Technology Analysis & Strategic Management Vol. 17, No. 4, 391 –408, December 2005
Gales of Creative Destruction and the Opportunistic Incumbent: The Case of Electric Vehicles in California ROMANO DYERSON & ALAN PILKINGTON School of Management, Royal Holloway, University of London
ABSTRACT This paper explores the introduction of electric vehicles in response to Californian regulatory pressures as an example of a disruptive technology. The central thesis is that this disruption may open the automobile market to new entrants but only if they collaborate with incumbent automobile manufacturers. This appears to support Schumpeter’s argument that large incumbent firms possess innovation advantages over the small entrepreneurial entrant. However, these innovatory advantages lie in the downstream complementary assets required for success in the automobile market.
Introduction Recent changes in Californian environmental emission standards are potentially having disruptive effects on the competitive ability of incumbent automobile manufacturers. These disruptive effects centre on the mandating of new technology into the sector that is incompatible with the prevailing set of technological capabilities. Perhaps uniquely, regulation is being used to shift the technological trajectory of the automobile sector into new paths that leave many existing competencies obsolete. This has modified the strategic response of both established and would-be entrants. In the twentieth century, Schumpeter1 argued that large incumbent firms possess innovation advantages over the small entrepreneurial entrant. Evidence from the results of Californian vehicle emission regulation suggests that synergic benefits exist if a strategy of alliance building and cooperation is adopted. This changes the rules of the games played between established and emergent firms from win –lose to win – win scenarios. This allows them not only to introduce new technologies and respond to regulatory pressures, but also to open new market niches in what has traditionally been seen as a mature industry. In the following, we first sketch out our exploratory framework, before going on to consider the changes in Californian regulation that has created an impetus for electric vehicle development. The responses of the established automobile manufactures to this threat are then examined
Correspondence Address: Dr Romano Dyerson, School of Management, Royal Holloway, University of London, Egham, Surrey TW20 0EX, UK; Tel: þ44 1784 443780; Fax: þ44 1784 439854. Email: r.dyerson@rhul.ac.uk 0953-7325 Print=1465-3990 Online=05=040391–18 # 2005 Taylor & Francis DOI: 10.1080=09537320500357160
392
R. Dyerson & A. Pilkington
using internal publications, news reports, government information and other sources. From this data, an extension from competition to co-oeptition is discussed to incorporate the positive spillover effects on the sector of automobile manufacturers’ strategic actions. Forces of Renewal in Mature Industries Schumpeter (1942) recognised that industry incumbents secured advantages over wouldbe entrants as a result of their longevity. Put into modern-day parlance, the experience of incumbents built up cumulatively to provide established competitors with first-mover advantages that made it difficult for would-be entrants to replicate. For much of the twentieth century the automobile sector, dominated in the post-war period by a handful of oligopolistic firms, would appear to be a prime example of his thesis. New entrants into this sector have required substantial public support, as in the case of the Japanese and Korean automobile manufacturers. Other more recent entrants from East Europe, suffering from a lack of investment and public support, have been taken over quickly by the dominant players, for example, Volkswagen’s acquisition of Skoda. And yet that very dominance, built upon years of experience and translated into the periodic release of incrementally innovative new car designs, may now be threatened by radically different technology regimes sparked by an adaptive regulatory framework. We should recall that Schumpeter changed his view as to how innovation acts to mediate competition at the industry level. In early versions of his work, he regarded the actions of small-scale entrepreneurs as vital to the process of innovation. Entrepreneurs driven by the opportunity of profit would seek out the innovative, and be willing to take risks, that more established firms would find problematic to sanction. He recognised that innovation presented particular difficulties for established firms (1942): To undertake such new things is difficult and constitutes a distinct economic function, first, because they lie outside the routine tasks which everybody understands and secondly, because the environment resists in many ways that vary, according to social conditions, from simple refusal either to finance or to buy a new thing, to physical attack on the man who tries to produce it. To act with confidence beyond the range of familiar beacons and to overcome that resistance requires aptitudes that are present in only a small fraction of the population and define the entrepreneurial type as well as the entrepreneurial function. (emphasis added) Under this formulation, competition is a whirlwind of change with industries marked by high rates of entry and exit. Entrepreneurship and innovation combine to usher in gales of “creative destruction” that overwhelm established firms. These latter firms are doomed by their timid and cautious approach to technological opportunities; more specifically, they are unwilling to consider technological opportunities that arise from outside of their conventional frames of reference. This creates opportunities for entrepreneurs to exploit. As a result, there is a fast turnover of firms, with established firms failing to retain leadership for long periods. The Changing Nature of Innovation The problem with this approach, as Schumpeter later came to realise, is that markets have not, in general, been characterised by the frequent turnover of firms blown over by the
Gales of Creative Destruction and the Opportunistic Incumbent
393
gales of technological change. A case in point is the automobile sector, in which a handful of firms active in the early part of the twentieth century, such as Ford, General Motors, Daimler, are still trading in the market today. Indeed, one could go further and point to the greater concentration in the sector as a result of successive waves of mergers and acquisition in the post war period; this has eliminated, or neutralised, former competitors such as Mazda, Chrysler and Rover.2 Arguably, the British car industry was one of the first causalities of this process now being repeated at a global level.3 While new firms have entered the sector, most notably the Japanese carmakers, they have debatably achieved entry as a result of strong state support and favourable cost conditions, rather than technology per se. Froud et al.,4 in particular, have argued that the success of the Japanese carmakers is more readily explainable as a combination of lower labour and social costs than the result of superior technological and process innovation. The answer to the puzzle, as Freeman5 describes, lies in the changing nature of innovation as the twentieth century progressed. This saw the relocation of innovative activities out of the realm of enthusiastic individuals and into the laboratories of industrial firms. In other words, innovation as an activity became increasingly institutionalised.6 Of course, Schumpeter witnessed this development, prompting a re-evaluation of his early theory. Now access to capital, resources and skills, became more important to the delivery of innovation than simple opportunity. Commercialisation and mass production required the resources of a large firm rather than the singular talent of an individual:7 “Small firms may have some comparative advantage in the earlier stages of inventive work and the less expensive but more radical innovations while large firms have an advantage in the later stages and in improvement and scaling up of early breakthroughs.” Moreover, as the institutional character of innovation processes deepened, experience and the build-up of skills became more important to eventual (and profitable) success. As a result, established firms began to acquire competitive advantages over entrepreneurs founded on their accumulated experience. Writing in 1959, Penrose observed that:8 “The general direction of innovation in the firm (including innovation in production) is not haphazard but is closely related to the nature of existing resources (including capital equipment) and to the type and range of productive services they can render.” As Rumelt’s (1984) has argued: “More efficient firms have created unique skills and strengths and will maximise their values by seeking other areas of activity where these special skills may also be of value.”9 That is, firms generate capabilities that they then extend into related areas. The corollary to this is that firms will find it difficult to radically alter the activities that they perform. Similarly, Pavitt argues that firms do not search for innovations in a general pool of knowledge, but rather in “zones” akin to their existing stock of knowledge and technologies.10 Here technology, developed by large firms, evolves over time along pathways or trajectories guided by the twin actions of discovery and demand.11 Infrequently puncturing this process are chance discoveries, that unexpectedly shock or disrupt the path of technological development, providing opportunities for new firm entry. Schumpeter wrote about the gales of creative destruction, but the above
394
R. Dyerson & A. Pilkington
would suggest that established firms sometimes have the misfortune to encounter an opportunistic hurricane. Concentration and Change in the Automobile Sector Turning again to automobiles, this revised version of Schumpeter’s theories appears more in keeping with experience in the sector. Technological development, as embodied in the internal combustion-driven motorcar, does appear to have evolved over time. Although engine configurations vary according to manufacturer, the basic principles remain the same. Moreover, modern innovations such as multi valve designs, variable inlet geometries and direct injection technologies have added and augmented but not challenged these basic principles. Arguably, in terms of powertrain and design, the cars of today can be plotted back through a continuum of incremental modification and adaptation. Elements in the design and configuration of the contemporary Ford Focus, for example, can be traced back through the Escort, Taurus and Cortina of earlier decades. Using Rothwell and Gardiner’s terminology, incumbent carmakers have been investing resources in the prevailing dominant design—the internal combustion engine (ICE).12 For much of the twentieth century, that common approach or dominant design has been remarkably stable, despite the multiplicity of potential designs powered by steam, electricity and combustion competing at the turn of the past century.13 That convergence has been marked by the transition from an early fluid stage, comprising small innovative firms, to an industry dominated by large established firms producing an evolving series of long-lived design families that have proven to be very “robust” (i.e., market established) and using similar production techniques. We can also point to the wider support infrastructure that has evolved around this robust design trajectory. Without a means of refuelling, support and servicing, the car has a very limited utility. The distribution and delivery of fuel in particular, is important to the overall functionality of the motorcar. Such functionality has required the development of common standards of both fuel purity (increasingly set by society) and in the design of pumping mechanisms for use by the motorist. In other words, a whole system has grown up dedicated to servicing the requirements of the motorcar. These systems act in a similarly evolutionary way to further entrench, or sustain, the status quo of car design and thereby the interests of the established carmakers. Path Dependency and Disruptive Change Conversely, while much of the academic literature has been exploring the competitive implications of path dependency, business theorists have echoed Schumpeter’s early view on the innovation process and how this affects competition. Foster, in an influential book, explored a number of case studies in which the central theme was the successful attack of the small firm armed with an innovation against the market power of incumbent firms.14 This is a premise that Christensen develops in exploring the adverse effects on incumbent firms of what he called “disruptive technologies”.15 Similar to Foster, in a number of case studies that includes an early exploration of the potential of the electric vehicle, Christensen analyses how radical changes in technology can unsettle incumbent firms. Such technology can prove to be unruly from an incumbents’ perspective because, as Christensen argues, disruptive technologies tend to emerge from outside of the bounds
Gales of Creative Destruction and the Opportunistic Incumbent
395
of the incumbents’ accumulated experience. This is problematic, because while disruptive technologies may initially present themselves as inferior to the technologies currently deployed, they have the potential not only to improve at a faster rate than conventional technology but also to create new market areas. Established firms initially viewed the development of the radial tire, for example, as inferior and unthreatening.16 The problem for incumbents is that their perceptions are hidebound by their experience and immediate customer demands. Incumbents, in other words, develop an orientation that reinforces rather than challenges the status quo. As Cohen and Levinthal have argued, a firm’s ability to absorb and exploit new knowledge from their environment largely is conditioned by their prior accumulated knowledge, and this in turn influences the firm’s perception of future technological advances.17 Day and Schoemaker also note that incumbent firms have a poor track record in developing and managing emerging technologies, especially when competing versions come forward.18 Firms have to choose where, and how, they will deploy their scarce R&D activities. Confronted with the ambiguity, not just of rival technologies, but also of opaque potential, firms invest resources in the prevailing dominant design or technical trajectory. Path dependencies are also important to the emerging new “capabilities paradigm” of strategic management. Teece et al. argue that a firm’s ability to maintain and adapt its dynamic capabilities helps to condition its competitive position.19 Dynamic capabilities are defined as “the subset of the competencies/capabilities which allow the firm to create new products and processes, and to respond to changing market circumstances”.20 This reflects the effectiveness with which the firm is able to learn. Moreover, the opportunities for learning enjoyed by the firm “will be “close in” to previous activities and thus will be transaction and production specific.” Here, the firm’s previous research activities will condition and constrain the “depth and width” of technological opportunities open to the firm. Volvo’s antibraking system technology, for example, emerged from the company’s early work in feedback systems, whereas Daimler’s battery technology developed from work on designing new power systems. The context with which learning takes place is also important in helping to explain Utterback’s (1994) observation that “discontinuous innovations that destroy core competencies (in technology) almost always come from outside the industry.”21 None of the established American carmakers in the 1970s, such as Ford and General Motors for example, pioneered the use of lean production in their production processes. However, the dominant players quickly have absorbed such process change. Using Spender’s terminology, the process changes of the last twenty years has been successfully incorporated into the accepted industrial recipe.22 As Tushman and Anderson have argued, path dependent technological evolution helps to incrementally reinforce or enhance the capabilities of existing firms but radical technological change subsequently can disrupt or destroy these capabilities.23 The implication is that the process of technical change, at the firm level, is generally evolutionary. Firms that survive within the marketplace will move along a technical trajectory accumulating resource commitments and expertise that is generally heterogeneous in character. Knowledge is learnt actively, rather than gained from an exogenously defined set of blueprints. Edith Penrose appeared to have this point in mind when she choose to stress that a firm’s ability to compete successfully depended upon its resource base. Resources may be built up over time but incur opportunity costs. Those costs include an increasing polarisation of resources towards specific knowledge and expertise.
396
R. Dyerson & A. Pilkington
Such polarisation may be particularly problematic when new technology threatens to disrupt established infrastructural and technical systems. With this in mind, Chesbrough and Teece’s distinction between autonomous and systemic innovation is helpful.24 Autonomous innovations are quite separate and independent, whereas systemic innovation requires complementary innovations for effectiveness. An innovative reactive windscreen, for example, can be independently fitted to a car but changes in its powertrain require more systemic adaptation. Autonomous innovation, then, can favour the entry of new firms. Existing firms have to balance the value of the innovation against the loss of their previous market; such firms can only retain their status quo. However, new firms have the incentive of gaining a new market. Systemic innovation, however, typically demands more extensive change. For instance, changing from petrol driven cars to battery powered vehicles would require not only a redesigned car, but also wide spread changes to the infrastructure within which the car operates. Incumbent firms have to weigh up the value of their existing infrastructure investments against the potential value of a new infrastructure that they may, or may not, control; this tends to promote inertia and the status quo. Entrants have less to lose but the potential value of a new network may be subject to ambiguity and incur high set up costs that may deter entry. For these reasons, systemic change is far less frequent than autonomous change. Under conditions of systemic change, firms have to engage in alliance building to bring in the required infrastructure adjustment. Switching from lead to lead-free petrol, for example, required the established carmakers to work together in adapting their products and agreeing common standards with the fuel suppliers. A useful concept here is Brandenberger and Nalebuff’s notion of co-oeptition in which firms are forced to engage in a duality of effort, sometimes cooperating, sometimes competing with business rivals.25 The effect is to move from a purely win – lose (Scumpeterian) scenario to one that embraces win –win opportunities. The need for collaboration between established and new firms would be particularly acute under conditions of disruptive systemic innovation, especially in mitigating potential buyer uncertainty. To enable the electric vehicle to function, for example, carmakers will have to engage in an alliance building processes of collaboration with competitors, new component suppliers and the electric utilities. The strategic responses are summarised in Figure 1. Entry under conditions of disruptive autonomous innovation may favour the small firm but systemic disruptive innovation favours the participation of a group of firms. In the latter case, such firms would typically combine both established and new firms. The Electric Vehicle in the 1990s As previously suggested, the automobile has been developed through a series of innovations as automotive companies have progressively refined ICE technology. Huge accumulated investments, in the order of tens of billions of dollars, have generated a great deal of knowledge about the control, performance and manufacture of the ICE. In contrast, the development of technology for electric vehicles, a focus of attention in the early part of the twentieth century, subsequently was ignored until contemporary moves towards the tightening of emission regulation, primarily in the US, sparked an awakening of interest. The biggest challenge in this area has been the demand for zero emission vehicles (ZEV) resulting from regulations in California. Zero emission legislation mandate electric
Gales of Creative Destruction and the Opportunistic Incumbent
397
Figure 1. A typology of strategic entry responses
vehicles in which the demands of the technology are radically different from those used in the development of internal combustion engines.26 With little, or no, experience of the systems needed to develop a viable electric vehicle (EV)—notably batteries or fuel cells, electric motors and electronic controllers—the established automobile manufacturers have had to enlist the support of many external firms, outside the boundaries of the traditional automotive manufacturing and supply environments. Ford and DaimlerChrysler, for example, have struck an alliance with Ballard Power to develop the next generation of fuel cell technology for use in the motorcar.27
Innovation and Regulation Regulation in the US has had a profound impact on the development of alternative fuel vehicles (AFVs) and electric vehicles. Several legislative acts have played a part in this process: (i) the Federal Clean Air Act Amendments (CAAA) of 1990, (ii) the 1992 National Energy Policy Act (EPA), and (iii) the California Air Resources Board’s (CARB) Low Emission Vehicle Requirements, 1990 (amended in March 1996, 1998, and under currently under review). The 1990 CAAA modified the original US Clean Air Act passed 20 years earlier and included provisions requiring fuel manufacturers to reformulate their products to meet more stringent emission standards, particularly in cities where carbon monoxide and ozone pollution are most serious. The Department of Energy’s EPA of 1992 has been instrumental in promoting the development of AFV and EV technology by stipulating purchase requirements for AFVs in certain federal and private fleets outside of the 22 areas covered by the CAAA. In 1993, President Clinton extended the provision by 50% and offered tax incentives to buyers of AFVs or clean fuel vehicles, as well as to companies that converted existing ICE vehicles. California, though, has gone further than these national measures in setting their own new car emission regulations. These regulations, much stricter than either the CAAA or EPA, were first introduced in 1988. They sought to lower non-methane organic gas emission standards for new vehicles by 40 per cent in 1998, and by more than 75 per cent in
398
R. Dyerson & A. Pilkington
2003. Revision in 1990 led to an even tougher mandate, which took effect in 1994 and included the first ever provision for zero (tailpipe) emission vehicles (ZEVs). The regulations, which applied to manufacturers selling more than 35,000 vehicles a year in the state, currently GM, Ford, Toyota, Chrysler, Honda, Nissan, and potentially BMW and Volkswagen, set guidelines for the percentage sales of different classes of vehicles rated by emissions. The classes are: the existing 1993 standard, transitional low emission vehicles (TLEV), low emission vehicles (LEV), ultra-low emission vehicles (ULEV) and ZEV (see Table 1). In 1998, CARB introduced a new category of Super Ultra-Low Emission Vehicle (SULEV), effective from 2004, to provide for partial credits for hybrid, electric, fuel cell and other close to zero emission vehicles.28 Regulation, in other words, forced existing manufacturers to develop and sell LEV/CFs and ZEVs in increasing numbers (see Table 2). This required that by 1998, 2% of all new vehicles sold by large producers in the state should be zero polluting at source.29 In practice this meant that they had to be battery-powered cars.30 The percentage was set to increase to 5% in 2001 and 10% in 2003, but in 1996 intense pressure from the oil companies and car manufacturers forced the revision of the mandate into a voluntary requirement up until 2003, at which point the original mandatory levels would be reapplied. Subsequent pressure produced a further concession, in 1998, that the minimum mandatory ZEV quota would be set at 4%. The reasoning behind the regulations, and the CARB mandate in particular, has many sources. The need for a radical solution to the pollution caused by ICE powered vehicles in large conurbations has become pressing. Cities such as Los Angeles and Sacramento have some of the worst pollution records in the US and this is the primary reason for the mandate’s introduction in California. Nonetheless, there are several other factors behind the regulations including (i) reducing the US dependency on imported fuel—particularly from potentially insecure sources such as the Middle East, and (ii) the economic situation in California. Recent years have seen serious cutbacks in the important defence sector following the end of the cold war and the authorities are attempting to re-engineer a new industry sector that could benefit from existing regional technological expertise and facilities. By nurturing the new technologies needed for electric vehicles—such as batteries, motor drives, electronic controllers, lightweight materials—it is hoped to develop both a new centre of expertise, and an industry that will sustain economic growth in the state.31 Table 1. CARB emission classification of vehicle types included in the 1990 mandate Hydrocarbon emissions g/mile
1993 Standard TLEV LEV ULEV ZEV
Carbon monoxide g/mile
Nitrogen oxides g/mile
,50,000 miles old
50,000 , 100,000 miles old
,50,000 miles old
50,000 ,100,000 miles old
,50,000 miles old
50,000 ,100,000 miles old
0.25 0.125 0.075 0.04 zero
0.31 0.156 0.9 0.055 zero
3.4 3.4 3.4 1.7 zero
4.2 4.2 4.2 2.1 zero
0.4 0.4 0.2 0.2 zero
0.6 0.6 0.3 0.3 zero
Source: The ABCs of AFVs, California Energy Commission, April 1996.
Gales of Creative Destruction and the Opportunistic Incumbent
399
Table 2. CARB target and mandatory percentages for manufacturers’ ranges Model year 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003
1993 Standard 40% 80% 85% 80% 73% 48% 23%
TLEV
LEV
ULEV
1990 ZEV mandate
25% 48% 73% 96% 90% 85% 75%
2% 2% 2% 2% 5% 10% 15%
2% 2% 2% 5% 5% 10%
1996 Revised ZEV mandate
1998 Revised ZEV mandate
10% 15% 20% 2% 2% 2% 5% 5%
voluntary voluntary voluntary voluntary voluntary 10%
4% minimum
Source: The ABCs of AFVs, California Energy Commission, November 2000, Staff Report: 2000 ZEV Program Biennial Review, California Environmental Protection Agency, August 2000.
Electric Vehicles and New Technology Taking up Christensen’s theme, electric vehicles currently on the road compare poorly against conventional motorcars in terms of both price and performance. They are restricted by comparatively short ranges—typically less than 100 miles—and lengthy charging times because they are battery powered conversions of vehicles originally designed for petrol ICEs. Typically though, the motorist in California, as elsewhere, travels less than 50 miles per day and the vehicle spends more than 12 hours parked each night—ideal for re-charging. This type of usage was well within the abilities of electric vehicle conversions 10 years ago.32 More significantly, perhaps, this also brings the electric vehicle into the orbit of enthusiasts. The pollution minimising benefits of the electric vehicle— attractive to the enthusiast—depends largely on the make up of the electricity generating plants and the efficiency of the EV power storage device.33 In areas that have relatively clean power sources, such as nuclear, hydroelectric and natural gas, existing electric vehicle technology can make a significant difference to the levels of pollution (see Table 3). This is the case in California and France where work to establish the infrastructure needed to operate electric fleets has already begun.
Table 3. Percentage change in emissions from gasoline-powered vehicles to battery-powered electric vehicles
France Germany Japan UK USA
Hydrocarbon
Carbon monoxide
Nitrogen oxides
Sulphur oxides
Particulates
299 298 299 298 296
299 299 299 299 299
291 266 266 234 267
258 þ96 240 þ407 þ203
259 296 þ10 þ165 þ122
Source: Sperling (1995, p. 45).
400
R. Dyerson & A. Pilkington
Uncertainty remains regarding capacity in the generating network to meet the needs of a large (electric) fleet. However, the power companies themselves have contradicted these claims and produced studies to show that large fleets of vehicles (typically 10 –20% of the US fleet) could be accommodated with existing capacity, particularly if pricing packages were introduced to encourage the use of off-peak electricity.34 Moreover, electric vehicles effectively are placed to take advantage of such technologies as regenerative breaking— where the powertrain acts in reverse to behave like a dynamo and feeds power back into the batteries—and, if they could be developed towards a point enjoyed by ICE technology, then as Sperling maintains, the electric vehicle looks increasingly viable. With the recent development of fuel cell technology, electric vehicle owners could help to power the national grid, opening up the intriguing possibility of new service applications for the car owner.35 Nonetheless, electric vehicle technology still requires considerable development for mass commercial exploitation. Current vehicles on the road are limited to short bespoke production runs of a few hundred at best and, given their high cost, tend to be leased rather than bought outright. Effectively, carmakers have been experimenting tentatively with various prototypes and using enthusiasts willing to work within an inadequate power infrastructure. The ZEV mandate has aided this experimentation by providing the carrot of (limited) public funding and the stick of regulatory decree. Albeit that the impact of this ‘stick’ relates to just 4% of sales in California at present. However, despite advances in motor controllers and the general design of lightweight vehicles, the key aspect constraining electric vehicle introduction stubbornly remains on the weight and limited power storage capacities of batteries. Although some advances have been made into alternative approaches, such as the electro-mechanical flywheel36 and ultra-capacitors37 which hold the energy through non-chemical processes, and in developing alternative materials and processes to reduce the weight of the whole vehicle, the industry is still seeking a breakthrough in battery technology. Recently, a wide-ranging survey of alternative fuels for the British-based Alternative Fuels Group concluded that the performance and range of battery driven vehicles fell short of conventional vehicles.38 Electric Vehicle Programmes Setting aside the continuing debate surrounding battery technology, and the uncertainty on the part of car makers as to the attributes that will prove commercially successful in electric vehicles, whether, in effect, they should mimic existing products or sell the vehicles as a supplemental short range cars for urban use39, the mandate has encouraged progress from the dominant car makers, as Table 4 demonstrates. For example, GM, Ford and Chrysler have established new divisions to develop parts of the EV system, such as charging equipment. They have also made agreements with specialist battery manufacturers to trial new battery technologies in various pilot schemes. Most notable in this respect is General Motors and its development of the first purpose-designed vehicle made available to the public—the ‘EV1’. As Shnayerson notes, the design and development of the EV1 involved, not only internal GM units such as Inland Fischer Guide and Harrison, but also many other companies such as Energy Conversion Devices, Hughes Corporation, Delco Remy and EPRI.40 Nonetheless, the EV1 was a market failure, hampered by poor promotion, a limited number of sales outlets and a scarcity of finance deals. Finance was particularly important to the EV1’s success because the vehicle was not
Manufacturer
Chrysler
Model Style Launch Year Battery Type
Epic Minivan 1998 Advanced Lead Acid
Motor HP Speed mph Accel. (sec.) Range (miles)
100 80 0 – 60 mph 16 60 Combined Cycle 113.3 inch Out of production
Wheel Base Availability
Ford
GM
GM-Chevy
Honda
Nissan
Solectria
Toyota
Ranger EV Pickup 1998 Lead Acid/ Nickel Metal Hydride 90 75 0 – 50 mph 12.5 50/85
EV1 Sports car Fall 1996 Lead Acid
S-10 Electric Pickup Early 1997 Lead Acid
EV Plus Small Car 1998 Nickel Metal Hydride
Prairie EV Estate Car Early 1998 Lithium-ion
Force Estate Car
RAV4-EV Sport- utility Fall 1996 Nickel Metal Hydride
137 80 0 – 60 mph 9 70 City, 90 Highway 98.9 Retail
114 70 0– 50 mph 13.5 40 City, 45 Highway 108.3 Out of production
66 80 þ 0 –60 mph 17.7 60 –80 Simulated 99.6 Out of production
83 74 n/a 120 Claimed
56 70 0 –50 20 50/100 Claimed
102.8 Demonstration only
93 Retail/Fleet
112 Retail/Fleet
Lead Acid/ Nicad/Nickel Metal Hydride
Source: Information based upon: Electric Vehicle Association of the Americas: http://www.evaa.org/evaa/pages/ele_ev_market.htm and 2000.
67 79 0 – 60 mph 17 130 City, 106 Highway 94.9 Fleet only
Gales of Creative Destruction and the Opportunistic Incumbent
Table 4. Electric vehicles in the USA
401
402
R. Dyerson & A. Pilkington
sold as such but leased from the company. This in itself represented a departure from General Motor’s normal way of marketing cars. Ford has shown little interest in emulating General Motors’ direct approach, preferring instead to limit experimentation to public sector partners. It has produced a vehicle, the City Bee, which forms the basis of the Bay Area Rapid Transport (BART) and Pacific Gas and Electric Company’s station car project.41 DaimlerChrysler’s NECAR (New Electric Car) programme has been experimenting with fuel cell technology through a series of prototypes from 1994, in conjunction with outside partners, Ballard Research and Ford.42 Japanese and European carmakers have also faced restrictions by the CARB ZEV mandate. Honda, Toyota and Nissan have introduced modified vehicles for California developed originally to meet changing emission regulations in Japan.43 As in the US, the programmes have sparked the generation of new networks of suppliers. The batteries for Toyota’s RAV4 led to the development of close links to the Japanese electrical giant Matsushita. Toyota is also involved with Delco to develop charging technology. This charging system is to be shared with GM and it is hoped to become an industry standard. Honda, who have always been at the forefront of developing advanced ICE engines, have been working with the US utility Pacific Gas and Electric in preparation for the ZEV regulations, whilst Nissan have a design unit in San Diego and make use of batteries developed by Sony. In Europe, Renault has been involved in a project to examine practical and infrastructure issues for electric vehicles in response to the VEL government initiative led by Electricite´ de France.44 Other French firms have also been developing vehicles for the programme, including PSA (Peugeot/Citro¨en) who produce the Tulip, and sell converted Peugeot 106 and Citroen AX models. The expensive battery packs in these vehicles are leased as part of the deal, allowing the customer to offset the expense of replacing the unit. Daimler Benz has developed a strong link with AEG to develop advanced battery powered vehicles. BMW have exhibited conversions and are rumoured to be working on a purpose-designed vehicle. Fiat produced small numbers of battery powered Pandas and has worked with firms in Poland seeking to produce an electric vehicle version of the Cinquecento. Of more interest, perhaps, is the emergence of firms not normally associated with car manufacturing. In Switzerland, for example, the specialist plastics maker, Horlacher, used lightweight carbon fibre bodies in developing a range of electric vehicle prototypes. Several firms have been created specifically to design and produce electric vehicles, either as dedicated products or as conversions of existing ICE vehicles. Other firms specialise in selling converted vehicles and conversion kits to the general public and fleet operators. For example, Solectria of Waltham, Massachusetts, exports vehicles to Japan through the Sanoh Industrial Company. These vehicles, such as the Force sedan and E-10 pick-up, were developed as part of various national and local government backed projects established under the CAAA and EPA frameworks. Several of these products make use of batteries from the big producers, linking the many programmes from both big and small firms together. However, these remain the interest of enthusiastic hobbyists. The regulatory push appear to be motivating the dominant carmakers to seek out, albeit reluctantly, new (disruptive) technology rather than acting as a spur to direct entrepreneurial entry into the sector. One could characterise the approach as a wait-and-see policy. In developing a hybrid approach, technological alliances rather than internalisation or arms length contracting, established carmakers might be creating opportunities for longer-term
Gales of Creative Destruction and the Opportunistic Incumbent
403
organisational learning, as Day and Shoemaker have advocated.45 At the same time, the established carmakers are able to position themselves to possibly “buy-out” partner innovations that they find useful. As McGrath has noted, more generally, new entrants encounter difficulty establishing ‘legitimacy’ in substituting new technologies for mature technologies.46 This favours incumbents. In the automobile sector, such legitimacy includes not only customer perceptions and expectations about the performance and attributes of the car, but also about the operation of the car within its refuelling infrastructure.47 As Weber and Hoogma have identified this tends to throw up a range of entry barriers that need to be overcome, including: “market barriers of quality, safety, reliability, service, mass production and distribution”.48 Discussion: From Sustaining to Disruptive Technologies The changing regulatory environment has begun to threaten the previously stable, sustaining, path of technology development enjoyed by the incumbent major car manufacturers. That environmental change is sparking a move towards new paths of technology development that encompass unproven and uncertain technologies. Note though that the impetus here is not stemming from technological change per se (a Schumpeterian perspective) but rather changes in regulatory behaviour sparked by environmental concerns. More specifically, changing regulatory requirements are creating a derived, albeit uncertain, demand for cleaner cars. From the point of view of the traditional car makers, demand uncertainty is exacerbated by technological uncertainty because existing technological competencies and organisational knowledge sets based on the mature ICE will not meet the full regulatory requirements. Failure though to come to terms with the technologies necessary for electric vehicles, particularly given the regulatory push, may eventually open the established carmakers to threats from new entrants. Table 5 provides some details as to the range of new technologies used in the construction of electric vehicle prototypes and early entrants such as General Motor’s EV1, over and above, existing technologies in use for ICEs. Froud et al. noted that existing competitive advantage is largely based on securing a cost advantage through manipulation and control of the value chain, even to the provision of customer credit; typically such manipulation is conducted in conjunction with suppliers in the supply chain.49 At the extreme, suppliers may become responsible for the modular manufacture of virtually the entire car and the automobile “manufacturer” relegated to a coordinating role under the so called factory within a factory system.50 Within such systems, the carmaker reconfigures itself from a bureaucratic organisation concerned with function and compliance, to a network organisation seeking teamwork and commitment.51 Arguably this reflects a view that existing automobile technology is sufficiently mature and diffused not to confer strategic advantage, as Arnold stresses: “manufacturing is an activity with low specificity”.52 However, securing a cost advantage, whether through the use of lean production techniques, business process reengineering or indeed globalisation, does not suggest the radical changes in technology necessary for the commercial development of electric vehicles. In other words, existing automobile manufactures have to augment their existing knowledge bases with new and often radical technologies that are organisationally unknown to them. Automobile firms do not appear to be acting in a Schumpeterian manner—ignoring the new technologies in favour of the “familiar beacons”. As we have seen above,
404
R. Dyerson & A. Pilkington Table 5. BEV vehicle system change and technology adoption Changes to existing design for BEV introduction
New technology used
Lightweight construction Amend to body material Replace with lightweight Redesign for lightweight Redesign for lightweight Changed functions Redesign for electrical operation
Space-frame and composites In mould coatings Polycarbonate construction New plastics and methods Plastic frames Complex system monitoring Self contained, not powered by engine
Replace with electric motor System controller
Advanced AC motors Power controller and regenerative braking systems
Extensively modified Deleted
Composite/ceramic materials
Refueling
Replace with lightweight Redesigned for change in weight All wheel drive adopted Redesigned for new weight Tank replaced with battery compartments in frame Replaced with onboard charger
Final Drive Wheels/Tyres Bumpers Fluids
Replaced with electric motor Low rolling resistance Amend to suit body and weight Many removed with drive-train
Space-frame and composites Plastics and composites Plastics and composites Regenerative electronics Depends on battery technology adopted Electronic inductive charging system Advanced AC motor New materials and profiles Plastics and composites
Vehicle sub-system Body Group Body-in-White Paint/Coatings Glass Body Trim Seats Instrument Panel HVAC Engine Group Base Engine Engine Control Transmission Group Transaxel Transmission Controls Chassis Group Frame Suspension Steering Brakes Fuel Storage
Source: Dyerson and Pilkington (2000, p. 38).
established firms have been experimenting with new suppliers in the development of prototype electric vehicles. Development of these prototypes is, in it itself, a complex activity involving the interaction of a range of high cost, engineering-intensive production technologies.53 This appears to be providing an indirect entry route for new firms. The products and programmes outlined above and in Table 4 have involved the generation of networks of firms, bringing in expertise from outside the traditional automotive sector. Establishing this framework of suppliers and specialist firms represents a shift in the usual way that carmakers develop new products and is a result of the alien nature of EV technology. Instead of adopting a highly secretive manner in order to protect new products, the carmakers have formed many formal and informal alliances to ease the burden of developing the unproven technology, often with public funded bodies as well as private firms. This type of activity has previously only been seen for a few peripheral systems or safety related products. Similarly the EV programmes have moved supplier relationships from the traditional role of offering parts within a framework determined by the establish
Gales of Creative Destruction and the Opportunistic Incumbent
405
firms, and even beyond supply chain management. Instead of developing mutual programmes built on close co-operation, the EV has seen suppliers take the lead role in a closely fashioned team developing and introducing new technologies. It remains to be seen whether these new forms of working in the car industry will be transferred into mainstream product development activities, but their frequency looks set to increase as ever more stringent emission regulation demands increasingly innovative solutions.
Conclusion Entry into an established industry is never easy. Path dependencies at a technological and social level act to lock out would-be entrants, as much of the history of the automobile industry would suggest. In Schumpeterian terms, the gales of creative destruction are channelled and tamed by incumbent firms through the processes of innovation, design and the build-up of complementary assets. This denies entry to all but the richest firm. But this forces incumbent firms to specialise and focus on the cumulative aspects of knowledge acquisition; knowing how to channel the gales of innovation requires dedication and attention to methodical fence building that is step by step in nature. Witness, for example, the secretive and highly complex programmes built up over time to develop conventionally fuelled motorcars by corporations, such as Ford and General Motors. One of the lessons to emerge from the events in California is that the state can have a profound effect on the shape of technological development in an industry. Established firms complacent to this development may be at strategic risk relative to more alert incumbents. Within the automobile industry, complacency is hard to find with all the major incumbents active in developing electric vehicle prototypes, albeit some faster than others. But technological development in a new field has come at a price; namely the opening up of the sector to new (smaller) entrants through collaborative agreements. Whether these collaborative agreements herald a wider change in the dominance of automobile firms remains to be seen. Prior experience may be helpful in forestalling entry when the gales can be anticipated with some degree of accuracy as to their strength and direction of travel. In other words, when experience can be used to help predict the present and near future. However, stretching our metaphor, experience may provide false security when a hurricane blows. This is because no amount of previous experience in taming and channelling is useful when a hurricane hits; a hurricane simply changes the rules of the game. When the rules of the game change, incumbents lose the (cumulative) advantages that protect them. This allows the possibility of entry, depending upon the localised nature of the change. Under conditions of autonomous innovation, entry may be facilitated but systemic innovation requires the cooperation of both incumbents and new entrants. It is systemic innovation that creates opportunities for incumbents. Such cooperation can be seen in the automobile industry, sparked by the, admittedly constrained, changes in emission regulations by the Californian Legislator. So what are the implications for entrants and established firms of these observations of innovation processes in incumbent dominated markets? From the firm point of view, one of the implications of events in the automobile sector is that entry is difficult, even with a hurricane of change pushing you forward. Effective commercialisation requires not only technological innovation but also resources and complementary assets in distribution
406
R. Dyerson & A. Pilkington
and marketing, and this is difficult for the entrant to muster. This suggests that would-be entrants might do better by working in tandem with incumbents to gain entry. For the entrants, rather than taking-on the established firms with products and innovations that need systematic networks for market penetration, the co-opetition strategy of collaboration, joint venture and licensing reap major benefits. New ideas are more likely to succeed with the support and leadership of one or more of the major players. Similarly, the win– win situation provides positive reasons for the established firms to support this strategy as they act as gatekeepers to the market. Instead of acting in a purely defensive manner, collaboration facilitates the selective development and control of new markets. This can be harnessed to support existing product introductions or managed to preserve competitive standing against existing rivals. At the same time, the established firms are able to absorb new technologies and so act as both Schumpeterian and entrepreneurial innovators simultaneously. Notes and References 1. J. A. Schumpeter, Capitalism, Socialism and Democracy (Harper & Row, 1942). 2. See, for instance, A. Pilkington, Manufacturing strategy regained: Evidence for the demise of best practice, California Management Review, 41(1), 1998, pp. 31– 42. 3. A. Pilkington, Transforming Rover: Renewal Against the Odds 1981–1994 (Bristol, Bristol Academic Press, 1996). 4. J. Froud, C. Haslam, S. Johal, and K. Williams, Breaking the chains? A sector matrix for motoring, Global Competition and Change, 2, 1999. 5. C. Freeman, The Economics of Industrial Innovation (London, Frances Pinter, 1982). 6. D. Mowery and N. Rosenberg, Technology and the Pursuit of Economic Growth (Cambridge, Cambridge University Press, 1989). 7. Ibid, p. 182. 8. E. Penrose, Theory of the Growth of the Firm (Oxford, Oxford University Press, 1959, p. 84). 9. Rumelt goes on to suggest that "strengths" could include unique resources, reputation, or brand image (for a development, see: J. Kay, Foundations of Corporate Success (London, OUP, 1993). 10. K. Pavitt, Sectoral patterns of technical change: Towards a taxonomy and a theory, Research Policy, 13(9), 1984, pp. 343– 373. 11. G. Dosi, Technical Change and Industrial Transformation (London, Macmillan, 1984). 12. R. Rothwell and J. P. Gardiner, Re-innovation and robust designs: Producer and user benefits, Journal of Marketing Management, 3(3), 1988, pp. 372–387. 13. D. A. Kirsch, The Electric Car and the Burden of History (New Brunswick, NJ, Rutgers University Press, 2000). 14. R. Foster, Innovation: The Attacker’s Advantage (London, Macmillan, 1986). 15. C. Christensen, The Innovator’s Dilemma (Boston, Harvard Business School Press, 1997). 16. As discussed in J. L. Bower and C. M. Christensen, Disruptive technologies: Catching the wave, Harvard Business Review, Jan–Feb, 1995, pp. 43– 53. 17. W. M. Cohen and D. A. Leventhal, Absorptive capacity: A new perspective on learning and innovation, Administrative Science Quarterly, 35(1), 1990, pp. 128–152. 18. G. S. Day and P. J. H. Schoemaker, Avoiding the pitfalls of emerging technologies, California Management Review, 42(2), 2000, pp. 8–33. 19. D. J. Teece, G. Pisano and A. Shuen, Dynamic Capabilities and Strategic Management, University of Berkeley, mimeo (November, 1991). 20. Ibid, p. 511. 21. Admittedly Utterback’s empirical sample is small: 29 cases in total, of which 23 discontinuous innovations came from outside the industry, four from inside the industry and two proved inconclusive. See: J. M. Utterback, Mastering the Dynamics of Innovation (Boston, MA: Harvard Business School Press, 1994). 22. J. C. Spender, Industry Recipes (Oxford, Blackwell, 1989).
Gales of Creative Destruction and the Opportunistic Incumbent
407
23. M. Tushman and P. Anderson, Technological discontinuities and organizational environment, Administrative Science Quarterly, 31, 1986, pp. 436 –456. 24. H. W. Chesbrough and D. J. Teece, When is virtual virtuous? Harvard Business Review, Jan–Feb, 1996, pp. 65–73. 25. A. M. Brandenberger and J. M. Nalebuff, Co-opetition (New York, Doubleday, 1996). 26. See, for example: T. Gouldson, Fine tuning the Dinosaur? Environmental product innovation and strategic threat in the automobile industry: A case study of the Volkswagon Audi Group, Business Strategy and The Environment, 2(3), 1993, pp. 12–21; M. B. Schiffer, Taking Charge: The Electric Automobile in America (Washington, DC, Smithsonian Institute Press, 1994); D. Sperling, New Transportation Fuels: A Strategic Approach to Technological Change (Berkeley, CA, UC Press, 1988). 27. W. W. Suen, Managing International Technology Alliances: Ballard Power and Fuel Cell Vehicle Development’, PICMET’01, July, Portland, Oregon, 2001. 28. California Energy Commission, ABCs of AFVs: A Guide to Alternative Fuel Vehicles (Sacramento, CA, 1999, Fifth Edition). 29. The term "zero polluting at source" does not mean that no pollution is produced in generating power for the battery. There has been a range of contradictory studies examining life-cycle emissions from electric and conventionally powered vehicles. However, most conclude that the arguments about moving the pollution from point of usage to point of generation depend largely on the make up of the electricity generating plants and the efficiency of the EV power storage device (see P. L. Adcock and P. McCusker, How beneficial are EVs to the environment? Electric and Hybrid Vehicle Technology 95, 1995, pp.232–238.). 30. We should note that, in recent years, the car companies have also begun exploring the possibility of fuel cell technology, as well as the potential of alternative fuels, such as, methane and liquefied natural gas. 31. See: A. J. Scott, Southern California: The Detroit of electric cars? Access, Transportation Research at the University of California, 3, 1993, pp. 8–13; J. Slifko and D. L. Rigby, Industrial policy in Southern California: The production of markets, technologies, and institutional support for Electric Vehicles, Environment and Planning, 27(6), 1995, pp. 933– 954. 32. J. MacKenzie, The Keys to the Car: Electric and Hydrogen Vehicles in the 21st Century (New York, WRI, 1994). 33. P. L. Adcock and P. McCusker, How beneficial are EVs to the environment? Electric and Hybrid Vehicle Technology 95, 1995, pp.232–238. 34. R. De Neufville, S. Connors, F. Field, D. Marks, D. Sadoway and R. Tabors, The Electric Car unplugged, Technology Review, January, 1996, pp. 30 –36. 35. Although fuel cell cars are not expected, even on an optimistic basis, to be commercially viable much before 2015, see: A. A. Evers, Go to where the market is! Challenges and opportunities to bring fuel cells to the international market, International Journal of Hydrogen Energy, 28(7), 2003, pp. 725– 733. 36. S. Narang, Advanced flywheel technology, Electric and Hybrid Vehicle Technology 95, 1995), pp. 137–144. 37. T. Grudkowski and E. Polley, Exceeding DOE mid-term performance with ultracapacitors, Electric and Hybrid Vehicle Technology 95, 1995, pp. 131 –137. 38. J. Murray, B. Lane, K. Lillie and J. McCallum, The Report of the Alternative Fuels Group of the Cleaner Vehicles Task Force: An Assessment of the Emissions Performance of Alternative and Conventional Fuels DTI Automotive Directorate, (Norwich, HMSO, 2000). 39. M. Cote, Technology Forcing Regulations for Electric Vehicles, The 12th Electric Vehicle Symposium, EV12, December, 1994, pp. 272–277. 40. M. Shnayerson, The Car that Could: The Inside Story of GM’s Revolutionary Electric Vehicle (New York, Random House, 1996). 41. The station car term relates to railway station and not estate cars as the term normally is used in the UK. 42. S. Renzi and R. Crawford, Powering the next generation automobile: DaimlerChrysler’s venture into fuel cell technology, Corporate Environmental Strategy, 7(1), 2000, pp. 38–50. 43. See: S. Toyota, The Electric Vehicle: The challenge of the next century, Report of EVS 13, Osaka, June, Electrifying Times, 4, 1996, p. 1; D. Coup, Toyota’s approach to alternative technology vehicles: The power of diversification strategies, Corporate Environmental Strategy, 6(3), 1999, pp. 258–269. 44. M. Callon, Society in the making: The study of technology as a tool for sociological analysis, in: W. Bijker, T. Hughes and T .Pinch, The Social Construction of Technological Systems (Cambridge, MA: 1989, pp. 83–103). For a historical review of some of the non-US regulations and activities of overseas manufacturers, see Quandt (1995).
408
R. Dyerson & A. Pilkington
45. G. S. Day and P. J. H. Schoemaker, Avoiding the pitfalls of emerging technologies, California Management Review, 42(2), 2000, pp. 8–33. 46. R. N. McGrath, Patterns in the legitimation of emerging electrochemical technologies in the Electric Vehicle Industry, Technology Management: Strategies and Applications, 3, 1997, pp. 145– 159. 47. For example, switching to the use of hydrogen fuel, were it technically feasible at present, would require overcoming consumers’ fears over its safety in use. 48. M. Weber and R. Hoogma, Beyond national and technological styles of innovation diffusion: A dynamic perspective on cases from the energy and transport sectors, Technology and Strategic Management, 10(4), 1998, pp. 545– 566. 49. S. Croom, P. Romano and M. Giannakis, Supply chain management: An analytical framework for critical literature review, European Journal of Purchasing and Supply Management, 6(1), 2000, pp. 76–83. 50. See: U. Arnold and E. E. Scheuing, Creating a factory within a factory, in: R. J. Baker and P. Novak, (eds) Purchasing Professional: The Stars on the Horizon, A Collection of Presentation from NAPM 82nd Annual International Purchasing Conference, NAPM (Tempe, AZ, 1997, pp. 79 –84); R. B. Handfield, G. L. Ragatz, K. J. Petersen and R. M. Monczka, Involving suppliers in new product development, California Management Review, 42(1), 1999, pp. 59–82. 51. C. M. Harland, R. C. Lamming and P. D. Cousins, Developing the concept of supply strategy, International Journal of Operations and Production Management, 19(7), 1999, pp. 650–673. 52. U. Arnold, New dimensions of outsourcing: A combination of transaction cost economics and the core competencies concept, European Journal of Purchasing and Supply Management, 6(1), 2000, pp. 23–29. 53. M. Hobday, Product complexity, innovation and industrial organisation, Research Policy, 26, 1998, pp. 689–710.