

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Jim:  Welcome to Asymcar.  Well, Horace, podcast number two.  Today’s topic is Tesla.  So what strikes you about Tesla?

Horace: Yeah, well, I…

Jim: It’s come up in the comments.  And you’ve mentioned it from time to time.  Let’s start with your observations.

Horace: Well, I think it’s a great case study.  And I’m very curious about what’s going to happen there.  The problem… OK, so here’s the dilemma.  If you follow the Innovator’s Solution, which is the book that describes the keys to a successful disruption and you go through the list of things that an innovator needs to do to be successful, as a disruptor it tends to be everything that Tesla doesn’t do.  Or that Tesla doesn’t do the things that are enumerated there.

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Horace (cont): So the challenge therefore is either the Innovator’s Prescription for our disruptor… The algorithm is wrong, or Tesla isn’t disruptive.  So we have to get to the bottom of this.  There are anomalies.  First of all, right off the bat you should declare that this recipe is not cast in stone.  It’s not irrefutable.  There are success stories which are not following that recipe.  But we have to ask exactly if Tesla is an anomaly, why and how we make sense of it. So the thing is this, that…  So let me go through some of these items.  And then we’ll get into some of the paradoxes as well, of Tesla.

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Horace (cont): First, the first think I’d look at is a question of asymmetry.  Now, asymmetry of what?  Typically what I look for is asymmetry of business model.  Not asymmetry of technology.  Not asymmetry of management style or organizational structure.  I look simply for the reasons why someone who is incumbent in the business wouldn’t want to do exactly what the entrant is doing.  And the logic of it is that if you’re entering a market like a David versus Goliath you set new rules.  You don’t need to engage in a head-to-head battle with the incumbent.  That preserves you.  Because typically what happens is the bigger guys win in most head-to-head battles, or sustaining battles.

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Horace (cont): They just have all the resources.  They have no incentive not to win.  But we’ll get back to that, whether indeed there’s something anomalous – not so much in Tesla, but in the incumbents in this case.  But at first glance it looks like Tesla is trying to make cars to sell to the same customers using similar methods.  Although yes, there are some differences.  But they are part of the same value network.  Although again, there are some distinct differences as well.

Jim: So they’re joining the club, in other words.

Horace: Yeah, but they’re making money the same way.  The idea is you buy a car for a certain amount of money.  And why wouldn’t an industry that has been cross-interbreeding for so long, where most large auto makers own a piece of another auto maker, which share platforms, which tend to share a lot of engines.

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Jim: Suppliers.

Horace: Which tend to share suppliers, tend to share even distribution in terms of dealerships.  You have a dealership which handles multiple brands – very common now.  So why would they look at this new producer of cars and say, well we don’t want any piece of it?  That is the real puzzle, ok?  I think power train in itself – and I mentioned this last time – power train in itself isn’t something that would put people off.  Yes, it’s a quantum leap in terms of technology.  Yes, you may have to adapt a lot of processes and tooling.  But fundamentally these are things with four wheels that drive on the same road, subject to the same regulation, subject to the same economics.  Yes, the fuel systems are different.  But then again, you have various fuel systems like diesel versus now ethanol.

Jim: Natural gas.

Horace: Natural gas coming up as well.  So there are different

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Horace (cont): fuel systems.  There are different power train technologies already which cohabit the same value network.  So that’s one issue: asymmetry.  The other issues are related to, for example, job to be done.  Is the newcomer addressing a job that’s an unmet need.  Typically, again, this is a new market disruption, not a particularly low-end one.  So you would see, for example, what Apple did in making our phones more computer-like.  It has essentially taken a new job to be done for the phone and exploited that.  And sure enough, people rushed in to hire the product for this new job.  Does the Tesla hire… Is the Tesla going to be hired for a new job to be done in transportation.  Well, if they had a weird business model where you didn’t own a cars, for example – and we mentioned this,

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Horace (cont): again, the last time which would be…  Well, you don’t actually own a Tesla.  You maybe don’t even lease it.  You rent it.  Or it’s a shared car scheme.  Or we take away the hassles of ownership.  We take away the hassles of insurance.  We take away the hassles of parking.  We take away a lot of issues which come along with ownership.  That’s a service.  That’s an interesting new job.  Many people have that problem, especially in cities.  They’re not looking for more transportation.  They’re actually looking for how do I not have transportation as much.

Jim:  Well there are a few companies like Zipcar.

Horace: Yeah.

Jim: And a few others out there that are abstracting that, right?

Horace: Exactly.

Jim: And taking the hassle away from you.  And interestingly, for the current manufacturers abstracting you from their dealer network, from their sales process, the leasing the financial, the whole thing.  So that perhaps is an asymmetrical approach.

Horace:  Exactly.  So they are

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Horace (cont): taking some things…  They are taking a distinct approach with respect to retail.  That is the network issue.  Although, again, we’ll get to that.  I think there is an exception there.  But I”m not sure how scalable it is as a global infrastructure because, again, the dealer networks are actually quite strong politically and may actually be able to stop Tesla.  The impetus might be that the laws can change.  Tesla will be powerful enough politically in its own right.  But we can’t get into that, quite, to see what the dynamic will be.  But that’s one of the…  The other thing is when you talk about disruption you sort of have to ask yourself, is it low end or is it new market.  And this has been sort of the dichotomy of disruption that’s been going on for a long time.  And… In other words, you have to understand how exactly will this

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Horace (cont): product compete.  So, on the basis that it’s low end it means that it competes with non-consumption, typically.  It competes with over-serving products that have moved up market.  Well, the auto industry is so broad that there are very few spots at the bottom.  Truly in the markets that Apple… that Tesla is attacking.  So we’re not sure.  And obviously they’re not priced as a low-end product.  They’re actually priced for the one percent’s of the world.  That is indeed an almost hyper-high end.  Because in fact these people are… Or the buyers are expected to kind of be almost altruistic and not economically-minded enough to really make a decision on the basis of economy.

Jim: Well, it’s almost a fashion statement.  I continue to see more Tesla’s even in my home of Madison,

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Jim (cont): which is interesting, given winter.  But they’re different colors.  And I view it that way, along with an environmental statement and all those things.

Horace: Right, right. So you’re still trying to go down the checklist and saying ok, I’m not sure it’s a low-end.  The next question would be new market.  But again, new market as we talked about in the Zipcar model…  It’s about really changing the job to be done, looking outside of the core.  So is it really doing that.  It could be.  There’s is a sort of possibility that we’re not quite seeing the market that Tesla is enabling here.  Then there [is] a bunch of things about the value network that are troublesome.  Does it conform or comply with the world that is as we have it today?  Or is it trying to create a new world?  Which is a very hard thing to do, especially if you’re a startup or an entrant.  Well, there is this question about charging stations.  They’re trying to not only take on the car industry, they’re

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Horace (cont): trying to take on the dealer industry.  They’re trying to take on…

Jim: The oil industry.

Horace: The oil industry.  But the actual people who own filling stations and do that sort of work.  Because it is very different in the way that it approaches that model.  Now again, there might be asymmetries in all of those three, in which case it would succeed.  But it’s very hard to make sure that you’re not gonna get into a head-to-head battle with all of those players.  I think that the interesting thing is the mentality of the company.  I think the management there – they’re really not of a mind that says, we are humble.  We are meek.  We are going to go about this slowly.  I think it’s the exact opposite mentality to the disruptor’s creedo: be hungry for profit; be patient for growth.  It exhibits none of these things.  It is bold.  It is brash.  It is…

Jim: Yes.  They’re not sneaking up on anybody.  That’s for sure.

Horace: Yeah.

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Horace (cont): It is not self-effacing in any way – not trying to hide and fly under the radar.  It is the exact opposite of that.  It is a moonshot.  It is a railroad building exercise, in a way.  Let’s change the world in as aggressive way as possible.  So that’s…  You go down the list, and I’m finding it difficult to find conformance to the rule book.  And that’s why I initially looked at it and said hmm.  This doesn’t seem to comply.  So that is one way to look at it.  But the real question is maybe I’m missing something.  Maybe there’s something going on here that would allow them to succeed and prosper.  Now one thing that is possible – and this is, I think, coming up as one of the potential keys – is that the industry may be so bad, and so inept, that they really…  And this is…

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Horace (cont): So there’s this sort of…

Jim: [crosstalk]

Horace: Yeah.  There’s a caveat to the disruption hypothesis, is that normally – in most cases – the incumbents will have motivation to respond.  But in some cases they really do fall asleep at the switch.  So that’s the question about that.  Now first of all, it’s hard to believe because there are really a lot of incumbents.  So if it’s not GM, if it’s not Ford, if it’s not Chrysler, it could very well be one of the dozen other large manufacturers.  And if not them, then there’s probably a few more that are smaller and mid-sized manufacturers who might be interested in what…  Certainly Toyota is not full of fools.  And the Koreans and Japanese and Chinese are no fools.  So it’s this question.  I was watching again… The latest Top Gear I saw showed a Mercedes

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Horace (cont): electric supercar.  Is it the CLS?  Or something like that.  It’s based on one of the top of the line supercars they make.  But it has an electric power train with four different motors.  Super high performance.  It’ll actually almost beat the best performing equivalent of that car.

Jim: The traditional one.  Right.

Horace: Yeah.  A 6.3 liter AMG equivalent is actually slower in some cases than this electric vehicle.  It has some issues with range.  But it also has an architecture very similar to the Tesla in having hundreds if not thousands of batteries.  It is four-wheel drive.  It has regenerative braking.  It has very smart electronic control system to manage the traction not only through braking, but actually

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Horace (cont): through regeneration so that when it goes around corners really quickly…

Jim: Right.

Horace: Very low center of gravity.

Jim: Lots of software.

Horace: On and on.

Jim: Lots of software.

Horace: And… Yeah, lots of software.

Jim: Yeah.

Horace: Lot’s of processing power.

Jim: To make all that work.  Yep. Yep.  But you know, BMW has the i8 – same idea – coming up.

Horace: Same idea.  And so the l…

Jim:  But it was marketed in Provence and Monaco and…  So it’s targeting, obviously, the very high end.

Horace: Yeah.

Jim:  But taking those same tools from Tesla, or similar tools.  And applying it to their models.

Horace: So already now, only a couple years down the road of Tesla’s progress, already the larger, more well-resourced, more engineering focused,

Jim: Right.

Horace: …more visionary manufacturers are beginning to actually reuse some of its ideas.  Not to say that they’re copying.  But it’s…  The point is that that’s the nature of business.  The engineers are certainly not gonna feel like, hey, these guys are smarter than we are.  I’m sure the German engineers who,

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Horace (cont): by the way, or French or whoever – they’ve been in the industry for decades.  They’ve been studying electrical systems and all these other things for decades, and controls and so on.  So they’re going to look at this as a challenge.  And so they’re going to respond very effectively.  So that’s one piece of evidence to sort of say, well, maybe from the luxury end those makers will be building product that will compete with the Model S.  Now, of course, the other’s argument – counter-argument – is that yes, but Tesla is going down-market pretty quickly.  So they’re going to reach lower price points, lower tiers of the market, as they go forward.  But, again, it’s gonna take a couple of years.  And, I think, also from the bottom we’ve seen a lot of electrical, or electric vehicles some coming from Citroen, some coming from Nissan, coming from…

Jim:  Mitsubishi, and Toyota obviously.  Ford.

Horace: And GM with its

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Horace (cont): own variant.

Jim: The Volt.

Horace: With the Volt.  So there isn’t an absence and complete ignorance of the opportunity there either.  But there’s one more thing which puzzles me.  And that is that, why have… If this electric vehicle is more about the job to be done, is the question.  If it’s more about economy – being efficient – then why haven’t the people who actually buy vehicles on the basis of costs and efficiency – i.e. not consumers – why haven’t fleet purchasers run full speed towards electric vehicles.  Because you would think delivery trucks.  You would think service fleet vehicles.  All of these people would look at the economics and say, I’ll drop internal combustion in an instant because this think is more efficient.

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Horace (cont): Besides, my routes are predictable.  The vehicle is parked every night in the depot where I can get it fueled.  I can regulate everything about the way the vehicle is operated.  I can manage everything perfectly.  And thus, for me as a fleet buyer electric would be the answer.  No manufacturer that I’m aware of has addressed that market.  Tesla mentioned it briefly in 2010 saying they’re going to go there someday.  But if that’s the job to be done – i.e. efficiency and economy – why hasn’t UPS, why hasn’t FedEx…

Jim: FedEx.

Horace: Why haven’t those guys jumped on it.  And especially in Europe where they’re dealing with smaller vehicles, typically.  Urban areas and higher density of

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Horace (cont): cities.  So you have this question of if economy was the job to be done and efficiency, the route would have gone through the… outside of the consumer space.  And as the case is, for example, with diesel.  Diesel is the absolute standard in trucking.

Jim: Distribution.

Horace: But also in distribution.  Because it is extremely efficient.  And the miles per gallon on diesel are often 30% – often higher than that – than you would get on a gas vehicle.  And so of course, if you’re a fleet buyer you’re going to go for the diesel vans and so on.  So that group of buyers hasn’t even been approached by manufacturers, probably because it still doesn’t make sense on the initial cost to purchase,

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Horace (cont): on the maintenance long-term of the batteries – not of the vehicle.  The vehicle will probably be cheaper to maintain.  But the batteries are going to probably wear out.  And then you have to fold into the…  These are people who do nothing other than sharpen their pencils and figure out the total cost of ownership.

Jim:  Sure.  It’s called money.  I think that there is another angle on that.  And I agree with you that diesel remains the power plan of choice in that space.  But T Boone Pickins has been lobbying, marketing, advocating for natural gas power for natural gas fleets around the country.

Horace: Yep.  And I know there’s great engine technology there…

Jim: Yes.

Horace: …that hasn’t been deployed.  I think there are several companies that are in the diesel business are thinking to switch out to natural gas for fleets.

Jim: Right. Exactly.

Horace:  And that makes a lot of sense.  Folks there are probably thinking hey, the economics of this technology are perfect for us.  So why… That is the puzzle to me.  Electric seems to be something positioned for consumers,

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Horace (cont): not for those who are really concerned about efficiency.  And the consumer pitch – as was the case with the Prius which, by the way, again why hasn’t hybrid been the approach to fleet sales.

Jim: Everything.  Right.  Right.

Horace: Right.  So hybrid is great.  It does improve efficiency of gasoline engines.  But it still doesn’t add up in terms of the econ…

Jim:  Right – there’s a cost.  There’s a tax for it.

Horace:  There’s a tax for it.  So this is again… I’m not saying there’s an absolute proof here.  But there’s a weirdness about it.  Why hasn’t the industry gone through that path of least resistance.  It seems that the path is going through a psychological job to be done rather than truly an economic, rational job to be done.  And so the psychological job is much more around feeling good about your purchase.  And so in that…  And that’s why I say the job of Tesla and the job of Prius,

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Horace (cont): to some degree, is to give people comfort about their consumption.  And that’s… Nothing wrong with that.  Businesses have been built on the notion of providing psychological comfort.  But we just have to be clear about it.  Because that means you don’t have to fight a battle of justification.  And you have to simply say – and many brands do this all the time – it’s about motivation.  It’s about feeling good.  It’s about solving that job to be done.  And that’s why I’m thinking that perhaps that…  Case in point: these luxury cars.  And we mentioned Mercedes.  I’ve heard of Range Rover.  I’ve heard of Bentley in some examples doing…

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Horace (cont): showing off concept cars which are hybrid and/or electric.  And the idea is, again, that if you are going to spend hundreds of thousands of dollars – which is what these cars cost – you might want to feel good about your purchase because you’re getting some green credentials with the fact that the power train is a little bit more green.  So it doesn’t make an impact, really, in the economic sense.  But it is there as a job to be done.  So again, we’re just kind of circling around the real question here.

Jim: Right.  Right.

Horace: So… yeah.

Jim: But certainly one thing we’re seeing is an – and I’m in the software business – an incredible growth in software in these cars.  I was reading a review of the new GTI and they were talking about software that uses the brakes to give you different effects depending on your settings,

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Jim (cont): both in the suspension and in the… when you’re cornering to give you a bit of an oversteer or understeer depending on your perspective.  And all those sorts of things.  And obviously the Tesla world, the BMW i8, i3, the Mercedes you mentioned, certainly the Toyota Prius – they have incredible amounts of software.  And that’s only going to grow.  So I wonder if some of those players – and maybe it’s Apple someday with their iOS in the Car – if they have another angle on the market, both from a customer relationship perspective, value chain, all those things.

Horace: Right.  And that’s another thing, that usually breakthrough – a disruptive breakthrough – comes from outside the industry.  Now Elon Musk is from outside the car industry.  So he kind of qualifies along…  But he hired people to build the business very much in the same…

Jim: Mold.

Horace: … the same mold that exists.  And I talk about this last time.  It was about the fact that from my point of view the production methods that are put to use

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Horace (cont): are actually…  They’ve argued well, we’re going to have a different power train.  We’re going to have a different dealer network.  We’re going to have a different charging system or fuel link system.  But we’re going to make cars exactly the same way as every other car.  In fact, we’re going to buy, in fact, a plant that used to make cars Fremont, California.  We’re going to build them using the same tooling, the same machines, the same sheet metal, the same unibody, the same technology as far as welding it together, and so on.  Paint.  Everything is more or less copy/paste or forklift technology, right?  You pick it up and you drop ship it.  And that’s…  You’ve got yourself a car factory.  And there are people who suggest that the problem is not the things that Tesla is solving.  The problem is actually the very thing of the production system.  The production system is one that forces you to be heavy, big,

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Horace (cont): and…

Jim:  Sure.  It’s huge capital.  Absolutely.

Horace: …inefficient.  And especially because the capital required also forces you into a scale mentality.  That means that…  So the real asymmetry and, I think, also the question of what’s overserving…  What’s overserving the market today is not the current cars.  Because actually they vary all across the spectrum.  You can get yourself from the cheapest car to the most expensive – prices for cars vary from…  I don’t even know what the bottom is, but maybe fifteen thousand up to hundreds of thousands or millions even.  So there is no gap in the price band.  Really.  Maybe you can go below fifteen.  But there’s issues with that simply in terms of getting regulation and all that.  so the problem I think is that overservice is in the production systems which are in use today.  That they’re more than good enough.  That you need to think about

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Horace (cont): how can you make a production system that costs ten percent of what exists, what is in use today.  And it produces one tenth the volume.  So you have this sort of threshold beyond which your project will not get approved.  You better sell three hundred thousand a year or something like that before you build the plant.

Jim:  I thought about that.  And that’s an excellent point.  Dan Neil who I read every now and then in the Wall Street Journal reviewed a class of these new off-road vehicles called side-by-side a couple of weeks ago.  And he mentioned that they are mutating and up to seventy-five miles an hour.  And Kawasaki makes them.  Yamaha, Polaris, here at least in the states.  And I thought they looked like the original Daimler motor carriage and, obviously, earlier Model T and some of their earlier cars.  Obviously much more sophisticated, obviously.  The interesting part of the article was the fact that the Consumer Product Safety Commission

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Jim (cont): in the US has gone after some of them for different safety issues One can imagine how different the car industry would be if you had to start today…

Horace: Mmm hmm.  Mmm hmm.

Jim: …with all of those regulations and requirements.  And so it is…

Horace:  One of the curious things about safety – and this always is a great gem of a story – is that if you think about motorcycles…  Motorcycles are horribly unsafe.  I mean, they are lethal.  They are vehicles, basically, to turn operators into organ donors.

Jim: [laughter]

Horace: You can sort of think of them as that, as a…  Sort of a positive way of looking at it.

Jim: Very efficient.  Absolutely.

Horace:  Right.  It’s an organ donor creation product.

Jim: Right.

Horace: But the funny thing is that if you imagine if they didn’t exist. If someone were to say, hey I invented a two-wheeled vehicle that you just kinda hang onto it and it’ll go a hundred and fifty

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Horace (cont): miles an hour.  And it’s protecting you with, in some places, with a thin sheet of plastic over your head.  And that’s the… If someone put that out there they would just not be…  It would be laughed out of existence.  But motorcycles are grandfathered, right? So in that sense you have car makers being put to increasingly onerous safety requirements.  But motorcycles aren’t.  Nor, for example, are trucks.  But the point is that the…  We as consumers don’t value the safety ?  It’s a purely artificial construct in the sense that most buyers are not conscious of all of the subtlety as far as safety.  We have to simply entrust

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Horace (cont): authorities who supposedly know what they’re doing to certify these products.  And they’re given very vague ratings.  One to five on some scale.  And yet…

Jim: It’s interesting, though, to consider the safety question.  Just to back up a minute.  One of my favorite writers – now deceased – in Car Magazine in the UK was L. J. K. Setright. and he wrote an article some years ago and said that if people had worn seatbelts for many years we would never have had the explosion in all the… around vehicles safety requirements. The bumpers and the airbags and all these other things.  And I wonder about that.

Horace:  It’s a good point.

Jim: Obviously there’s a lot of cost.

Horace:  There isn’t a market mechanism at work.  Safety has not been driven by market forces.  It has been driven by…

Jim: Interests.

Horace:  Yeah.  There are simply things that are felt to be the right thing and you simply impose a blanket

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Horace (cont): requirement.  But you exempt a few things, like we said.  Motorcycles, trucks, certain vehicles which aren’t, quote, cars.  And that’s the interesting thing is that in order for you to innovate now, you have to somehow jump out of the classification of car to make something that actually solves a job that is different.  This is sort of the…  And I don’t argue against safety regulation.  But we have to…  You see, there isn’t room within that to think about where do we go from here.  And also, you can’t think outside of the network effects.  Because we have also roads and service stations and all of the paraphernalia that come along with cars.

Jim:  Right.  Road taxes, tolls and vehicle taxes.

Horace:  Taxes, tolls.

Jim: License fees.  Insurance costs.  All the interests are aligned. Yes.

Horace:  Exactly.  And it’s all an

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Horace (cont): interconnected mesh that prevents anything from really changing it.  There are places in the world that may still be open to innovation.  But most places aren’t.  And that’s…  Even emerging markets are, instead of thinking how can we create an infrastructure for transportation, they simply say, ok we’ll have whatever they’re having.

Jim: Right.

Horace: We’ll just adopt the standard, quote, best practices.  And so we don’t get even experiments that happen.  Or if they do, people immediately say, but this wouldn’t have happened if you adopted the best standards.  In that sense it’s a little bit depressing.  And I’m… Maybe Tesla is simply doing the best it can – the best given the circumstances, given the fact that they are an American company.  But it’s still a struggle to me to think outside this box.  And maybe

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Horace (cont): pressure builds up over time.  As you noted, the fact is more and more young people are choosing not to own a car.  More and more…  So you’ll have, potentially in the future, less driving.  Which means lower taxes from all of these fuels and cars and roads. Then you have…

Jim:  Unless they raise them, which they’re talking about. [laughter]  And the [crosstalk]

Horace:  Well, they’ll raise them.  So they’re going to squeeze people…

Jim: Right.

Horace: …so that those who remain with cars…

Jim: Yes.

Horace:  And the main thing is that it actually may affect all kinds of things.  I mean, the U.S. has been built – in the last century, last half-century or, I would argue even the whole last century, let’s say – has been built around the automobile.  Meaning that we’ve had urban planning, or lack thereof.  We’ve had the road network itself – which is one of the most impressive networks in the world, electric or not.  And the way homes are built, the way people live,

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Horace (cont): the way people shop, the retail environment, the mall concept, the…  All that has been build on the premise of a car.  Now I didn’t say internal combustion car.  I simply said car.  So what would enforce, or what would perpetuate the network and make sure people don’t have to abandon their homes and don’t have to change jobs and move from where they live – a lot of that will allow the car to be sustained as it is in terms of a vehicle for a finite number of passengers, etc.  You’re not going to see, suddenly, a new road network that’s friendly to bicycles, a new rail or public transport network that will emerge.  These are not economically viable.  Because even if you can engineer the trains and the vehicles, you can’t rebuild

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Horace (cont): the infrastructure easily enough.  So there are questions about land use.  There are questions about zoning.  There are questions about laws.  There are questions about millions and millions – hundreds of millions of people having been vested in a system.

Jim:  Although the bike people have been thinly successful in certain places in tapping some of the gas tax revenues to build bike lanes or separate bike paths.  But I want to go back even farther, because I think this cultural or political or economic incentive to maintain the current environment we have – the auto environment – it tells us a little bit of the story from Segway.  Remember when Segway was super hyped.

Horace: Mmm hmm.

Jim:  I know one of the first things they ran into was getting political approval to operate these  things in different places.  And that seemed to just stop it.  Among other issues.

Horace:  Yeah, and…  That’s a great story.  Segway even sold

35

Horace (cont): a utility… what is… not the word… a fleet-type vehicle which was supposedly for mail carriers.

Jim: Right.

Horace: The mail carriers could use this thing to deliver mail.  And the funny thing was the unions were against it.  Because actually it made them more productive.

Jim: More productive, right. [laughter]

Horace:  And so you can see how you introduce something…

Jim: Interests pile up.  Sure.

Horace:  And just… There’s resistance.  And of course the municipalities or local councils or whatever they’re called in different countries said, no, there’s no room for this.  It’s not allowed on the sidewalk, it’s not allowed on the road.  And they tried to lobby.  They lobbied for all kinds of concessions.  But no was the answer to all of them.  And it ended up in some really tiny niches.  And that was a very low-end vehicle.  That, to me, felt very disruptive because it had

36

Horace (cont): this idea of mobility at a tiny incremental improvement beyond walking.  And it was…  The only thing it didn’t have – which, again, is a deal killer – was conformability with the current network.  The current transportation and…  Yeah.  Well, that’s all you can call it.  And we go back to the question of if you find countries that have adopted bicycles to a large degree you find that they did build a lot of bike paths.  But they’ve had to do it over decades.

Jim: Yes.

Horace:  They’ve been thinking about it since the seventies.  This is true of Holland.  This is true even of the Nordic countries.  Even though the weather is miserable here in Finland most of the year, we have bike paths everywhere.  You can go from almost any point to any other point.  And you can get a map – an urban map – to tell you exactly how to do that.  And people get on their bikes year-round, even in the snow. And they actually

37

Horace (cont): drive around on bikes with studded tires.  So you change to winter tires.  And they’re not even mountain bikes.  These are people driving – even old people – driving or riding their bicycles in the snow.  I’ve seen it.  Speaking of mail carriers, mail carriers also use bicycles here.  And they do it in the winter.  So I should post some pictures I’ve taken over the years of bicycles in knee-deep snow.

Jim: In the winter.  Yes, yes, yes.  We have a few die-hards in Madison as well.

Horace:  In this sense here it’s just some normal person.  It’s not some kind of guy showing off.

Jim:  [laughter] Right. Is Segway an example of first-to-market, first-to-fail?  And I say that because I posted something on the Asymcar River that Toyota announced – and this would not surprise me – that they’ve cut a deal with the City of Tsukuba to begin a public sidewalk demonstration of Winglet, which looks quite similar to the Segway.

38

Jim (cont): A “Toyota Personal Transport Assistance Robot”, they’re calling it.

Horace:  Yeah, I’ve seen some concepts of those.

Jim: Yep.

Horace:  So they’ve been looking at this personal transportation question.  These vehicles that can go from being scooters or, essentially, wheeled chairs to somehow more road-friendly.  And these are brilliant people.  And the robotics that…  The technology and robotics and electric motors and battery technologies and the stabilization – all of these have been going through huge leaps which allowed the Segway to be born.  It allows now all of these.  And again, the Japanese are no fools about these things.  They have a very good process and a very good institutionalized engineering culture that allows the refinement of these great ideas.  And so the problem for Japan is the same as the problem for everyone else.  How do you make that conform.  And

39

Horace (cont): what they’ve done with the Prius is really impressive – that they’ve actually managed to make that a great product.  But it wouldn’t succeed.  And the reason Prius doesn’t succeed outside of the U.S. and Japan is because it competes with diesel.

Jim: In most markets.  Right.

Horace: In Europe there is… It essentially becomes a very expensive so-so mileage car.  Those mileage figures that it’s able to get are not particularly relative to diesel cars in Europe.  So it’s… In Japan diesel is very rare.  In the U.S. it’s very rare.  But that’s not the case in Europe.  And that’s why we’re seeing… In Europe we have amazing seventy mile-per-gallon cars that run circles around the Prius in terms of efficiency.  These are engines, also, that automatically stop

40

Horace (cont): when you’re at a light.

Jim: Right.  More software.

Horace:  So that part of the problem that Prius solved of saying, we provide motion or energy in those moments when the internal combustion engine is inefficient.  Those have been mitigated by a lot of wizardry with respect to software, as you said.  And also the…  Having stronger batteries and things like that just to start the engine.  And so for example – great example – of super-efficient engine is…  This is from Fiat.  It’s a twin…

Jim: The TwinAir.  Right.

Horace:  It’s called the TwinAir.  It’s about eight hundred CCs.  And yet it delivers about eighty horsepower which is plenty enough for something like a Fiat 500.

Jim: City, urban car. Sure, sure.

Horace:  A tiny little car.  But plenty good for Europe.  And that number of HP is about one hundred HP per liter, which is supercar territory.  And the way it does it is through turbocharging.

41

Horace (cont): And the engine is a twin cylinder.  But the cylinders are essentially locked together.  So they are not actually reciprocating.  And so it has a very compact design.  Very lightweight.  And it delivers excellent performance.  The mileage isn’t as good as a diesel.  But it is good enough.  So you can see how the industry is responding, even to the hybrid notion, by cranking up the improvement and the efficiency with…

Jim: Sure.  Doubling down on the current infrastructure.

Horace:  Yeah. So, I still think a diesel with…  And you sent me some links.  For example, Mini.  The next generation Mini will have a three cylinder, one point five liter as the standard engine across both diesels and internal combustion.  And three cylinders is one of these weird configurations.

42

Horace (cont): It’s very rare because it’s very unbalanced.

Jim: Right.

Horace: It’s not an engine configuration that lends itself to…

Jim: To symmetry.

Horace: Four cycle.

Jim: But software can solve a lot of it’s problems.

Horace: Right.  The four-cycle problem.  You have a four-cycle engine there’s gonna be a lot of weird forces acting on the engine when it’s only three.

Jim: Right.

Horace: But I think they solved it somehow, either through balance shafts, which unfortunately add weight.

Jim: Right.

Horace:  But you can probably hack in such a way…  It’s not a great configuration.  And the best configuration is an inline six.  But people moved away from that already many years ago.

Jim: Yes.  It’s too inefficient.  Yeah.

Horace: Yeah.  I don’t think there’s any inline sixes.    It’s also a packaging problem.

Jim: Right.

Horace:  An inline six is a horribly big hunk of metal to stick in a car that you want to have as small space as possible for your engine.  So I don’t know who makes them anymore.  I think maybe only BMW still makes an inline six.

Jim: I think you’re right.

43

Jim (cont): In mass volume, anyway.  So it sounds like our discussion about the asymmetric aspects of Tesla has concluded that it’s mostly operating within the current structure – maybe pushing the envelope here and there.  But so are others.  With powertrains or software…  The last one I want to mention is – and again, I find this interesting from an Apple perspective – that Ford appears to be one of the few big car makers trying to go their own way on software.  And they have announced a developer program.  You can write apps for their Microsoft-based software in their cars.  I don’t think it’s gotten any traction that I can see.  But I just wondered what that means.  If, since Apple’s been able to cut deals with certain car makers…  Ford trying to go on their own.  And obviously others are thinking…  BMW builds their own.  And where do you see…  Is there a value proposition or a disruption potential in that experience or that space?

Horace:  Yeah.  So this is gonna get… We should get a whole show going only on that.

Jim: Right.  Tease it a bit.  Yeah.

Horace:  Yeah.

44

Horace (cont): So let’s just say that a lot of it will depend on what we hear from Apple as far as what they do with iOS in the Car.  I think it’s…  It could be simply a protocol similar to AirPlay where the device can use an internal…

Jim: Display.

Horace:  …an internal display.

Jim: Some interfaces.  Yeah.

Horace: And controls.  And the whole thing may be run over wifi so they don’t even have to have a physical wiring connection.  And the whole thing can be configured in software.  There are two classes of software.  There’s the software which drives your entertainment, your navigation, and your…  maybe some limited degree of car… control over the environment you’re in.  But the other set of software is the embedded stuff that controls the engine, controls the…

45

Jim:  The brakes, the suspension, the cooling system, the air conditioning, everything.

Horace:  The brakes, the performance.  Yeah.

Jim: The entertainment.

Horace:  That is off limits for the time being because we think that you don’t want to have someone hacking.  Just like when you have a mobile phone.  Remember when the mobile phone became an app platform.  A lot of operators said we need to be involved in the decision making as to whether this is allowed or not.

Jim: Right.

Horace:  Because they used to want to be involved even in to the point where we’re not sure if any phone at all that’s switched onto our network is certified. They used to have to certify all kinds of phones. Maybe they still do.  But famously AT&T didn’t even allow you to buy a phone. But the phones – even the old style rotary phones – were their phones that they would lease to you so that you…

Jim: completely closed. Right. Exactly.

Horace: Yeah. It was a completely closed… They were called terminals in the network. And the terminal was something that had to be certified compatible with the network.

Jim: Monthly fee. The whole thing.

Horace: Yeah. So…

46

Horace (cont): so to some degree you’re seeing the industry holding onto this idea that we need to certify every piece of software – everything that connects to the grid, which means the car – that we have to ensure safety.  Usually safety is the last…

Jim: The last bastion.

Horace:  The last bastion of the incumbent.  So we’ll see how long it takes them to allow APIs into the depth of the car.  But…

Jim:  Well, a good topic for a future show.

Horace:  Some… I think this will be a gradual discussion.  I think the main thing we’ll see is probably a display with…  which allows you to essentially mirror your iPad or iPhone onto the car’s display and allow a lot of the functionality to be

47

Horace (cont): visible and controllable in that way.  We’ll see.  I’m really interested and impressed that Apple has managed to even get this far.  That the car has become, potentially, an accessory to your iPhone which is…

Jim: [laughter]  Cutting deals.  Well, what’s interesting about Ford is – I think I sent you a link a few months ago – Jim Farley, who’s their marketing guy, said at a conference that the auto industry has thought incorrectly about this.  That they need to think about the phone or the device as the center and the car, as you say, as an accessory.  And they have tried to put everything in the car.  Now Ford, as I said, is going their on own with these apps.  So it’s an interesting [crosstalk].

Horace:  And so maybe… BMW…  A lot of these guys are actually invested.

Jim: Right.

Horace:  They have sunk costs.  And they have the same phobia that everyone who has a sunk cost mentality has.  That you can’t let go.  We’ve put too much into it.

Jim: We’ve spent fifty million.  Right.  I can’t write that off.

Horace: I can’t… Right.

Jim:  I can’t loose my job over this.

48

Horace:  It’s a sunk cost.  That’s it.  And those who know what that means  It’s not…  It doesn’t help them at all.  I don’t know.  We’ll see.

Jim: Right.

Horace: Some have run down the road with Microsoft and not gotten far.

Jim: Right.

Horace:  And we’ll see.  And it’s very fragmented.  And some divisions of a car company will do something.  And other divisions will do something completely different.  There’s no sort of czar over running the…

Jim: No.

Horace: Talking information systems in the car.  It’s not a… That’s not a sort of position reporting directly to the CEO.  I think that’s an interesting topic.  I think it might be an interesting way of breaking into the whole thing.

Jim: Right.

Horace: But fundamentally I still worry about the ability of the industry to accept an entrant that

49

Horace (cont): is predicated on manufacturing things.  I still think of the auto industry as being something that’s production oriented.  As much as people think that it’s about marketing.  It is that.  But it is also…  The cost structure is so driven by the way the infrastructure, manufacturing…

Jim:  Oh, and software has made that even stronger.  It has creating increasing returns to that mentality.  My sister, for example, just bought a new Honda minivan.  And she went to various dealers in the Twin Cities.  And they said if you buy this one – not any of these other ones which have the same configuration – but this one (because it’s been sitting here, of course; the inventory tells them that), they’ll give you an extra thousand off, or whatever.  And certainly they manage their inventory.  They manage their month-end.  Yeah.  The production system is everything.  There’s no doubt about that.

Horace:  Mmm hmm.

Jim:  Wow.  Lots to cover today.  We’ll look forward to chatting again in a few weeks Horace.

Horace:  All right.  Well, thanks again.

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