The Tuck School at Dartmouth
Entrepreneurship & Innovation Strategy, Fall 2011
The rise of the
Electric Vehicle
An ecosystem approach
Manish Dalwadi ● Yang Zhang ● Patroklos Karantinos
Table of Contents
Introduction .................................................................................................................................................. 2
What is an Electric Vehicle? .......................................................................................................................... 3
The Ecosystem .............................................................................................................................................. 5
The value chain ......................................................................................................................................... 5
The players ................................................................................................................................................ 5
Adoption-chain risk ................................................................................................................................... 8
Co-innovation risk ................................................................................................................................... 10
Expectation of results ............................................................................................................................. 11
Summary ..................................................................................................................................................... 12
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Introduction1
The first decade of the 21st century will be remembered by the global automobile industry as a
significant landmark: almost 150 years after it was invented by Nikolaus Otto and approximately 100
years after it was first used in massively produced cars, the internal combustion engine (ICE) was
challenged by the electric motors. The concerns about the world’s finite fossil fuels supplies, the
increasing dependence of many countries on imports from relatively unstable countries to cover the
demand for those fuels, and the associated national security concerns, the increasing oil prices and the
rising concerns about environmental pollution and global warming gave rise to the commercial
introduction of electric vehicles (EV).
Currently there are two basic categories of vehicle that use electric engines: the ones that combine an
ICE with an electric motor (hybrid electric vehicle - HEVs) and the zero-emission vehicles (ZEV) that only
utilize an electric engine. Hybrid EVs use the gasoline engine and the car’s braking power to charge the
car Ni-Cad or Ni-MH batteries while the car is running; an on-board computer optimizes the use of
either source to provide lower emissions and increased mileage. The first commercial launch of an EV in
the U.S. was undertaken by General Motors which launched EV1 in 1997. Before production was halted
in 2003 approximately 900 consumers had used the car. In 1997 also, Toyota launched its RAV4 EV; a
total of 1,485 vehicles were leased or sold until 2003, when Toyota ceased production and 750 were still
in use as of the second half of 2010.
As a response to the Clean Air Act of 1970, the 1990 Low Emission Vehicle Regulation in California and
the 1993 initiative of Clinton administration to support the development of more fuel-efficient cars,
some auto manufacturers turned their attention and their developmental efforts in the direction of
commercial scale production of EVs. Honda introduced its HEV, the Insight, in 1999 in the U.S. and
Toyota released the first-generation Prius, also an HEV, in 1997 in the Japanese market and in 2000 in
the U.S. market; although Honda was first to introduce an HEV in the U.S. market, it was Toyota with
Prius that was leading the market.
The big boost for electric vehicles came in the 2000s, when the gas price skyrocketed: having not
exceeded $1.50 per gallon between 1980-1998 gas prices reached $4.12 per gallon in July 2008. Initially
appealing to the relatively small segment of environmentalist consumers, electric vehicles started
becoming popular to a more mainstream car audience and more car manufacturers came up with HEV
offerings (Ford, Chevrolet, GMC, Mercury): from 2001 to the end of 2009 Americans bought 1.6 million
HEVs, the majority of which made by Toyota (Toyota commanded a 61% market share in HEVs at the
end of 2009). In the present we will present the electric vehicle ecosystem and the co-innovation and
adoption risks.
1
This section draws from HBS Case 9-510-076 “Plugging In the Consumer: The Adoption of Electrically Powered
Vehicles in the U.S.” and from relevant Wikipedia.com entries.
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What is an Electric Vehicle?
An electric vehicle (EV), also known as electric drive vehicle, uses one or more electric motors or traction
motors for propulsion. Electric vehicle first came into existence in the mid-19th century but was not fully
introduced to the market until 1990s due to the rising concern about environment. In 1997, General
Motors released EV1, a two-seat car powered entirely by electricity with three hours recharging time.
However, GM did not launch the product in the market and also refused multiple offers from consumers
to buy the EV1s, instead they destroyed all the 900 models and only left a few in the museum. Toyota
had also developed an EV for lease in California in the mid-1990s, same as GM, the RAV4-EV was only
popular among a small segment of environmentalists and was eventually discontinued. As public
concern over global warming and pollution from fossil fuels peaked in 2000s, 51% of respondents said
they were interested in a car that would reduce their emissions and fuel costs in a survey conducted in
the US in 2008. This was the dawn of a new era of electric vehicles.
There are three types of Electric Vehicles in today’s world. They are Hybrid Electric Vehicles (HEV), plugin hybrid electric vehicles (PHEV) and single fuel all-electric vehicles (ZEV).
HEVs use the gasoline engine and braking power to charge the car Ni-Cad or Ni-MH batteries. The best
representative of HEV is Toyota’s Prius. The Prius used a gasoline engine and the application of the
brakes to charge its nickel metal hydride battery while the car was running. The transition from gas to
electrical power managed by a computer system helped Prius have a better fuel mileage and lower
emissions than any vehicles at that time. At beginning, the Prius was in demand with a relatively small
segment of environmentalist consumers. It was not until gas hit $4 per gallon in 2008 that Prius had an
incredible increase in sales and Toyota started ramped up production, almost 10 years after it was first
introduced to the market. From 2001 to the end of 2009, Americans bought 1.6 million HEVs; one
million were Toyota’s Prius.
PHEV models use much of the same technology as the HEV, running on either electricity or gasoline and
transitioning seamlessly from one to the other. However, there are two major differences between
PHEV and HEV. First it was the battery. PHEV used a Li-Ion battery instead of the Ni-Cad and Ni-MH
batteries that are used in HEVs. This would allow PHEV to have a greater range and speedier recharge.
Second it was the way that battery works. The batteries for PHEVs could be charged by plugging into an
electrical outlet. It would allow PHEVs to run on electricity exclusively until the battery ran out of power.
Most PHEV models used a traditional three-prong plug and could be fully charged in 6 to 8 hours using a
110-volt line. Also they could be charged faster using a 220-volt line or at some special charging station.
The single fuel electric vehicle is a truly emissions-free vehicle. The ZEV is powered solely by electricity,
with zero emissions at the tailpipe. However, there is a clear downside of this product. Once the battery
runs out of power, not like its predecessors who can turn to alternatives to power the car, ZEV has no
alternative. While charging ZEVs with a 110-volt outlet could take as my as 20 hours for some models,
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charge time depended on many factors and the time could be shorten to eight hours or even fewer for
some models, especially with some new high-volt charging innovations. The biggest challenge for this
currently most environmental-friendly car in the world is the power. Most of the EVs in today’s market
are within 100 mile limit per charge. Although it is usually longer than most of the PHEV, for example, as
for Nissan Leaf (ZEV) it can run over 80 miles per charge while as for Volt (PHEV) it can only run 40 miles
per charge, PHEV does have alternatives to power the engine after the battery dies while ZEV will have
no other resources to run the engine. Also some studies show that the CO2 emission produced by
driving an ZEV powered by electricity generated from burning coal versus burning fossil fuels to power
an ICE vehicle is similar.
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The Ecosystem
The value chain
The following chart exhibits the interaction between the various value-chain players:
The players
There are several “links” or players in the EVs adoption/value chain: consumers, car dealers and garages,
gas stations, charging infrastructure manufacturers, battery manufacturers, car companies, utilities,
financing and insurance companies and the government.
Consumers
Consumers constitute the end link of the adoption chain and the decisive one. EV consumers can be
individuals, corporations or fleet management companies but in any case they look for similar attributes
in their electric cars, on top of the attributes they look for in regular cars: economy and environmental
friendliness. EV consumers’ main concerns are mileage, especially for ZEVs, ease of use (charging
considerations) and price.
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Car dealers & garages
The car dealers and the garages are important so that EVs are available throughout the country. They
will not be willing to stock PHEVs and ZEVs unless they are certain that the infrastructure necessary to
support demand, i.e. charging stations, home-charging infrastructure etc., is in place. An important
concern for the dealers is the extra requirements in terms of capital investment, space and training that
will be required to support EVs maintenance as they will have to move from repairing just ICE to
repairing electric motors as well. Also, some characteristics of electric vehicles may render them less
appealing to support: for example, the batteries are affected by extreme temperatures and this will
reflect on how long the vehicle can stay at the dealer’s shop. State regulations will play some role in the
dealers “willingness” to adopt.
Gas stations – charging stations providers
Gas stations become relevant when it comes to charging either PHEVs or ZEVs. Currently gas stations are
the link that connects the car users with the energy companies and, in that fashion, they can be the link
that will connect the electricity producers (practically the utilities) with the electric car owners. In order
to play that role, gas stations will have to invest in, currently, expensive quick charging infrastructure
and, given that EVs are not abundant, retain some exclusivity over some geographic area. On the other
hand, as the driver will have to wait c. 10 minutes for a full charge, providing charging services will allow
gas stations to increase their high margin “mini mart” sales.
Charging infrastructure manufacturers
Charging infrastructure manufacturers’ role is critical for the further adoption of EVs. EVs users will need
to charge their cars and so far the indication is that this will take place either at home or at work (1 & 2
level charging, respectively) and less in dedicated charging stations. Charging infrastructure
manufacturers is the link between the car manufacturers and the utilities, where they seem to have a
two-way role: providing cars with electricity and the utilities with data for billing, forecasting etc.
Charging infrastructure manufacturers are also linked to the battery manufacturers (how fast a battery
can be charged is a function of both the charging infrastructure and the battery technology).
Battery manufacturers
Battery manufacturers are the key co-innovators. The EVs battery performance is directly related to car
price, performance, mileage, charging time and required equipment, as well as maintenance
requirements. Also, because of the cost of the car batteries is significant, there have been proposed
various solutions that will affect the shape of the ZEVs’ value chain; for example the car companies will
own the batteries and lease them to the car owners or that instead of charging the battery there will be
battery-exchange stations (the latter has been already implemented in Israel). And those issues possibly
affect the insurance and the financing of the EV purchase or lease. A key concern for battery
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manufacturers is whether new zero-emission technologies emerge and become commercially justifiable,
such as the use of hydrogen fuel cells.
Car companies
Car companies are the main innovation drivers in the case of EVs. They have already invested
significantly in the development of HEVs and some ZEVs and their growth in the future depends, partly
at least, on the commercial success of the EVs. EVs can be the product through which car companies will
extenuate their client relationships and develop new ones, among environmental-conscious consumers.
The widespread adoption of EVs will allow car manufacturers to differentiate away from their
“dependence” on oil companies. Furthermore it will allow auto manufacturers to become players in the
electricity market: not only EVs will consume significant energy, which means new business for electrical
utilities, but also, through “smart grid” applications, the batteries of the electric vehicles can act as
energy storage solutions that will allow utilities to stabilize demand and to better schedule electricity
production.
Utilities
In EVs utilities will find a new source of demand for electricity as well as, with the development of the
“smart grid”, a way to reduce volatility in demand, as described above. Utilities will be responsible to
bring appropriate electrical power (EVs chargers operate on higher voltage than usual domestic outlets)
to charging stations, which in some cases will require network upgrades etc. The “connecting link”
between utilities and EVs are the charging stations which will have the “double role” of facilitating the
charging, on the one hand, and the billing, data transmission etc on the other.
Financing & insurance companies
Financing and insurance companies are important for the development of the EV market, as they
already are for the ICE car market. At the moment EVs command a price premium over comparable
traditional cars and this makes prospective EV owners prime customers for financing providers.
Furthermore, EV owners may need to finance the purchase or leasing of new batteries for their cars
some years after the buy them, and this also an opportunity for financing companies. Similarly,
insurance companies will need to innovate offering insurance products that suit the characteristics of
the EV and its use, e.g. insurance for charging station failure or damage. The challenge for both financing
and insurance companies is that the business model for ZEVs is not clear yet, or is not clear if more than
one models will emerge, and this means that their tactics depend on those of other players.
Government
EV adoption is strongly encouraged by local, state and federal legislation. In the San Francisco Bay area
there are in place three initiatives to support the adoption of EVs, sponsoring the use of an EV or the
development of needed infrastructure: the Transportation Fund for Clean Air, the Alternative Vehicle
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and Infrastructure and the Innovative Climate Grants. Furthermore, the State of California has in place
four initiatives, with most important one being the ZEV regulation, according to which certain quotas for
EVs sales in CA are imposed onto car manufacturers. In the Federal level, the American Recovery and
Reinvestment Act provides with $2.4 billion for EV related infrastructure; furthermore, the acquisition of
EVs is supported by tax credits ranging from $2,500 to $7,500 per vehicle.
Adoption-chain risk
“Chicken or the egg” – The charging infrastructure/gas station adoption risk:
The primary challenge in this ecosystem is who will initially bear the risk of implementing the
infrastructure necessary to make EVs attractive to the mainstream consumer population. It is difficult to
sell EVs in volume without a widespread charging infrastructure in place (which with current battery
technology is necessary for trips over 40-100 miles), but in order to make investing in implementing a
vast charging infrastructure attractive you need a critical mass of EVs; thus the analogy to the chicken or
the egg riddle.
This is very similar to the cam-pill case we covered in class. The player that builds out the charging
infrastructure will build the infrastructure for everyone to leverage. The key point is the technology is
available; level 1/2/3 chargers exist, but how can this first mover stakeholder protect against late
movers taking advantage of their large, upfront effort? Similar to “cam-pills” core competency with
enhanced doctor diagnostic speed due to advanced software, what is the early mover’s defensible
position? The industry hasn’t figured it out yet, thus the lack of widespread charging infrastructure.
We suspect gas stations will play a critical role here. As electric battery performance, measured by
mileage/charge and charging station performance, measured by charge time improve, existing gas
stations can be retrofitted to include EV charging infrastructure with less investment costs. We believe
the key here is 1) lowering the investment cost required making the implementation more attractive
and 2) providing a new stream of revenue to gas stations who currently operate on slim margins
(especially on gasoline). Value-added services like streaming movies, music, Wi-Fi or payment processing
maybe be opportunities for gas stations to improve margins and given them a reason to invest in EV
charging infrastructure.
Battery technology S-curve risk (Technology and Demand) – The consumer adoption risk:
Another risk is associated with the battery portion of the value chain. As discussed early, there is the coinnovation risk, but there is also an adoption risk involved here. Battery makers have developed very
sophisticated batteries capability of powering cars for substantial distances (i.e. Telsa, Nissan Leaf).
However, the key issue here is lack of consumer adoption of vehicles with these batteries embedded
due to S-curves.
First, in terms of the technology s-curve, lithium-ion batteries have been in development for quite some
time now and have been pushing up the technology S-curve. The hope in the industry is the capacity of
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the batteries will continue to improve over time. On the demand S-curve we see a different story.
Consumers have been anchored by the performance of the existing combustion engine vehicles. As a
result, the current capacity of ~100 miles per charge simply does not create the same value a
500miles/gas tank provides.
Figure 1 – Demand S-curve
Figure 2 – Technology S-curve
Because of this lack of value, there is a large risk that customers will not adopt the current incarnation of
EVs. The simple approach to address this adoption risk is to improve the batteries to the point that they
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create the same “value” as gasoline. The problem is it will take time to advance battery technology to
that point. To address this, the industry has taken on a hybrid approach. The Toyota Prius, one of the
first commercially successful EV) uses a hybrid engine that combines a primary combustion engine with
an electrical system that can be used to supplement the combustion engine. GM, with their Chevy Volt
took a different track building a hybrid with its primary engine being electric and a combustion engine to
provide power on longer trips. By doing this, the car manufacturers make the EV more attractive to
mainstream customers. We believe it is a smart move because it is a step towards solving the chicken
and the egg problem mentioned earlier. Car manufacturers are leading the way by taking the steps
necessary to get EVs on the road with the hope that charging infrastructure will follow.
The utility electrical infrastructure adoption risk:
The utility companies pose an interesting adoption risk. Because of heavy regulations, utilities measure
success based on asset utilization and not pure profits. That generally implies when they invest in
infrastructure they will attempt to suck every ounces of useful life out of it. What is interesting is in the
U.S., the power infrastructure is relatively old; the US power grid is sometimes described as a third
world grid. So there are opposite forces pulling on the utilities. One they want to get the most use out of
their current assets, but two they are facing rising maintenance costs of aging equipment and pressure
from communities to update their power grids. The reason this is such a big deal is if EVs reach
mainstream adoption, having 100’s of cars charging overnight in one neighborhood on one aging
transformer will result in power grid failures.
The utilities so far have taken a wait and see approach. Utilities like PG&E do have incentive plans in
place where EV owners get discounted rates when charging their vehicle at certain times during the day,
but they have not invested a great deal to upgrade the power grid. Another interesting dynamic here
that remains to be played out is the idea of a smart grid where customers can sell back electric from
solar cells or even a charged EV. Most likely there will be heavy government involvement here which
most likely is also driving this wait and see approach by the major utilities.
Co-innovation risk
The success of the EV depends on many factors, e.g. the charging speed, the driving range per charge,
the charging method and etc. It is necessary to keep innovating around this electric power system. The
most important co-innovation is obviously on the supply side, the battery and the charging device, as
most of the consumers of EVs share the concern that the range that EV can run per charge can put them
in an awkward situation. First, the range per charge is probably not long enough to cover the return trip.
Second, the charging place is way too less than the gas stations, making it harder to get recharge. Even if
the range is enough due to the calculation, an unexpected traffic will put you in a very awkward
situation. Third, the charging hours is too long. Unlike internal combustion engines (ICE) which usually
take 10 minute for a full refill that can support 400 miles, an electric engine will need 8 hours to
recharge the car which can only run another 100 miles or less.
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To solve this problem the battery manufactory will need to invent a battery that can give the electric
engine longer hours to run and have much less charging hours. Also the battery should be easy to carry
on or be charged by some easy carry-on electric devices. Thus, when the battery is running down in the
middle of the road, the driver will at least have some backups rather than dial 911 and wait for someone
to tow the car.
The battery should also be indifferent on the volts. This will give the EV driver more flexibility when
charging their cars. Such battery and charging device should be available at most of the gas station.
Another co-innovation can be a recharge device at the gas station. Just to make EV drivers’ life a little
easier, most of the gas stations should have special devices to recharge the battery quickly. Same as ICE
drivers have gas station to back up their needs, EV drivers require similar re-charge stations (normal gas
stations will start doing that as long as the demand is big enough) and a quick re-charge. However, such
an infrastructure should not take too much initial investment as the gas station may not be willing to
spend too much on the cost until they can see the profit. Also it should not take too much space as
otherwise it will require the gas station to expand their place which they may be not likely to do. These
co-innovation risks will significantly affect the success of EV.
Expectation of results
…the “Apollo project of our times” is the goal for the United States to be “the first country to have a
million electric vehicles on the road by 2015”…
President Obama in his 2011 State of the Union address set the expectation for EV adoption. In
California, the initial launch state for the GM Volt, the Nissan Leaf and the Ford Focus Electric, HEV
registrations have exceeded 200,000 vehicles and ZEVs are expected to be more than 180,000 by 2015.
Although specific numbers or time-lines for the adoption of EVs have not been provided by car
manufacturers, the above numbers and the prominence of the issue, both in the public sphere as well as
among car manufacturers’ executives, are indicative of the expectations of the car industry about the
adoption of electric vehicles.
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Summary
The first decade of the 21st century will be remembered by the global automobile industry as a
significant landmark as the internal combustion engine (ICE) was challenged by the electric motors. The
concerns about the world’s finite fossil fuels supplies, the increasing dependence of many countries on
imports from relatively unstable countries to cover the demand for those fuels, and the associated
national security concerns, the increasing oil prices and the rising concerns about environmental
pollution and global warming gave rise to the commercial introduction of electric vehicles (EV).
An electric vehicle (EV), also known as electric drive vehicle, uses one or more electric motors or traction
motors for propulsion. As public concern over global warming and pollution from fossil fuels peaked in
2000s, the dawn of a new era of electric vehicles came to arise. Currently, there are three types of
Electric Vehicles: Hybrid Electric Vehicles (HEV), plug-in hybrid electric vehicles (PHEV) and single fuel allelectric vehicles (ZEV).
There are several “links” or players in the EVs adoption/value chain: consumers, car dealers and garages,
gas stations, charging infrastructure manufacturers, battery manufacturers, car companies, utilities,
financing and insurance companies and the government.
The success of the EV depends on many factors. The most important co-innovation is obviously on the
supply side, the battery and the charging device, as most of the consumers of EVs share the concern that
the range that EV can run per charge can put them in an awkward situation. First, the range per charge
is probably not long enough to cover the return trip. Second, the charging place is way less than the gas
stations, making it harder to get recharge. Third, the charging hours is too long.
To solve this problem the battery manufactory will need to invent a battery that can give the electric
engine longer hours to run and have much less charging hours. The battery should be easy to carry on or
be recharged by an easy carry-on electric device. It should also be indifferent on the volts. Another coinnovation can be a recharge device at the gas station. However, such an infrastructure should not take
too much initial investment as the gas station may not be willing to spend too much on the cost until
they can see the profit. Also it should not take too much space as otherwise it will require the gas
station to expand their place. These co-innovation risks will significantly affect the success of EV.
The primary challenge in this ecosystem is who will initially bear the risk of implementing the
infrastructure necessary to make EVs attractive to the mainstream consumer population. It is difficult to
sell EVs in volume without a widespread charging infrastructure in place (which with current battery
technology is necessary for trips over 40-100 miles), but in order to make investing in implementing a
vast charging infrastructure attractive you need a critical mass of EVs. Another risk is associated with the
battery portion of the value chain: apart from the co-innovation risk, there is also an adoption risk also
involved here, as battery makers have developed very sophisticated batteries capability of powering
cars for substantial distances.
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The utility companies pose an interesting adoption risk. Because of heavy regulations, utilities measure
success based on asset utilization and not pure profits. That generally implies when they invest in
infrastructure they will attempt to suck every ounces of useful life out of it. What is interesting is in the
U.S., the power infrastructure is relatively old; the US power grid is sometimes described as a third
world grid. So there are opposite forces pulling on the utilities. One they want to get the most use out of
their current assets, but two they are facing rising maintenance costs of aging equipment and pressure
from communities to update their power grids. The reason this is such a big deal is if EVs reach
mainstream adoption, having 100’s of cars charging overnight in one neighborhood on one aging
transformer will result in power grid failures. So far, the utilities have taken a wait and see approach.
Although specific numbers or time-lines for the adoption of EVs have not been provided by car
manufacturers, the prominence of the issue, both in the public sphere as well as among car
manufacturers’ executives, are indicative of the high expectations of the car industry about the adoption
of electric vehicles.
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