Friday, July 30, 2010

The Chevy Volt: Now For The Good News

The American economy does not recover simply because macroeconomic conditions are right, or because it is stimulated by government in ways that make them more nearly right. It recovers because new industries—-rooted in technological innovations, but growing out of established industries—-create whole new opportunities for entrepreneurship; new industries that engender collateral industries and build a new supplier ecosystem.

It wasn't (just)the Reagan tax cuts that lead to economic growth in the 1980s; it was the development of cellphones, personal computers, and the networks that connected them. It wasn't (just) Clinton's tax hikes that led to economic growth in the 1990s; it was the development of whole new layers of software for personal computers and the development of the Internet. Macroeconomic policies can create a favorable environment for this kind of entrepreneurship. But the environment will not determine the success of an economy anymore than the weather will determine the success of a farm.

Which brings me to today's Times. On page one, we learn how—on the very day it is reported that economic growth is slowing slightly—President Obama is visiting, among other companies, General Motors. On the editorial page, we learn from a contributor, Edward Niedermeyer, that GM's Chevy Volt is a lemon. Make no mistake: if the second claim is true, then the first story is not going to have a happy ending.

One can talk endlessly about green jobs leading the American recovery, but ultimately this boils down to whether America can be a center of the development of green mobility. If America's flagship automobile company cannot develop an electric car that matters—like IBM developed the personal computer, Motorola the cell phone, and Microsoft the operating system, and so forth—the prospects for growth, and for the planet, would be pretty grim.

HAPPILY, HOWEVER, NIEDERMEYER’S article is not only misguided as an assessment of how electric car technology can enter the mainstream market, but it misses the larger point—that of the significance of electric cars to the economy as a whole. (I say this respectfully, and regretfully, because his website, “The Truth About Cars,” is unusually well done.)

Imagine an article about the iPad that not only misunderstood how it fits into its information networks and market, but also says nothing about what a portent it is for the future of publishing.

Niedermeyer’s main complaint against the Volt seems to be its price:

G.M. decided to make the Volt more affordable by offering a $350-a-month lease over 36 months. But that offer allows only 12,000 miles per year, or about 33 miles per day. Assuming you charged your Volt every evening, giving you 40 miles of battery power, and wanted to keep below the mileage limit, you would rarely use its expensive range-extending gas engine. No wonder the Volt’s main competition, the Nissan Leaf, forgoes the additional combustion engine — and ends up costing $8,000 less as a result.

There are so many silly things implied here one hardly knows where to begin:

In the first place, most people—that is, according to DOT figures, 78% of people—drive less than 40 miles back-and-forth to work or doing chores around the home. So 36,000 miles over three years is not different from what most lease contracts assume.

Second, if you do drive under 40 miles a day, then you will be driving at between one and two cents a mile on electricity, instead of 15-18 cents a mile on gas. Do the math: at 2 cents a mile, 36 months of driving a Volt will cost you about $720. At 18 cents a mile, 36 months of driving a comparably priced gas-driven car will cost $6480. This means that the all-in-cost of the Volt will save you about $6120—or about half the total cost of the lease contract.

Third, and most important, the onboard engine is critical for the same reason the iPad’s ability to connect to cellular networks is critical: it lets you go anywhere, anytime; leaving that ability off the iPad to keep the price lower would be ridiculous.

The problem is not the cost of the engine (which serves as a dynamo that recharges the batteries, and allows the Volt to go another 320 miles, beyond the 40 miles it gets on electricity). It is running out of electricity in a snow storm on the New Jersey Turnpike on the one day a month you go to Granny’s. By building in the capacity to use the existing gasoline infrastructure, it turns the electric car into something a family of four can entertain as their only car. This is revolutionary.

Niedermeyer seems to have little idea of how new technologies need to root in existing technology infrastructures. Imagine Apple trying to launch the iPod/iTunes platform before the Internet was second nature to people. But he's also missed the importance of GM's lead in creating an operating system for the Volt—essentially an advanced mobile device—and especially the importance of software that governs, precisely, communication between the engine and the battery. (To be clear, I know, and like, Tony Posawatz, the line director of the Volt, whom I got to know as a journalist. But I am writing this without any connection whatever to GM, except for my citizen's share in its ownership, which I am grateful to Obama for.)

It is the onboard engine that is GM's competitive advantage; and every electric car that hopes to break into the mainstream market, as long as batteries are limited in range to under 100 miles, will have to go this route, falling back on 220,000 service stations, while driving mainly on electric power. Toyota, which Niedermeyer obviously admires, is planning a similar car.

By the way, Niedermeyer also falls into the trap of speaking about the batteries as a Korean, not an American, innovation. But the battery cells the Koreans make--and make well--are to the battery pack in the Volt what protoplasm is to, say, an organ. It is the way the cells are put together, the way their voltage is regulated, they are heated and cooled, and so forth, that is the critical intellectual property. General Motors has a lead here, too, which they could blow. But it is absurd not to acknowledge it.

WHICH BRINGS ME to the final point. It is precisely because the Volt is the first car with a real shot at the mainstream car market that we should be thinking about its impact, and the impact of all electric vehicles, on the economy as a whole. What makes the Volt such a landmark is that electric cars are the killer app for the smart grid.

This launch of the Volt, really, should be seen as comparable to the launch of personal computers. The car makes sense as a solution to the problem of gas prices and ecological responsibility, the same way the personal computer made sense as a solution to the problem of having to retype documents. But in the same way that the ubiquity of personal computers drove the development of the Internet, the growing presence of electric cars will drive the development of the smart grid, and all the infrastructure jobs this entails.

I wrote about the dangers, and urgent commercial opportunities, that electric cars present to the existing electric power grid at length about a year ago in Inc. Magazine. You can read the article here. Or watch a 25 minute lecture on the subject to the 2010 Personal Democracy Forum here.


Ken Houghton said...

720 + 6120 = 6,840, not 6,480.

There's a typo or a math error there--though the point certain abides.

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Anonymous said...

We drive a 2012 Volt and love it. It's like driving an iphone, constantly surprising us with things we didn't know it could do, surpassing expectations. Four months, 1800 miles, $25 in gas one time, no noticeable spike in our electric bill. Not for everyone, but a technological leap that is worth supporting as it develops here in the US. Go drive one before your nail its coffin shut!