CASE STUDY ANALYSIS

BUSINESS STRATEGY AND ENTERPRISE MODELING

STANDARD BATTLE: WHICH AUTOMOTIVE TECHNOLOGY

WILL WIN?
(CS-2)

By
Adityo (29316053)
Irfan Farhan Sudrajat (29316087)

Master of Business Administration Program

School of Business and Management
Institut Teknologi Bandung
Jakarta
 STANDARD BATTLE: WHICH AUTOMOTIVE
TECHNOLOGY WILL WIN?

Case Synopsis.

Nissan -with its CEO, Carlos Ghosn- believes the next technological paradigm
will be electrical motors. Ghosn calls hybrids as halfway technology and will be
temporary. Some companies like Tesla Motors and BYD Auto share Ghosns belief.

The biggest problem of large-scale adoption of electric vehicles, however is

the availability of charging stations. With current electric vehicle range limited to 200
miles, many consider lack of charging stations a serious problem (the so called
range anxiety). Though so, Tesla Motors is already working on that and by summer
of 2015, had built a network of 500 supercharger stations throughout the United
States.

Ghosn beliefs electric cars will account for 10 percent of global auto sales
over the next decade. While Toyota, is convinced gasoline-electric hybrids will
become the next dominant technology. These differences between Toyota and
Nissan brings influence on how much money invested in their technology. In
Nissans case, since it introduced Nissan Leaf in December 2010, it became the
best-selling electrical vehicle with more than 180.000 units sold. Toyota on the other
hand, has already sold 8 million of its popular Prius cars since it was introduced in
1997. By 2020, Toyota plans to offer hybrid technology in all its vehicles.

Other alternative is that neither hybrids nor electric cars. To add more
uncertainty, Honda and BMW are betting on hydrogen fuel cells powered cars. In
short, many alternative technologies are competing to become the winner in setting
a new standard for propelling cars. Only time will tell which technology will win this
standard battle.
Issues Identification.

The main issues behind these new automotive standards emergence is

because of two factors: oil reserves and global warming. Based on BPs prediction
on World Energy Day in 2014, worlds oil reserve is enough only for about 53 years
with current production levels.1 So we can say that within 50 years from now (2017,
red.), will be very scarce. Its safe to say that the worlds economy, including the
automotive industry, will soon depend less and less on fuel fossil.

In the other hand, we also have global warming problem. One of the cause of
global warming is the burning of fossil fuels to support our economy. Currently, the
global average temperature is 0.85oC higher than it was in the late 19th century.2
Having that high of temperature already causes many shifts in climate and weather
pattern, including bigger and more dangerous storms, tornados, and hotter summer
and hot seasons. If it went well beyond 2oC, it might result in higher risk and more
catastrophic result.3 In the newest Paris Agreement in 2016, it is even targeted that
vehicle emissions must be reduced for as much as 60% by 2050. 4 With these
conditions, there is no way the automotive technology wont change in the near
future.

Even though both factors explained above are the recent situation, it is
generally the same condition with this case. The sudden rise of new technology
innovations in automotive industry, fueled by the two factors above, brings confusion
and fierce competition in which will be the standard that will eventually replace fossil
fuel such as gasoline and diesel. The real problem in this competition might as well
be decided by cost of the innovations, the resource availability to sustain the
innovations, and how well the market will accept and eventually, embrace and
sustain the innovation as a business.

1 See http://www.nasdaq.com/article/how-much-oil-is-left-in-the-earth-cm711409
2 See https://ec.europa.eu/clima/change/causes_en
3 Ibid.
4 See https://ec.europa.eu/clima/policies/strategies/2050_en
Related Theory.

The main theory related with this case is about Innovation and Strategic
Entrepreneurship.5 Innovation is the commercialization of any new product, process,
or idea, or the modification and recombination of existing ones. To drive growth,
innovation also needs to be useful and successfully implemented. The successful
commercialization of a new product or service allows a firm to extract temporary
monopoly profits.

Industries tend to follow a predictable industry life cycle. As an industry

evolves over time, we can identify four distinct stages: introduction, growth, maturity,
and decline. Exhibit 1 depicts a typical industry life cycle, with corresponding
consumer-adoption categories.

Exhibit 1. The Industry Life Cycle and Consumer Adoption Curve.

5See Strategic Management Concepts by Frank T. Rothaermel (2013), chapter 7, for more detailed
description on this theory.
 One insightful way to categorize innovations is to measure their degree of
newness in terms of technology and markets. Here, technology refers to the methods
and materials used to achieve a commercial objective. We also want to understand
the market for an innovatione.g., whether an innovation is introduced into a new
or an existing marketbecause an idea or invention turns into an innovation only
when it is successfully commercialized. Measuring an innovation along the
technology and market dimensions gives us the framework depicted in Exhibit 2.

Exhibit 2. Type of Innovations Combining Markets and Technologies.

From Exhibit 2, we can see there are four types of innovation. Incremental
innovation is an innovation that squarely builds on the firm's established knowledge
base, steadily improves the product or service it offers, and targets existing markets
by using existing technology. Radical innovation is an innovation that draws on
novel methods or materials, is derived from either an entirely different knowledge
base or from the recombination of the firm's existing knowledge base with a new
stream of knowledge, or targets new markets by using new technologies.
Architectural innovation is a new product in which known components, based on
existing technologies, are reconfigured in a novel way to attack new markets.
Disruptive innovation is an innovation that leverages new technologies to attack
existing markets from the bottom up.

Innovation is a powerful force with potentially lethal consequences for

incumbent firms, which will lead to a period of discontinuities. Discontinuities is
periods of time in which the underlying technological standard changes.
Discontinuities can lead to a paradigm shift, a situation in which a new technology
revolutionizes an existing industry and eventually establishes itself as the new
standard. Exhibit 3, which plots the performance of a given technology against time,
shows this transition.

Exhibit 3. Likelihood of Discontinuity Increases as Technology Approaches

Physical Limit.
Case Analysis & Solutions.

This case is a showcase of three sides of innovation of technology creating a

new standard for automotive industry fuel in the future. These sides can be
separated into:

1. Electric cars => Nissan, Tesla, and BYD.

2. Hybrid cars => Toyota.
3. Hydrogen fuel cells cars => Honda and BMW.

To understand every sides of innovations, we need to analyze them deeper.

For electric and hydrogen fuel cell cars, their technology is considered a
disruptive innovation, since it will change how the automotive industry works,
including the absence of gasoline industry because both innovation wont need them.
Especially for electric cars, the absence of gasoline and, also, lubricants mean that
they will not just disrupt, but become lethal for the oil industry. But electric cars will
bring more demand in electricity production, which means more power plants
needed. If the power plants are still fueled by fossil fuel, then the oil industry will turn
itself from car industry to power plant industry. Unless, the power plants are
substituted with non-fossil fuel ones, then the oil industry will be severely disrupted.

For hybrid cars, in the other hand, their technology is considered an

incremental innovation. They are not changing the whole technology, but only adding
electric engine into the existing combustion engine. This means that hybrids still use
gasoline and wont be disrupting the oil industry as much as electric cars.

In terms of production cost, the electric cars are far cheaper because it uses
a relatively easy to build and smaller machines, resulting in lighter cars. In the other
hand, both hybrid and hydrogen fueled cars use bigger, heavier, and more complex
engines, resulting in more expensive cost for engines alone.

In terms of fuel cost, the electric cars are the cheapest, because its entirely
run on electricity. Hybrids are slightly cheaper than usual gasoline cars, since its
more fuel efficient thanks to the help of its electric engine. The hydrogen fuel cells
cars, in the other hand, is the most expensive, since it relies on an exclusively made
hydrogen fuel which is very costly to produce and hard to distribute.

Environmentally, as said before, electric and hydrogen fuel are the cleanest
ones since they use no fossil fuel at all, provided that the power plants as electricity
source are also not fossil fueled. The hybrids, even though has less emission, will
still produce greenhouse gas since it still uses gasoline as its main source of fuel.

All those analysis can be summed up into Exhibit 4.

Innovation Production Fuel Cost Environment

Type Cost Friendly
Electric Cars Disruptive Very Low Low Yes*
Hybrid Cars Incremental High Medium No
Hydrogen Fuel Disruptive High Very High Yes
Cells Cars
*provided that the power plants are non-fossil fueled.

Exhibit 4. Car Technologies Comparison.

From the analysis above, we can see that hydrogen fuel cells cars have the
most trouble out of all the technologies, mainly in their costs. So prematurely, we
can put hydrogen fuel cells out of the competition, judging only from its costs alone.

From initial market result, we can also see that Toyota Prius has outsold
Nissan Leaf 40 from 1, but Prius has been sold for longer time (15 years) compared
to Nissan Leaf (3 years). We can assume that electric cars are still new on the market,
though it still has its share problems of the recharging stations and battery capacity.
From the potential alone, electric cars have the potential to entirely change how the
car industry works. So, its imperative for them to do another radical approach and
re-innovate things, especially in the recharging problems (which eventually they will
do, but from Tesla Motorss side, with its own portable super recharger).
 There is also a problem of resource availability, mainly in the oil industry. As
it was explained in the Issues Identification chapter, we only have another 50 years
of oil reserve worldwide. Eventually, the world will abandon the use of fossil fuel and
change into renewable energy source. The trend has started and many nations are
starting to build renewable energy power plants. In one side, this will solve the
electric cars problem of non-environment friendly power plants, while in the other
side the decrease of oil reserve will eventually bring discontinuity of fossil fuel use
and renders the hybrids industry unsustainable, since it still uses gasoline as its main
fuel.

The world, both from the oil reserve side and environmental side will
eventually turn into non-fossil fuel based energy and, at some point, abandon the oil
industry entirely. Though it seems still far, the sustainable industry will be the ones
without fossil fuel at all and with cheaper costs. Out of the three technologies, the
electric cars are the most fitting one and will eventually emerge to replace the fossil
fuel automotive industry.

Conclusion & Recommendations.

It can be concluded that electric cars have the most potential and best fit to
replace the old fossil fuel industry. It is considered a disruptive innovation at the
moment, but will eventually be the one that can cross the discontinuity when the oil
industry eventually collapsed.

Though so, the electric cars must still tackle their own problems of recharging
stations. They should try to create a portable or an embedded recharger that can be
plugged into normal power outlets, so the car can be recharged anywhere, as long
as there is a power outlet.

It is recommended for other car manufacturers to either embrace the electric

cars technology or come up with a newer and cheaper technology that can replace
the electric cars technology. Either to sustain their own business or to create
competitive advantage over the electric cars.

Lesson Learned.

New technologies or currently popular technologies doesnt mean it will stay

sustain forever. The hybrids will eventually turn obsolete if the oil industry collapse
or there is no more oil reserve in this world. A technology must consider its own limit
in order to survive for a very long time.

Even though a technology innovation may be certain to be sustainable for the

future, doesnt mean it will be accepted right away. Problems that come up with it
must also be tackled in order not to give trouble to its users. Electric cars might have
a great potential, but without tackling its problem and improving its performance,
there will be little to none users who will adopt it. Tackling the problems and
answering to the users needs will eventually be the key to a technology adoption.

References:

Rothaermel, F.T. (2013). Strategic Management Concepts. New York.

McGraw-Hill/Irwin.
https://ec.europa.eu/clima/change/causes_en, accessed in August 22nd,
2017.
https://ec.europa.eu/clima/policies/strategies/2050_en, accessed in August
22nd, 2017.
http://www.nasdaq.com/article/how-much-oil-is-left-in-the-earth-cm711409,
accessed in August 22nd, 2017.