BUSINESS

THE NEW CAPITAL OF CARS?

California is teaching old-school Detroit about innovation

COLIN CAMPBELL June 23 2008
BUSINESS

THE NEW CAPITAL OF CARS?

California is teaching old-school Detroit about innovation

COLIN CAMPBELL June 23 2008

THE NEW CAPITAL OF CARS?

BUSINESS

California is teaching old-school Detroit about innovation

COLIN CAMPBELL

Buzz Hargrove, the outgoing head of the Canadian Auto Workers, couldn’t have picked a worse day last week to visit Detroit. While meeting with General Motors Corp. chief Richard Wagoner, in a bid to stop GM from shutting down its Oshawa, Ont., pickup-truck plant, the price of oil was in the midst of its biggest one-day jump ever, rising by more than US$10 to over US$139 a barrel. If GM had any doubts about shutting down the Oshawa assembly line, and three others in North America, they evaporated like a drop of gasoline on hot asphalt that day. Demand for Detroit’s SUVs, pickups and gas-guzzling cars is all but gone. Last month, pickup sales fell 38 per cent. And it’s not just GM that’s floundering. With billions of dollars in losses piling up, this is not a good time to be an American automaker.

Someone, however, forgot to tell the small but growing collection of car designers and investors in southern California. In this happy, parallel automotive universe, things could hardly be better. One automaker, Tesla Motors Inc., has a 400-person wait-list for its new US$109,000 roadster. The car went into production in March, and celebrities are climbing over each other to get their hands on one. When Tesla opened a $ 2-million showroom in Los Angeles last week, even the governor of California, Arnold Schwarzenegger, stopped by. Its advantage over Detroit? It isn’t just selling a sleek little sports car, capable of 0 to 100 km/h in less than four seconds. It’s selling something big automakers have refused to: an electric car. To top off this unlikely feat, it’s doing so under the leadership of an auto industry outsider, Elon Musk, who before building cars was president of the Internet firm payPal. He’s put US$37 million of his own money into the company.

Other start-ups like Fisker Automotive

Inc., Phoenix Motorcars Inc., and Aptera Motors Inc. are also rushing to get electric cars to market, helped along with a healthy dose of money from Silicon Valley venture capitalists. Fisker has the support of Kleiner Perkins Caufield & Byers, the same company that backed Google and Amazon.com and counts Al Gore as a partner. So does Think, a company from Norway with ambitious plans to sell as many as 50,000 electric cars a year in the U.S. at a cost of about $25,000 each. For fans of the electric car, this is the future of the industry. “It’s not incorrect to say Silicon Valley could become the new clean-car Detroit,” says Felix Kramer, head the California Cars Initiative, a group of engineers and entrepreneurs that promote electric cars and convert hybrids cars into plug-in electric vehicles.

To be sure, Silicon Valley is a long way from taking over Detroit. Making and selling cars is an incredibly capital-intensive business that doesn’t take kindly to newcomers. But while the price of oil has Detroit full of fear and loathing, Silicon Valley is literally buzzing with talk of the potential for electric cars and lofty ideas about the future.

For many observers, the sign that Silicon

Valley’s auto industry had truly arrived came late last year, when entrepreneur Shai Agassi secured $200 million in financing for his venture, Project Better Place, despite the fact that the former president of the software company SAP had no prior experience in the auto industry. What he has are a salesman’s skills and an idea that might have branded him a lunatic in Detroit. Better Place’s plan is to develop a network of battery charging and exchanging stations. It wants to sell electric cars (which will actually be built by Renault-Nissan), but own the expensive, slow-to-recharge batteries that power them, thus eliminating one of the big drawbacks for early adaptors of electric cars. “Detroit is a car manufacturing centre. I think what we’re looking at is not something that could be done in a normal way,” Agassi told the San Jose Mercury News earlier this year. “It needs an Internet approach, a Google approach.”

This kind of left-field thinking is a big attraction for the venture capitalists looking to sink their money into the next big thing. Steve Jurvetson is a managing director at Draper Fisher Jurvetson, a top Silicon Valley venture capital firm. His company, he says,

TESLA, FISKER AND OTHERS ARE TAKING THE LEAD IN AUTO TECHNOLOGY. BUT DETROIT IS TRYING TO CLOSE THE GAP.

has invested over $10 million in electric car projects including Tesla and Reva, an Indian company. Asked about the level of development in Silicon Valley compared to Detroit Jurvetson laughs. “There’s nothing happening in Detroit,” he says. Like Agassi, Jurvetson sees the electric car start-ups as not just nimble competitors, but bringing the kind of innovation to the industry that’s been sorely lacking. He envisions a change not only in how cars are sold and built—personalized the way the computer industry makes PCs, he says—but also designed. For instance, with heavy

batteries below the wheelbase, the handling characteristics of cars could be changed dramatically. “I don’t think we’ve begun to see the design potential,” he says.

Design is one thing Silicon Valley understands perhaps better than anyone. The area near San Jose got its name for the high-tech industry that exploded there in the 1990s, bringing us everything from iPods to ink-jet printers. Today’s entrepreneurs could do for cars what they did for the computer industry, says Kramer. He likens what’s happening with electric cars to the development of cellphones. The first cellphones were hugely expensive, impractical bricks. But that didn’t stop cellphone makers from releasing them to the market while simultaneously developing better and cheaper

mass-market versions. Apple has employed the same strategy with the now-ubiquitous iPod. The big automakers haven’t grasped this idea of “versioning,” says Kramer. Instead, they’ve been sitting on products until they think they’ve perfected them. And thus, they remain parked at the side of the road. GM released an electric car in California in the 1990s called the EVl. But it killed the project in 2000 after building little more than 1,000 vehicles. It gave up and has never looked back, until now.

The unprecedented jump in the price of oil in recent months seems to have awakened the sleeping giant. The big automakers, once content building trucks and SUVs, are finally starting to put some of their billions of dollars in capital behind electric innovation. Last week, GM put to rest rumours about plans for its electric car, the Volt, announcing it will launch the automobile by 2010. “There’s no question GM is rolling the dice big time on

the Volt,” says auto industry analyst James Rubenstein. Toyota has plans to make a electric version of its already popular hybrid, the Prius. Silicon Valley may be a step ahead, but don’t count out Detroit. If the auto industry decides to turns its considerable might to electrics, California’s start-ups could very well end up as roadkill, or as takeover targets or strategic partners with the big three.

That latter scenario seems the most likely. While Detroit has been a laggard in terms of innovation, it still has a huge advantage in terms of the ability to successfully commercialize the electric car—making it something more than a status symbol for California’s rich and famous. Big automakers sell about 16 million cars a year in the U.S. alone compared to the few hundred electrics now being sold. And they’re not lacking the technological know-how to start building electrics and sending them off to their huge network

of dealerships. Furthermore, the money currently being spent to develop electric cars might be large by Silicon Valley standards, but not for the auto industry. Agassi’s $200 million is about the amount a big carmaker might put into something like designing a car’s interior, says Neil Dikeman, a founding partner in the San Francisco-based venture capital firm Jane Capital Partners LLC. “Any one of [the big automakers] could squish these guys like a bug,” he says of the new electric car companies. “The auto industry is a very tough game that does not reward being small and nimble.”

So far, Detroit seems to be tolerating its new, smaller competitors and keeping an interested eye on their progress. “It’s the more the merrier at this point,” says Rubenstein. And with the heavyweights watching from the curbside, the novices seem to be moving along remarkably well. Even their lack of manufacturing acumen hasn’t slowed

them much. Nowadays there’s a rich supply chain for auto parts, says Jurvetson. Today’s automakers don’t actually need to know how to make headlights and car seats—just where to buy them.

The odds are still stacked against California’s automakers. And there have been bumps along the road. Earlier this year, Tesla filed suit against Fisker, alleging its competitor stole some of its design ideas. Nevertheless, electric cars are humming around on California roads while in Detroit, they’re little more than blueprints and topics for marketing meetings. Critics might discount these new start-ups as bit players, but the big automakers would be wise to remember that a few of today’s biggest business success stories, from Google to Hewlett-Packard, started off as little more than a couple of guys fiddling with computer parts and big ideas in a Silicon Valley garage. M