Apr 15, 2009 (From the CalCars-News archive)
At a moment when the future of two of the Detroit Three hangs in the balance, the new administration's Automotive Task Force (ATF) is relying in large part on the expertise and strategic outlook of the Boston Consulting Group (BCG) for its evaluation of GM's and Chrysler's prospects. Whatever BCG's expertise on the auto industry in general, we are concerned that in its understanding of future pathways, it offers a flawed analysis and predictions based on "business as usual." BCG acknowledges a theoretical possibility that the U.S. could make a rapid transition to plug-in vehicles, with GM leading the charge. But it concludes it probably won't happen -- based, we think, on narrow and short-sighted ways of thinking. Below, we analyze and critique a public report on plug-ins by BCG. We suggest there's a divergence between BCG's outlook and the forward-looking views of this Administration. We also include not-easily available background on the ATF in hopes that followers of this newsletter will make their voices heard to decisionmakers as they see appropriate
WHAT THE TASK FORCE SAID ABOUT THE GM VOLT: When President Obama unveiled the Automotive Task Force's analyses of the auto industry, many people were taken aback at the ATF's summary dismissal of the Chevy Volt:
"While the Volt holds promise, it is currently projected to be much more expensive than its gasoline-fueled peers and will likely need substantial reductions in manufacturing cost in order to become commercially viable." (Read the full document at http://www.whitehouse.gov/assets/documents/GM_Viability_Assessment.pdf and one of many summaries at http://www.greencarcongress.com/2009/03/presidential-auto-task-force-concluded-plugin-gm-volt-likely-too-expensive-to-be-commercially-succes.html .)
BOSTON CONSULTING GROUP WEIGHS IN: In early April, we had heard that BCG http://www.bcg.com -- a management consultancy and business strategy firm with 66 offices in 38 countries -- was highly influential in developing the ATF's report. Since then it was announced that ATF is paying BCG $7M to help it evaluate GM's restructuring plan and the proposed Chrysler-Fiat alliance. So it's important to understand BCG's perspective.
BCG's LITTLE-NOTICED JANUARY REPORT: ATF's verdict on the Volt makes sense as a logical continuation of "The Comeback of the Electric Car? How Real, How Soon, and What Must Happen Next." It's worth your time to go back to the source on this. Start with the press release (less neutrally titled, "Electric Cars Are Unlikely to Help Carmakers Cut CO2 Emissions Significantly by 2020") at http://www.bcg.com/impact_expertise/publications/publication_view.jsp?pubID=2819&language=Englishl and download the report (a quick 10-page read) at http://www.bcg.com/impact_expertise/publications/files/Comeback_Electric_Car_Jan_2009_rev.pdf .
(We were alerted to the report by a hybridCARS.com interview http://www.hybridcars.com/news/auto-task-force-advisors-beware-ev-costs-25685.html with Xavier Mosquet, Senior Partner and Managing Director in BCG's Detroit office, who is the point person with the ATF. Mosquet is one of five authors of the report; the others are all based in Germany.)
The report oscillates between "realistic" business analysis and occasional nods to the growing wave of support for a massive and rapid transformation of the auto industry. It begins inauspiciously by saying there is little consensus in the auto industry, citing two poles: "one perspective holds that hybrid electric engines violate the laws of physics, whereas another holds that by 2020, companies will sell nothing but hybrids." (This is either a joke, or perhaps an attempt to mimic the style of global warming deniers.) The report then makes admirably short work of natural gas and hydrogen, and while acknowledging that electric propulsion wins on CO2 reductions, picks improvements in internal combustion engine (ICE) technologies as the most likely path to reduce CO2. (It misses important subtleties in saying plug-ins won't help emissions in China or India today or in 2020 because of their high use of coal. Like other analysts, BCG hasn't understood that within a decade, the choices for these nations with soaring vehicle populations will not be electricity from coal vs. imported gasoline but rather electricity from a evolving power grid vs. fuel made by liquefying domestic coal, with 2-3x the CO2 of coal-fueled plug-ins.)
The report reaches questionable conclusions about costs for plug-in vehicles based on elevated battery costs, which it sees currently at $2,000 per kiloWatto-hour now, declining to $500-$700 by 2020. This assumption is the heart of its analysis -- and it's one that automakers, especially GM, have strongly criticized. While not getting specific, GM has made clear that its battery costs (for packs, not cells) will be "hundreds less" than $1,000 for the first generation Volt http://fastlane.gmblogs.com/archives/2009/03/our_real-world_learnings_differ_from_cmu_study.html and still lower in the second and third generations of the Volt, on which it is already at work. GM isn't waiting for the "breakthroughs in technology" BCG sees as necessary. The report projects continued high incremental costs for hybrids; Mosquet in his interview doubts carmakers make money on hybrids, and the report sees full hybrids stuck at $4,000 more than ICEs even by 2020.
BEGGING TO DIFFER: Rival consultant Bain sees a battery cost of $4,000 in 2020 for a battery equivalent to one BCG pegs at $14,000 http://www.businessweek.com/magazine/content/09_12/b4124078381283.htm . Former President Katsuaki Watanabe's in early 2008 said Toyota makes money on hybrids and is bringing to market new system designs at half the cost and half the size http://money.cnn.com/2008/01/15/news/companies/isidore_detroit.fortune/index.htm?postversion=2008011510 . GM spokesman Rob Peterson responded to the ATF conclusion, "The Volt is a brand-new technology, no different than the iPod, plasma-screen televisions or DVD players. We're working towards Generation II and Generation III, when costs come down and the business case gets brighter. But you have to take the first step in that direction, and that's what we're doing." http://wardsauto.com/ar/criticism_chevy_volt_090401/
TOTAL COST OF OWNERSHIP: The rest of the report hinges on BCG's projections of TCO, using high battery costs as the starting point. BCG asserts "recent surveys confirm that a key criterion influencing consumers' buying decisions is the total cost of ownership. (We have NEVER seen anyone except a fleet owner or an automotive analyst do that math -- we'd love to see the surveys.) Its five-year TCO calculations (not including maintenance costs, which of course favor plug-in cars) show plug-ins as uncompetitive until batteries are at $500/kWh and oil is at $100-$120. This is presented in a skewed graphic that misrepresents a $5-$7,000 gap by cutting out most of the base of the chart -- showing the same amount of space for $0-$25,000 as for $25,000-$30,000. (If you don't read the report, you can see the graphic at the HybridCARS.com URL above.) And once again undercutting its own argument, it acknowledges that subsidies available already in France, Denmark and Israel make plug-in vehicles competitive now.
Projecting alternative future paths consultant-style, BCG proposes three scenarios in four markets and globally. It projects oil prices from today to $300/barrel; we think it disqualifies its base case from serious consideration by suggesting "abated" energy security and "diminished" global warming concerns compare to today. In all three cases, it sees ICE vehicles as the "dominant technology" in 2020, with plug-ins ranging from a few million vehicles up to 16% globally. (This is based on consumer demand, not on scaling or market penetration factors; like all mainstream analysts, it does not consider the possibility, about which CalCars will soon have more to say, that conversions of ICE vehicles could speed up the evolution of the global fleet.)
It confirms its projections by citing the "staggering" $49 billion cost for Europe in 2020 for "embedded extra product costs," plus $21B for battery charging infrastructure. BCG mystifyingly sees as unattainable investment levels that are in fact already starting to appear in France, Germany and Spain. The analysts don't recognize the U.S. TARP program committing $25B for automaker retooling, our recent $1.4B battery program, or multi-billion dollar public and private investments in Japan. And since the report's release, China has committed to $8,800/vehicle fleet subsidies and $1.46B to the auto industry for plug-in development. See two important reports by NY Times Hong Kong Bureau Chief Keith Bradsher (author of "High and Mighty," the best-seller on SUVs): on April 2, "China Vies to Be World's Leader in Electric Cars" http://www.nytimes.com/2009/04/02/business/global/02electric.html and on April 11, " China Outlines Plans for Making Electric Cars" http://www.nytimes.com/2009/04/11/business/energy-environment/11electric.html .
BCG'S BOTTOM LINE: The report continues with uninformed comments about the lack of a business case for public charging facilities, giving no indication of being aware of the trend to "decouple" utility profits from increased sales of power, and dismissing the significance of turning families' second cars into plug-ins. And finally, as if the analysts had been reminded that people buy cars for features (many decide to buy a V-8 or V-6 engine despite the negative TCO), they reluctantly acknowledge those motivated by what we call the Green Feature or the Show OPEC Feature, while patronizingly relegating them to the margin: "peoples' buying decisions are rarely based on logic. Emotional factors, such as distress over high oil prices or concern about environmental degradation, may move some consumers to buy electric vehicles at a relatively high TCO. Such decisions are likely in some niche segments...Clearly consumers who care keenly about their environment and want to contribute to the sustainable use of the earth's resources can look forward to having some interesting automotive options in the next dozen years."
We can't help being reminded of Dick Cheney seeing energy conservation as a "personal virtue." Yet repeatedly these analysts also acknowledge that the world might be changing. Throughout the report and in the press release, we see mentions of a possible different direction -- if governments scale up incentives for plug-in cars. They even mention "disincentives," indicating they are aware of feebate programs in development, in which revenue-neutral vehicle taxes incentivize higher-MPG cars and penalize same-class lower-MPG vehicles. All these could swiftly affect the demand for plug-in cars -- and any TCO calculations.
BCG AND THE OBAMA ADMINISTRATION'S COMMITMENT TO PLUG-IN CARS: The administration's TARP and ARRA (stimulus bill) funding of what it calls "fuel-efficient vehicles" is admirable. And we are eagerly awaiting federal action allowing California to put its long-stalled new vehicle standards in place. Public statements by many officials confirm the administration recognizes the imperatives of a rapid transition. Twice in the past month, in full-page Newsweek features, Energy Secretary Steven Chu has made the case for plug-ins http://www.newsweek.com/id/192481 and http://www.newsweek.com/id/193488 . Cathy Zoi, nominee for Assistant Energy Secretary, and many others recognize the urgency and the opportunity.
But we see a disconnect between their statements and the advice Washington is getting from BCG on the importance of GM's Voltec and Chrysler's ENVI plans. Reading this report, it seems to be the product of insiders who until recently assumed an endless future for fossil fueled-vehicles. Just as many people wonder why Washington decided that the people who could best resolve the fiscal crisis were those who understand it because they helped set it in motion, so relying on advice about GM and Chrysler's future from analysts who are accustomed to business-as-usual and expecting more of the same may not be the only option. Where are the problem-solvers whose starting points align with those of top appointees? Where are consultants who seek to accelerate electrifying transportation, lightweighting, reducing miles travelled, and cleaning the power grid? Such analysts would ask, "how do we take struggling companies and enable them to contribute to a rapid, massive rapid transformation of the auto industry, stoked by public subsidies for higher up-front prices that will help free us from the external costs of continuing oil addiction?"
A TENTATIVE FIRST STEP ON THE FEDERAL FLEET: Matching the famous "bully pulpit" of the President, we've been looking forward to the government's first use of its purchasing power (Obama's platform included $300M for federal PHEV fleet purchases). The first step was disappointing: President Obama announced the General Services Administration would spend $285M of stimulus funds on17,600 "fuel-efficient vehicles" by June 1. With a goal of immediate car sales from the Detroit 3 and a restriction to "commercially available" vehicles, GSA simply required vehicles to be 10% more efficient than existing ones So a new 14-20 MPG Chevy Suburban easily retires an older 12-17 MPG Suburban! The purchase includes the federal government's largest one-time buy of 2,500 hybrids -- which continue to be described popularly as "alternative-fuel vehicles," though they're simply more efficient gasoline vehicles. An additional $15M by September 30 will fund some "advanced technology" hybrid, CNG and electric vehicles and buses.
Below we supply information on who's who in the new administration's work on vehicles; if you're connected, we encourage our readers to contact any and all of those involved.
WHO WAS AT OBAMA'S PRESS CONFERENCE? When the President on March 30 announced "one last chance to fundamentally restructure" GM and Chrysler (for a transcript, see http://www.nytimes.com/2009/03/30/us/politics/30obama-text.html ), the live coverage and every newspaper showed him with a large lineup of people in the White House Grand Foyer. They were chosen carefully to demonstrate how broadly the auto industry affects the nation -- but we didn't see anyone ask, "WHO WAS THERE?" We found a photo that identifies everyone rounded up at http://www.gettyimages.co.nz/detail/85703661/Getty-Images-News -- confirming how high this issue is on the President's priorities. From left to right, Former National Economic Adviser Gene Sperling, Executive Director of the Task Force and Chief Economist and Economic Policy Adviser to the Vice President Jared Bernstein, National Economic Council Director Lawrence Summers, White House Budget Office Director Peter Orszag, Secretary of Transportation Ray LaHood, Secretary of the Treasury Timothy Geithner, former Deputy Labor Secretary Edward Montgomery [named Director of Recovery for Auto Communities and Workers], Secretary of Commerce Gary Locke, Secretary of Energy Steven Chu, Council of Economic Advisors Chair Christina Romer, and White House Energy And Climate Adviser Carol Browner
MEMBERS OF THE AUTOMOTIVE TASK FORCE: Here's a list from http://www.forbes.com/feeds/ap/2009/03/30/ap6231326.html of all members as of March 30 of the Automotive Task Force, a Cabinet-level group that includes the Secretaries of Transportation, Commerce, Labor and Energy, along with top officials from the president's Council of Economic Advisers, the Office of Management and Budget and the Environmental Protection Agency, and Treasury Secretary Timothy Geithner's top two advisers. Members include:
- Ron Bloom is a former investment banker who has worked with the United Steelworkers union since 1996. A Harvard Business School graduate, he serves as a top adviser to Geithner. Bloom was once a vice president with the Wall Street firm Lazard Ltd., focusing on the steel and airline industries.
- Steven Rattner, a Wall Street financier who was a co-founder of the Quadrangle Group LLC in 2000, serves as a top adviser to Geithner. He previously acted as deputy chairman and deputy chief executive officer of Lazard Freres & Co. LLC.
- Diana Farrell, formerly of McKinsey & Co., is deputy director of the National Economic Council.
- Gene Sperling, a former White House economic adviser to President Bill Clinton, is a top Treasury adviser to Geithner.
- Jared Bernstein, Vice President Joe Biden's economic adviser, is a former senior economist at the liberal Economic Policy Institute.
- Edward Montgomery is a senior adviser to the Labor Department.
- Lisa Heinzerling, a Georgetown University law professor, is a senior Environmental Protection Agency adviser.
- Austan Goolsbee is staff director and chief economist of the Economic Recovery Advisory Board.
- Dan Utech is a senior adviser to the secretary of energy.
- Heather Zichal is deputy director of the White House Office of Energy and Climate Change.
- Joan DeBoer is chief of staff for the Transportation Department.
- Rick Wade is a senior adviser and acting chief of staff at the Commerce Department.