Tuck School of Business at Dartmouth
Entrepreneurship and Innovation Strategy
Professor Ron Adner
Project: Flex Fuel Vehicles in the U.S.
Fall, 2011
David Leal
Frederico S. De Miranda
Louis Marie de Langlois
Luciana Zanini Rocha
Megan F. Shackleton
Thiago C. Vasconcelos
Executive Summary
This project examines how an innovation was brought to market and the ways in which the opportunity
was structured and exploited. Specifically, we explored Flex Fuel vehicles in the United States. The rise of
oil prices around the world in the 1970’s gave rise to alternative fuels as a viable option. Among these
options, ethanol-based fuels became popular because they were considered cleaner-burning and were
promoted by governments as a way to boost the local agricultural industries. This type of fuel had the
added advantage of being less expensive than petroleum-based fuel as well as allowing governments to
decrease their dependence on the politically charged oil industry.
Today, more than 9 million vehicles in the U.S. are flex fuel cars, although 68% of flex fuel car owners do
not realize they own a flex fuel vehicle.
The most significant challenge that FFVs face is adoption chain risk. Though most major car
manufacturers have developed FFVs, they are still a minority of the cars being developed, therefore car
manufacturers are still in the process of fully adopting the innovation. Though even within the FFV that
are produced and sold, the vast majority of consumers with FFV vehicles are not utilizing the flex fuel
capability due to a lack of adoption by the fuel station, which is where the most critical risk in the
adoption chain lies.
Considering the number of FFVs in circulation in the U.S. today (~8 million or 3% of the U.S. fleet) and the
number of FFV units sold in the U.S. in 2009 (~1 million units or 10% of sales of new cars), one might
conclude that the innovation has been successfully implemented. However, we believe that the correct
way of measuring the success of this innovation is by analyzing the effective use of ethanol as a fuel
source for FFV because, ultimately, the purpose of this innovation is to reduce the consumption of fossil
fuels , substituting renewable fuels (in this case, ethanol) in its place. This analysis demonstrates that,
although the innovation is relatively successful in terms of units sold, it has not significantly reduced the
consumption of fossil fuels.
There are several challenges that have led to the ineffective use of FFVs and the overall disappointing
levels of consumption of E85 fuel in FFVs. We believe the most important factors are lack of consumer
awareness, inadequate distribution of E85 and few cost incentives. Overall, the FFV implementation in
the U.S. is being relatively successful and, although it may seem to be adopted at a glacial pace,
frustrating those who desire faster adoption, we believe that this pace of adoption allows the whole
ecosystem to develop and, therefore, allow the innovation to eventually flourish.
1
.
Part 1 – Context for the Innovation

Innovation Overview – Flex Fuel Vehicles
Flexible fuel vehicles (FFV) or dual-fuel vehicles are widely known as flex-fuel vehicles and
consist of a vehicle that can run on more than one fuel, usually gasoline blended with either ethanol or
methanol fuel, and in which both fuels are stored in the one common tank. These vehicles are different
from bi-fuel vehicles, which have one tank for each fuel and the engine runs on one type of fuel at a
time.
The most common FFV available in the market is the ethanol flex-fuel vehicle, with more the 25
million units sold in the world by 2011. These vehicles are concentrated in Brazil, USA, Canada and
Europe. Although there is technology that allows the FFV to run at any level of ethanol (from 0% to
100%), each country has its own regulations on the percentage of ethanol that can be mixed with
gasoline. In the U.S., the standard is 85% ethanol, 15% gasoline, which is referred to as E85.
The value proposition for FFV is closely tied to the active use of flexible fuels in the vehicles.
There are three key elements that drive the value of FFV:
-
Reduction of CO2 emissions
-
Lower price fuel for customers
-
Breaking the country’s dependence on oil
Flexible fuel vehicles have garnered much attention in the media an in the automobile industry
for many years. In fact, the first commercial flexible fuel vehicle was the Ford Model T, produced from
1908 through 1927. This early model contained a carburetor with adjustable jetting, allowing use of
gasoline or ethanol, or a combination of both. Despite the early availability of flexible fuel vehicles,
2
however, low crude oil prices through much of the mid-20th century caused gasoline to prevail as the
fuel of choice. This was the case until 1973, when the Arab oil embargo led to an oil crisis that resulted
in gasoline shortages in the U.S. and, for the first time in decades, awareness on the dangers of oil
dependence. As part of the conversation to reduce the United States’ long-term dependence on oil, the
crisis opened a new opportunity for ethanol and other alternative fuels, such as methanol, CNG, and
hydrogen. Ethanol, methanol and natural gas CNG were the three alternative fuels that received more
attention for research and development, and government support.
If the economics of oil and gasoline in the United States was the impetus for igniting the
movement on alternative fuels, the goal to improve air quality added fuel to the fire. Ethanol fuel was
supported by environmental groups early on as it generates fewer emissions than gasoline when
counting only fuel burning in vehicles.
More importantly, liquid fuels were preferred over gaseous fuels not only because they have a
better energy density but also because they were the most compatible fuels with existing distribution
systems and engines. In theory, this would avoid a big departure from the existing technologies and
would take advantage of the vehicle and the refueling infrastructure. Methanol beat its corn-based
cousin to market as California led the way by requesting vehicles that ran on methanol. In 1981, Ford
delivered 40 dedicated methanol fuel (M100) Escorts to Los Angeles County. However, only four
refueling stations were installed in what was a preview of the challenges that would face the adoption
of alternative fuels.
Meanwhile, engineers debated the merits of using methanol vs. ethanol. Challenges existed
around compatibility of materials with the fuel. While engineers and policy-makers in the U.S. debated,
Brazil mandated ethanol vehicle production that advanced the ethanol-based technology, which made it
easier for U.S. regulators to accept commercialization of ethanol-based technology. Ford Motor
3
Company was a leader in commercializing both methanol and ethanol-based technology in the U.S. in
the early 1980’s.
As an answer to the lack of refueling infrastructure, Ford began development of a flexible-fuel
vehicle in 1982, and between 1985 and 1992, 705 experimental FFVs were built and delivered to
California and Canada, including the 1.6L Ford Escort, the 3.0L Taurus, and the 5.0L LTD Crown Victoria.
These vehicles could operate on either gasoline or methanol with only one fuel system. Legislation was
passed to encourage the U.S. auto industry to begin production, which started in 1993 for the M85 FFVs
at Ford. It was not until 1996 that a new FFV Ford Taurus was developed which was fully capable of
running on either methanol or ethanol blended with gasoline. This ethanol version of the Taurus
became the first commercial production of an E85 FFV. The momentum of the FFV production programs
at the American car companies continued although by the end of the 1990s the emphasis shifted to the
FFV E85 version, as it is today. Ethanol won the battle over methanol as the preferred alternative to
gasoline largely based on its support from the farming community and legislators sympathetic to this
community. Congress passed incentive programs and corn-based ethanol subsidies that made
producing corn-based ethanol more economically attractive.
Using ethanol as a standard additive to gasoline gained traction during the mid-2000s, at a time
when oil prices were rising significantly. By 2006, about 50 percent of the gasoline used in the U.S.
contained ethanol in different proportions, making the United States the world's largest ethanol
producer, overtaking Brazil in 2005. This ethanol supply shift contributed to a sharp increase in the
production and sale of E85 flex vehicles through the 2000’s.

Ethanol Production
Ethanol fuel is widely used in the United States and in Brazil; combined, these two countries
produced 88 percent of the world's ethanol fuel in 2010. Ethanol is commercially produced using either
4
the dry mill or wet mill process. For instance, with corn as feedstock, the former process use the entire
grain kernel, ground into flour, where the latter involves separating the grain kernel into germ, fiber,
protein, and starch prior to fermentation. The starch in the flour is converted to ethanol during the
fermentation process, creating carbon dioxide and distiller’s grain.
Ethanol production capacity in the U.S. is approximately 14.2 billion gallons per year (bgy),
produced by 209 refineries located mostly in the Great Lakes region. Corn is the main feedstock used
for producing ethanol in the U.S. to the extent that nearly 40% of U.S. corn production is used to
produce ethanol. One decade ago, this level was only 10%.

FFV Market Analysis
The potential market for FFV is made up of all purchasers of cars, but the success of fueling
these vehicles with flex fuel is directly tied to the market for automobile fuel. The following outlines key
elements of both the current market for flex fuel vehicles and for automobile fuel.

By December 2009 there were 8.3 million E85 flex-fuel vehicles on the U.S. roads, representing
around 3.3% of the U.S. total, up from 4.1 million in 2005 and 1.4 million in 2001, as shown in
Exhibit 1
5
Exhibit 1: E85 FFVs Manufactured and in
Use in the United States 1998-2009
LightLightTotal
Duty
Duty
fleet
E85 FFVs E85 FFVs E85 FFVs
Year
net
produced
in use
annual
increase*
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
Total
216,165
426,724
600,832
581,774
834,976
859,261
674,678
735,693
1,011,399
1,115,069
1,175,345
1,049,478
9,281,394
144,000
306,149
456,947
466,203
700,719
750,437
609,437
683,217
960,287
1,076,902
1,149,389
1,049,478
8,353,165
144,000
450,148
907,096
1,373,299
2,074,018
2,824,455
3,433,892
4,117,109
5,077,396
6,154,298
7,303,687
8,353,165
8,353,165
Note: * Net increase is new FFVs manufactured
discounted by the survival rate.
Source: National Renewable Energy Laboratory









A total of 1.05 million E85 vehicles were sold in 2009, representing 10% of U.S. auto sales that
year
Nevertheless, the U.S. Department of Energy estimated that in 2009 only 504,297 flex-fuel
vehicles were regularly fueled with E85, and these were primarily fleet-operated vehicles
A 2005 survey found that 68% of American flex-fuel car owners were not aware they owned an
E85 flex
Since 2008, all new FFV models in the U.S. feature a bright yellow gas cap to remind drivers of
the E85 capabilities and include proper flex-fuel badging
In 2008 total gasoline demand in the U.S. was 139 billion gallons
A 10% blending level would have used 13.9 billion gallons of ethanol
However, the production capacity for U.S. corn-based ethanol was only 10.9 billion gallons a
year
Total planned capacity is expected to reach 13.8 billion gallons in 2013
As of May 2011, there were only 2,749 gasoline fueling stations selling E85 to the public in the
entire US (2 % of fueling stations in the US)
6

Ethanol is primarily transported by rail to demand centers. Many terminals, however, lack rail
accessibility in the U.S., as shown in Exhibit 2
Exhibit 2 (Source: McKinsey Quarterly)
7

FFV Ecosystem
The below figure represents the relationship between the various players in the Ecosystem:
8
As outlined above, the FFV Ecosystem includes a number of key actors; we analyzed the Benefits and Costs for every player in the value
chain of Flex Fuel Vehicles:
Exhibit 3: FFV Ecosystem Description of Actors
Key Actors
Car Manufacturer
Current Stage
Ford, GM and Chrysler
offer a large portfolio of
flex fuel cars and, by 2008,
almost any type of
automobile and light duty
vehicles was available with
flex fuel option.
-
-
Expectations
Reduce manufacturing
production costs and
product development
times
Pursue advanced
technologies for nearterm — vehicle
improvements that
increase fuel efficiency
and reduce emissions
of standard vehicles
-
-
-
Benefits
Technology is well
known and
implemented
There are government
incentives to develop
flex-fuel cars
Potential
differentiation for
customers
-
-
-
Car Dealer
FFV are available to Car
Dealers and there is no
significant price difference
between flex fuel cars and
standard cars
-
Increase in sales by
offering wider variety
of products, matching
customers’
expectations for green
technologies
-
-
New demand from
customers for more
green technologies
There is no price
difference from
standard cars, so any
-
Costs
Ethanol is more
corrosive than
gasoline, accelerating
the deterioration of
non-synthetic and
natural rubber fuel
system parts. These
parts had to be
manufactured with
new, more resistant,
materials
Flex fuel engine with
ethanol is less fuel
efficient than using
regular gasoline
It means, high R&D
investments
Train sales force to
inform customers
about the benefits of
an FFV
9
cost reduction would
benefit their margins
Garage
There are no big changes
in the Garage capabilities
-
-
Customers
Government
Ethanol Refineries and
Distributors
1
By December 2009 there
were 8.3 million E85 flexfuel vehicles on the U.S.
roads, representing
around 3.3 percent of the
U.S. total
-
Provides tax incentives for
R&D on alternative fuels
and alternative fuel
vehicles
Passed several rules to
address the problems of
lack of awareness and
deficient distribution
system
-
In 2011, the US production
capacity was around 14.6
billion gallons1, with Iowa
and Nebraska as the
largest producers.
-
-
-
Be prepared to serve
customers of flex fuel
technology
High volume of flexfuel cars to specialize
their efforts
No benefits
No costs
Low cost vehicle
Environmental
benefits
-
Drivers are not
dependent on ethanol,
once flex-fuel cars can
run on gasoline,
ethanol, or any
combination
-
Reduce risk related to
oil prices and oil
supply
Environmental
benefits
Decrease impact of
carbon emissions
-
Be less dependent on
oil supply
-
High investment to
create and incentivize
a new industry related
to FFV
Increase production of
ethanol with a
competitive price
Match new demand of
biofuels by oil
-
Trend of price
reduction of Ethanol
with the development
of new technologies
and access to new
-
Price of oil is still
competitive with
Ethanol price in the US
-
No increase to sticker
price
Extra time spent to
drive to ethanol fuel
station if actively
seeking ethanol fuel
Source: Renewable Fuels Association, January 2011
10
The majority of Ethanol is
transported from
producing regions to
demand centers by rail
Oil Refineries and
Distributors
Fuel Station
refineries and new
regulations
Continue production and
distribution of petroleumbased fuels
-
There are 2,400 filling
stations in the US that
dispense E85 fuel2, mostly
located in the Corn Belt
-
-
-
feedstock in the US
(i.e. beet and sugarcane)
Increase efficiency of
fuels
Reduce cost of
production
-
No benefits
-
Loss of market-share
Increase availability of
ethanol to consumers
Provide product
demanded and
consumers
-
Early adopters have
potential for
differentiation in
highly commoditized
market
PR potential of “being
green”
-
Most fuel stations are
owned by oil
companies therefore
integration of ethanol
hurts their central
business proposition
Infrastructure
investments (tanks,
fuel pump, etc.)
-
2
-
Source: U.S. Department of Energy
11

Ecosystem Risk Analysis
We can classify the various risks involved in the ecosystem as follows:
Co-Innovation Risk: The co-innovation risk was addressed by producers and car manufacturers by
developing technology, complementary products and the capabilities to manufacture them in scale.
Ethanol and car parts were developed in a way that made FFVs able to be run on a blend of ethanol and
gas.
Execution Risk: Car manufacturers succeeded in developing cars that run on flex fuels.
Adoption Chain Risk: The most significant challenge that FFVs face is adoption chain risk. Though most
major car manufacturers have developed FFVs, they are still a minority of the cars being developed,
which means that car manufacturers are still in the process of fully adopting the innovation. Also, when
looking at the FFVs that are currently being produced and sold, the vast majority of consumers with FFV
vehicles are not utilizing the flex fuel capability due to a lack of adoption by the fuel stations, which is
where the most critical risk in the adoption chain lies.
Adoption Time
Car Manufacturer
Adopted
Ethanol Refineries
and Distributors
Adopted
→
Car Dealer
Adopted
→
Customers
To be adopted
→
Fuel Station
To be adopted
→
12
Part 2 – Assessment of effective use of FFV in the US
Considering the number of FFVs in circulation in the U.S. today (~8 million or 3% of the U.S.
fleet) and the number of FFV units sold in the U.S. in 2009 (~1 million units or 10% of sales of new cars),
one might conclude that the innovation has been successfully implemented. However, we believe that
the correct way of measuring the success of this innovation is by analyzing the effective use of ethanol
as a fuel source for FFV because, ultimately, the purpose of this innovation is to reduce the consumption
of fossil fuels , substituting renewable fuels (in this case, ethanol) in its place. This analysis
demonstrates that, although the innovation is relatively successful in terms of units sold, it has not
significantly reduced the consumption of fossil fuels. According to a study from U.S. Department of
Energy, in 2009 only about 500,000 flex-fuel vehicles were regularly fueled with ethanol (E85), and these
were primarily fleet-operated vehicles. This number represents ~6% of the flex-fuel fleet in the US.
There are several challenges that have led to the ineffective use of FFVs and the overall
disappointing levels of consumption of E85 fuel in FFVs. We believe the most important factors are lack
of consumer awareness, inadequate distribution of E85 and few cost incentives. Below we describe
these factors further followed by a discussion of various attempts at leadership in the ecosystem
targeted toward addressing these challenges.

Barriers to Use of Ethanol in FFVs
Lack of Consumer Awareness and Education: Among FFV owners there is an overwhelming lack of
awareness that their cars are equipped with E85 technology and that they can run on flex fuel.
According to a survey conducted in 2005, 68% of FFV owners in the US did not know their car could run
on ethanol. This partially explains why only about 6% of the FFV fleet is regularly fueled with ethanol.
One of the reasons for this lack of awareness is that automakers do not have an incentive to advertise
13
this feature and, other than the fact that they are capable running on blended fuels, FFVs are identical
to regular vehicles. Some automobile manufacturers have made press releases about the development
of FFV vehicles, but most are wrapped in to their CSR reports and statements, rather than a part of their
mainstream consumer-directed advertising campaigns. Though there is little incentive to promote the
fact that their vehicles can take flex fuel, the primary reason that car manufacturers produce FFV is to
meet regulations that give them tax credits for selling these cars, independently of the fuel that the
consumer ultimately uses.
A second challenge on the consumer level is a general lack of knowledge about ethanol and its
benefits to society – and instead a belief that ethanol is a net negative for the economy rather than a
positive. This is largely due to a public relations campaign launched by the Grocery Manufacturers
Association (GMA), a trade association that represents more than 300 food, beverage and household
goods companies, in May of 2008. The GMA campaign was launched to give an explanation for
increasing food prices in the U.S. and targeted the Energy Independence and Security Act of 2007
specifically. GMA focused on leveraging environmental concerns and rising food prices to influence
public opinion related to biofuels. Their ultimate hope was to overturn the biofuels provision in the
Energy Act.
3
The campaign was a wide-scale multi-million dollar six month campaign that received
consumers’ attention.
The American Coalition for Ethanol (ACE) and other pro-ethanol groups responded by trying to
raise awareness on two levels – first, that ethanol production was not responsible for rising food costs
and second, that it was contributing significantly to decreased oil and gas prices.4 The Renewable Fuel
Association (RFA) published pieces to help inform the public about the low relative proportion of corn
being used for ethanol as well as the part of the corn plant being used for ethanol production. One-third
3
4
http://www.ethanolproducer.com/articles/4428/gma-launches-campaign
http://www.ethanol.org/pdf/contentmgmt/Grocery_manufacturers_claims_are_deceiving_5_22_08.pdf
14
of the corn is returned as feed to the livestock feed market, making the net usage of corn for ethanol a
significantly lower percentage of the crop than otherwise estimated.5 This counter-effort struggled to
overcome the multi-million dollar GMA campaign, which ultimately tainted public perception of the
overall impact of ethanol production, making consumers less inclined to support the production of
ethanol-based fuels.
Inadequate Distribution of E85: In addition to awareness levels being low, consumers also have
inadequate access to E85 due to the limited number of gas stations that provide E85 fuel and that have
the infrastructure to blend the fuel. As of October 2011, there were about 2840 gas station selling E85
fuel in the U.S. This number is clearly insufficient to meet the potential demand for E85 and represents
a bottleneck in the ecosystem. Because of consumers’ low level of awareness in their cars’ ability to run
on flex fuels, and because FFVs do not require flex fuels, gas stations have no incentive to provide it as
an option for their consumers. There is also a cost in adapting a conventional gas station to be able to
sell E85, since it requires the installation of a new gas tank at estimated cost of $60,000, as well as the
inventory space that it takes from standard oil, which, as long as consumption levels are low, is difficult
to justify.
An additional factor to consider is that the majority of major national gas chains are owned and
operated by oil companies. Carrying ethanol to blend flex fuel may be seen as going directly against
their core line of business. The gas stations that are carrying ethanol now are largely small, independent
operators, or chains that are not owned by oil companies. However, interestingly, the major fuel station
companies, including BP, Shell and Chevron, are investing billions in ethanol and other new sources of
efficient fuel. Despite the cannibalization of their primary product in the short term, these companies
are incentivized by the need to meet the long term challenge of filling the world’s future energy
5
http://www.ethanolrfa.org/page/-/objects/documents/1898/corn_use_facts.pdf
15
needs. We also believe that they are proactively investing in ethanol to be prepared for future
government legislature requiring that consumers use ethanol-based fuel in their vehicles. As will be
discussed later, the government is a critical player in driving this ecosystem and the success of the
innovation, and we believe is a large factor in the companies that own fueling stations investing in the
fuel-source today.
Economic viability vis-à-vis oil price: The cost gain may also be too little for now for flex-fuel car users to
care about what fuel they use or go through the hassle of finding an E85 fuel station. We may assume
that the gap between ethanol blends and gasoline costs will grow due to the overall rise in oil price, but
ethanol blends and gasoline prices seem to follow the same evolution – ethanol blends being always
cheaper. See exhibit 4 for a national price chart of different ethanol blends compared to ethanol.
Exhibit 4: National E85 Price charts (2010-2011 and 2008-2011)
16
Source : http://e85prices.com/

Leadership Analysis
Given the challenges in the ecosystem keeping consumers from effectively using FFVs with
ethanol-blended fuels, it is especially important that there be a leader to provide the necessary
incentives. There has been one clear attempt at leadership that failed, and another that has been
underlying the ecosystem’s development which we believe will ultimately be the driver to the
innovation’s success. The leadership position that the ecosystem demands is one that will drive
consumers to, not only purchase FFV, but to use E85, or other form of flex fuel to fuel their vehicles. As
long as the current political environment is maintained, fuel stations, car manufacturers and car
dealerships’ success is not contingent on consumers’ use of flex fuel. Currently, car manufacturers and
dealers are successfully selling FFVs, so they would not benefit from leading an initiative to increase use
of flex fuels in their vehicles. The successful leader will be the one that is incentivized by more than just
the profit potential of ethanol, but by its environmental and political importance.
17
The first clear attempt at leadership came from an ethanol producer, the party that has a
significant amount to gain financially from the successful use of FFVs. No other player’s ultimate success
depends so closely on consumers filling their tanks with flex fuels as ethanol producers. The player who
had attempted to play a leadership role was Verasun. Verasun, who in its peak was the largest producer
of ethanol, operating 16 refineries that produced approximately 1.6 billion gallons of fuel annually,
incented participation by fuel stations and car rental companies. Car rental companies, like dealers, are
a gateway to end consumers of FFVs and E85. 6 In addition to their position as a leader in production,
Verasun played an important role in the industry as one of the few players focused on creating a market
for ethanol-based fuels. They launched initiatives to address the adoption chain challenges described
above, by developing strategic alliances with key corporations. These partnerships were intended to
target adoption risk at both the fueling station level and at the consumer awareness level. One
underlying element of this strategy was creating a brand around Verasun’s product to give consumers a
brand with which to associate ethanol fuel. Their fuel, VE85™, was a blend of 85 percent ethanol and 15
percent gasoline for Flexible Fuel Vehicles. E85 had already been established, but by branding it to their
company and expanding its presence and visibility in fueling stations the goal was to enhance consumer
awareness.
In 2007, Verasun announced an initiative in partnership with The Kroger Co. and Enterprise
Rent-A-Car focused on expanding the availability of VE85 and improving consumer education around
ethanol and other flex-fuel options. Through this partnership, Kroger, a retail food chain that at the
time operated 650 supermarket fuel centers in 31 states, agreed to put VE85 in twenty of their fueling
stations in Ohio and Kentucky, with an understanding that Kroger would continue to expand the
presence of VE85 in fuel stations over time. Though this brought the total number of VE85 stations to
over 100 in eleven states, this was the first national retailer to offer VE85.
6
http://www.sustainablebusiness.com/index.cfm/go/news.display/id/17062
18
The second part of this initiative involved Enterprise Rent-A-Car committing to drive awareness
about ethanol and other flexible fuel options through targeted VE85 rental locations. Initially, Enterprise
launched four rental locations designated as VE85/Flex Fuel branches, where one quarter of their fleet
would be GM FlexFuel Vehicles. In addition to fueling these vehicles with VE85, Enterprise would
include educational materials in the car about ethanol and flex fuel vehicles, and would encourage
renters to fill the vehicle with VE85. These locations were all in close proximity to Kroger fueling
stations. Executives at Enterprise stated that their efforts to create more efficient fleets of vehicles
allowed renters to essentially “test drive” alternative fuel vehicles to help drive the ultimate purchase
decision of a flex-fuel vehicle.
These efforts to drive the market for ethanol-based fuels came to a halt just over a year after
announcing the partnerships, when Verasun filed for Chapter 11 bankruptcy. Their financial troubles
were largely due to liquidity issues arising from overly procuring corn and hedging efforts that went the
wrong way. One of the key factors in being a leader is having enough capital to drive the participation of
those less incented to participate. Going bankrupt indicated that Verasun was not capable of playing
this role.
A driving force behind the innovation of FFVs in the first place is the player that we believe has
taken on the leadership role and will ultimately be responsible for the success or failure of FFVs – the
government. The government is a representative of society, which is the party that will ultimately
benefit most from FFVs becoming the dominant vehicles on the road through the positive externalities
offered by cleaner-burning fuels. The U.S. government has been playing an active role to overcome the
challenges addressed above – increasing consumer awareness, reducing the adoption chain risk by
getting E85 in gas stations, and driving down the cost of ethanol to make it a more attractive option
than gasoline.
19
In order to increase awareness, since 2008 the U.S. government has required that all FFV
produced have a yellow gas cap and an official flex-fuel badge. The goal of these efforts is to help
consumers realize that their car can take flexible fuels and make them cognizant of it in the moment
that they are fueling. However, because of the distribution challenge, most consumers currently won’t
have a flex-fuel option. The hope is that once it becomes more readily available this awareness element
will drive the consumption by users. The government is also making an interesting effort to incentivize
car manufacturers to care about more than just the production of FFV, but to make them a player in
driving the use of flexible fuels in FFV engines. To do this, they have changed the Corporate Average
Fuel Economy (CAFE) so that effective 2017 the carmakers only receive tax credits if they show that FFVs
sold are effectively consuming ethanol. Finally, to address the adoption chain risk that lies in the fueling
station’s distribution of flex fuels, the US Government has recently passed legislation called the Rural
Energy for America Program (REAP) to provide financial assistance for gas station to install E85 pumpers
and blenders. In addition, as noted above, we believe that the investments that the companies that
own major fuel station chains are making in ethanol are tied to the efforts that the government is
making to drive this innovation forward.
20
Part 3 – Conclusion and Recommendation
The analysis of the FFV ecosystem in the U.S. reveals that the implementation of the innovation
has been relatively successful, with the co-innovation and execution risks being almost completely
overcome. However, the adoption chain risk is still very significant and one of the main risks that
remains to be addressed.
The ecosystem analysis also reveals that out of all players, the consumers and society seem to
be the ones that will most benefit from the implementation of the innovation. Certainly other players
such as ethanol producers will benefit as well, but we believe that the real value will be captured by
society as whole through improvements to the environment and through a decrease dependence on oil.
With this in mind, we believe that the government should play an important leadership role in the
ecosystem, representing the interests of American society.
Some government initiatives, such as incentives to carmakers to produce FFVs, financial
incentives to gas stations, and investment in fuel technologies, suggest that it is taking the lead in the
ecosystem and being the instigator of change. However, critics think that the U.S. government is not
doing enough and that the process is too slow. Those critics focus especially on the fact that carmakers
receive incentives only for producing the FFVs, independent of the whether ethanol is actually used as
the fuel of choice on these vehicles, and that the government should reduce the barriers to import more
efficient and cheaper ethanol, especially from Brazil, where flex-fuel vehicles are widely adopted.
Our view is that the U.S. government is doing an admirable job in the promotion of the
innovation and that government initiatives which some critics see as simply careless and incomplete
legislation, such as incentives for carmakers and barriers to import more efficient ethanol, are in reality
a well-orchestrated strategy. By giving carmakers the incentive to produce FFVs independently of the
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fuel that is effectively used, the government is building an enormous customer base, which will be used
to attract other players to the party and build a solid ecosystem. Today, with about 10% of the cars sold
in the U.S. classified as FFVs, players such as oil companies and gas stations have started to have an
interest in FFVs. Also, we believe that the lack of awareness might have actually been an intentional
part of the strategy, since the ethanol supply in the U.S. would not be sufficient to meet the demand
that would exist if all the FFVs on the road started using ethanol immediately. So by building a base of
FFVs that does not necessarily use ethanol, the government is giving time for ethanol producers to
prepare themselves and, at the same time, gives them incentives to develop new technologies.
In parallel, the government is signaling to the market that ethanol will be a reality in the future,
by establishing a target for consumption of ethanol in the country. As ethanol production increases, the
government has started to address the lack of awareness by transferring part of the responsibility to the
carmakers through legislation that requires that car manufacturers use badging in FFVs. And by 2017,
additional legislation will give carmakers remove current incentives for producing FFVs if they cannot
prove that those vehicles are effectively using ethanol.
In conclusion, the FFV implementation in the U.S. is being relatively successful and, although it
may seem to be adopted at a glacial pace, frustrating those who desire faster adoption, we believe that
this pace of adoption allows the whole ecosystem to develop and, therefore, allow the innovation to
eventually flourish.
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