Transportation

What Future for the Global Auto Industry? Discussion Post

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In December, I announced an upcoming discussion of the future of the auto industry and, in particular, of the role and impact of electric cars.   In that post, I included a number of links to worthwhile reading on the subject.   Let’s do the discussion this week, in comments to this post.   I have a few thoughts to get things going:

–It is true, as Vitaliy Katsenslson points out in his essay, that electric cars are much simpler than conventional cars…but I would qualify this statement as mechanically simpler than conventional   cars.   They are significantly more complex electrically and especially in terms of the electrochemistry of the battery…a hidden kind of complexity, but important nonetheless. From what I have read, there seems to be considerable uncertainty about the expected lifespan of new lithium-ion battery models..which lifespan, of course, has a major impact on the overall economics of electric cars.

EVs are expected to have lower maintenance costs and requirements than conventional vehicles, based on their relative mechanical simplicity.   This is probably true, in general, although a lot of the problems with cars these days seem to be with systems other than the engine and drivetrain..airbag sensors, seat actuator motors, various sensors, etc.

–Range limitations and “range anxiety” have been significant inhibitors to EV sales.   Vitaliy K makes the excellent point that it is much easier to set up an electric-vehicle charging station than a conventional gas station, with its underground tanks and consequent regulatory complexities, and he believes we will see tremendous growth in the number of such charging stations and consequent reductions in EV range anxiety.

It takes about 45 minutes to an hour to fully charge an EV (using Tesla as a model and assuming a high-power charger such as Tesla’s “Supercharger’), which implies that people are going to need something else to do while their vehicles are charging, away from home or the office.   Restaurants and shopping centers become obvious venues for charging; however, this leads to another issue, that the driver may wind up being away from the car for a couple of hours or more, tying up the charger for that whole interval: this issue would need to be reflected in the pricing of the charging facility.

Also, while it is true that setting up EV charging is simpler than opening a gas station, it is not necessarily trivial if one is setting up multiple high-capacity chargers.   A Tesla supercharger draws 150KW, so putting 30 of them in a parking lot would result in an incremental peak demand of up to 4.5 megawatts.   I doubt if the electrical systems feeding many restaurants, or even shopping centers, could accommodate 4.5MW of additional demand without some work by the utility supplying the power.

–Efficiency:   It is true that the conversion of stored energy into motion is much more efficient in an EV than an internal-combustion-engine vehicle; this is mainly a matter of the engine thermodynamics.   BUT, if the charging electricity comes from a natural gas plant of a coal plant, you are looking at best at a 60% fuel-to-electricity conversion efficiency, and there will also be losses in power transmission and distribution.   If the electricity comes from solar or wind, then..depending on the time of day and weather conditions of the charging..you may be faced with a double battery storage situation, where energy is stored in a utility or home battery until needed for charging, and then stored again in the vehicle’s battery.   That double-storage situation carries both efficiency losses and, more significantly, additional capital costs.

EVs do have the ability to capture much of the energy that would otherwise be lost in braking, and this is especially valuable in start-stop driving situations, as with local delivery operations, and probably extends the lifetime of the mechanical brakes.

–Performance…EVs have excellent acceleration capability (when adequately powered) due to the torque characteristics of electric motors.   They may be able to achieve very good handling if battery installation provides for a very low center of gravity.

–Climate…not speaking here about ‘climate change’, but about climate in its ordinary meaning.   In a conventional car, heating is basically free, using rejected heat from the engine (ignoring the energy used to power the fan, but that’s a small part of the picture), whereas in an electric car, heat must be generated using electricity from the battery, which of course has a negative impact on range.   Also, the battery itself will have lesser performance in cold weather.   (And the regenerative braking feature is also limited in very cold weather.)

–Relative Costs…a high % of EVs today are either sold with subsidies by national/local governments, are built and sold in response to government edicts, or are bought in significant part for status purposes by individuals and organizations. Can EVs compete on cost head-to-head with IC vehicles on a nonsubsidized, free-choice basis?   This would seem to be largely a matter of how successfully battery costs are further driven down and how long battery lifespans turn out to be in actual service.

It should be noted that electric vehicle sales in China have cooled rapidly…down 44%…since the government reduced most subsidies at the end of June.   What would be the ‘true’ demand in the US without consumer incentives and mix requirement on the manufacturers?

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Business Stories

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We’ve talked before here about the point that most fiction seems to be about people who are lawyers, policemen, criminals, soldiers, spies, students, politicians, and noble but struggling writers. But there are indeed some works of fiction, and some vivid personal memoirs, in which business plays a central role without being portrayed simplistically or as stereotypically evil. Here are some that I like…please add your own favorites in the comments.   (I posted this at Ricochet, in slightly different form, about a week ago)

The Current War, a recent movie about the late-1800s power struggle to determine which technology…AC or DC…will dominate America’s electrical distribution system. Edison, Westinghouse, and Tesla are the key characters, played by Benedict Cumberbatch, Michael Shannon, and Nicholas Hoult respectively. My review is  here.

The Big Short, a 2015 film about the 2007-2008 financial crisis, based on Michael Lewis’s book. A hedge fund manager concludes that the subprime-loan market is not sustainable, and makes a billion-dollar bet against the relevant mortgage-backed securities. Based on real events. I thought it was very well done.

God is an Englishman, R F Delderfield. Following his return to England from the Crimean War, Adam Swann identifies a business opportunity: although railroads are being built throughout the country, there will always be sources and destinations of freight which are not on the tracks. Hence, the potential for a nationwide gap-filling road haulage business based on the systematic use of horse-drawn wagons. (This is the first book of a three-book series called the Swann Family Saga.)   Reviewed here.

Oil for the Lamps of China, Alice Tisdale Hobart. This 1933 novel is about a young American working as a sales rep in China, focused on selling oil for his employer (unnamed, but clearly based on Standard Oil) and increasing volumes by promoting the kerosene lamp as a better alternative to traditional lighting methods. The book was the basis for a 1935 movie of the same name…the film has its moments, but overall is not worthy of the book.

Father, Son, and Company, by Thomas Watson Jr. This is the best business autobiography I’ve read. It’s about Watson Jr (the long-time CEO of IBM), his difficult relationship with his father, the company they built, and the emergence of the computing industry. It is an emotional, reflective, and self-critical book, without the kind of “here’s how brilliant I was” tone that afflicts too many executive autobiographies. I reviewed it  here.

A Man in Full, by Tom Wolfe. The central character of this 1988 novel is Charlie Croker, an Atlanta real-estate developer who has gotten himself into way too much debt. Other characters include Charlie’s current and former wives, the Black mayor of Atlanta, the bankers who must deal with the debt problem, and a warehouse worker at one of the Croker enterprises. The book also casts a not-very-complimentary light on the Atlanta society/arts scene.

Trial by Fire, Stephen Buck. The adventures of a Honeywell field engineer in the early days of process-control computing. The book’s title reflects the point that the industrial processes being controlled frequently involved combustion, sometimes in scary circumstances. Much of the author’s work took place outside the US, in countries ranging from Poland to Brazil.

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What Future for the Global Auto Industry?

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**An upcoming Chicago Boyz group discussion**

There is much media and analyst discussion lately concerning possible sea changes in the auto industry..which would, of course, likely have major impacts throughout the economy and on society as a whole.   Some of the driving factors worth considering include:

–The government incentives put in place in many countries…in some cases not just incentives but absolute requirements…in favor of electric cars

–The emergence and growth of ride-sharing services such as Uber and Lyft

–The development of partial ‘autopilot’ functions for cars, and the anticipated development of full automatic driving at some future point

–The apparent reduction of interest among young adults and older children in driving and automobile ownership

–Technological factors, including the continued improvements in battery energy storage capacity–but still very limited in comparison to liquid fuels…the continued incremental improvements in internal-combustion engines…and the emergence of new manufacturing technologies, including 3-D printing aka ‘additive manufacturing’.

I’d like to have a group discussion of the possible future direction and shape of the industry…let’s do this sometime next week.   If you’re interested in participating, here are some links that are worthwhile thought-starters.

Vitaliy Katsenslson is a fund manager; his blog is Contrarian Edge–I generally like the way he thinks.   Concerning electric cars in general and Tesla in particular, he says:

You don’t really know the company until you buy the stock. It has happened to mea few times. We did hundreds of hours of research, bought a stock, and that act of buying activated new senses. I started seeing new angles. Something similar happened to me with Tesla, except I didn’t buy the stock, I bought a car.

His ownership experience, and the thoughts triggered by the “activated new senses”, are captured in an 11-part series of posts.   You can get it emailed to you by signing up here.

https://contrarianedge.com/signup-for-tesla-article/

Concerning self-driving cars, here are three articles reflecting various degrees of enthusiasm versus caution:   from Forbes, from Investor’s Business Daily, and from Road/Show.   Also this Financial Times article, which is about the difficulties involved in the interaction of automated systems with humans in other cars or with human pedestrians.

An interesting general discussion of AI misinformation and hype…not primarily focused on driverless cars although it does touch on that subject.

Concerning battery technology, here’s a link on the trends in $/kWh and the future possibilities.   See also my 2017 post on battery materials constraints.

Homework:   Please take a look at the above articles, at least the ones that aren’t behind paywalls..   I’ll put up a post as a place for discussion sometime next week.

Diseconomies and Dysfunctions of Scale

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Why are short-line railroads able to survive, and sometimes thrive, in an industry dominated by a few giant companies?  An article at Railway Age suggests some answers. These points are relevant, I believe, in other industries as well.  To excerpt summarize the points in the article:

–Short lines are formed with a much lower manpower cost structure that includes more-flexible work rules.

—Short lines are very effective at negotiating service and shared capital project business deals with their face-to-face local customers. That was always a hurdle when the corporate headquarters of a railroad like Conrail was hundreds of miles away in Philadelphia compared to sites like Cairo, Ill., or Kewaunee, Wisc.  

–Short lines are focused directly upon industrial development along their limited geography service tracks. They are not distracted by competitive locations that want their location to be the next job creation site.

–Short lines have a simple way to calculate customer profitability as a guide for managing their service responsiveness.

–There is an ease of doing business with short lines. The difficulty of transacting business has long been an internally acknowledged Class I issue. Local small railroads have successfully addressed this with local managers dealing one-on-one with local customers.

–The short line railroads have worked to grab growth opportunities. They developed local community and state railroad DOT programs that gave them access to development and rehabilitation capital.

Most of these advantages could, in principal, be achieved by the large railroads through improved organization design and better internal measurements/incentives. And similarly in other industries…but it rarely seems to actually work out that way.  Re the profitability-measurements point, the article notes that Class I’s have tried for decades to calculate and then share with their remote train crews information about branch line financials. The Class I’s even tried to create regional cluster profit centers that would better focus attention on local branch line customers and new business development.  The results were at best a mixed success.

and hence

Selling off or otherwise leasing “troubled lines” to a smaller company typically became the favored big railroad divestiture business process.

Any thoughts on similar factors at work in other industries?

Ayiti Pa Nimewo Yo

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I. Departure

Our transportation to Aéroport International Toussaint Louverture was a decrepit Honda Civic with no working inside door handles, no exhaust system, and a barely functional starter. The guesthouse driver poured a liter of water into the radiator immediately before starting the engine so that it would not overheat, even though the drive was only 3 kilometers. Our luggage proved too big for the trunk, so most of the team’s belongings were wedged in beneath the open trunk lid, which was not secured by so much as a single bungee cord. Threading through the remnants of at least a dozen barricades on Avenue Gerard Téodart half an hour before sunrise, we high-centered on some rubble and dragged a sizable rock for several hundred meters before the driver backed the car up to dislodge it. After we made the turn onto Boulevard Toussaint Louverture, there were no more barricades, thanks to the proximity of a MINUSTAH logistics base and a Police Nationale d’Haïti station. There were pedestrians, of course—Port-au-Prince is very much a city that never sleeps—but not many, and few vehicles thanks to severely interrupted fuel deliveries, which had nearly stranded us altogether. One of the team members riding in the back seat later told me that the gas gauge was on “E.”

What is happening when a Third World country loses a key component of its energy supply, and what might be the lessons to learn for those apprehensive over a significant breakdown of logistics in the US?

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