Mobility Innovation for a Better Place - Insead

Social Innovation Centre

Mobility Innovation for a Better Place (A)

09/2009-5630 This case was written by Renato J. Orsato, Senior Research Fellow, Sophie Hemne, Research Associate and Luk Van Wassenhove, Academic Director of the INSEAD Social Innovation Centre. It is intended to be used as a basis for class discussion rather than to illustrate either effective or ineffective handling of an administrative situation. Copyright © 2009 INSEAD TO ORDER COPIES OF INSEAD CASES, SEE DETAILS ON THE BACK COVER. COPIES MAY NOT BE MADE WITHOUT PERMISSION.

Social Innovation Centre Shai Agassi was already in bed when the phone rang. Trying to gather his thoughts as he picked up the phone, he heard the words: “Please hold for the president, Mr. Shimon Peres.” Then he heard Peres’ calm, reflective voice refer to their meeting earlier at a conference where Agassi had presented his idea for a world without oil. “You have a good idea, Mr Agassi,” he said. “Now what are you going to do about it?” Agassi’s idea had been developed two years earlier, when attending the World Economic Forum for Young Global Leaders in Davos, Switzerland, representing the German software giant SAP. The Forum invites promising business people under 40 to brainstorm global economic issues. In January 2005, the challenge for the young leaders was: “How to make the world a better place by 2020”. Agassi and a few others had chosen to focus on environmental issues and climate change. Until that day he had not been particularly interested in energy issues but he left the workshop thinking about how the world could move away from its dependence on oil. Back home in California, he spent his evenings studying the carbon economy and learning everything he could about energy. The mission that he had set himself was to “get the world off oil”. He learnt from a report that around 50% of global oil consumption was used for transportation – to fuel trucks, cars and airplanes. He figured that if he could change the way people thought about personal transportation it would be a first step to reduce oil dependence. He looked into hybrid vehicles, bio-fuels and several other options to “green” personal transportation, and concluded that the only sustainable solution was the mass deployment of electric vehicles (EVs). To make a business out of this conclusion, however, he needed help. In January 2007, Agassi returned to Davos but this time he was on a personal mission – to connect with business leaders who could help him set up his business. He met Carlos Ghosn, CEO of Renault and Nissan, and ex-US president Bill Clinton, among other leaders, to discuss his white paper on the future of transportation, which would ultimately form the basis for his new enterprise.1 After collecting opinions and closing business deals he returned to Palo Alto. His resignation from SAP became official in March 2007. Agassi then turned his attention to venture capitalists and by October 2007 he had managed to raise $200 million to launch Project Better Place (subsequently renamed Better Place). The initial investment of $130 million came from Idan Ofer, CEO of Israel Corp., Israel’s largest oil refinery. Morgan Stanley, Vantage Point Venture Partners (VPVP) and a few others added $70 million in funding for the start up. Now Agassi could answer Mr Shimon Peres. He needed a friendly environment for his project to develop and Israel emerged as the ideal host. After all, it was there – in his native country – that Agassi had previously developed and sold two software companies, making a name for himself as a high-tech whiz-kid. The Israeli president not only supported his idea, he announced that Israel would end its dependence on oil by 2020. Agassi was ready to start.

1

Agassi, Shai. Projecting the Future of Energy, Transportation and the Environment, Better Place white paper, October, 2007.

Copyright © 2009 INSEAD

1

09/2009-5630


The Business Proposition For the executives of Better Place, cars are “incomplete products” – they depend on complementary services and products, such as road infrastructure, maintenance and fuel distribution networks. Moreover, the most costly part of car ownership – fuel – occurs during the use phase rather than at the point of purchase. Hence, the successful commercialisation of electric vehicles depends on customers first understanding the total cost of running a car. The average small car in Europe, for instance, costs around €12,000 to buy. Driving the car over 12 years, customers will buy approximately 30,000 litres of fuel worth €35,000. While they pay only €100 up-front for the fuel tank of a car powered by an internal combustion engine (ICE), they will thus spend €35,100 over the life cycle of the car (depending on the price of petrol and their driving habits), bringing the total cost of buying and fuelling an average ICE car to around €47,100.2 Better Place executives contrast the life-cycle costs of an ICE car with those of an electric vehicle (EV). In an EV, the cost of the battery (which replaces the fuel tank) is much higher, around €7,000, but the cost of fuel (electricity) used during the lifetime of the car is around €2,000, resulting in a total of around €9,000 – much cheaper than the €35,100 to fuel an ICE car. Using this logic, the total cost of an EV plus fuel is around €21,000. Better Place estimates that the cost of the battery will decrease to around €5,000 by 2015 and to €3,000 by the end of that decade, based on historical trends indicating that battery costs have decreased by about 50% every five years over the last 25 years.3 The results of the company’s research on driving patterns in Israel and Denmark revealed that approximately 25% of drivers drive over 25,000 kms per year, representing 66% of all kilometres driven. These they refer to as frequent drivers. Conversely, 40% of cars accounted for less than 10,000 kms per year, or around 10% of fuel consumption – referred to as marginal users. In a nutshell, frequent drivers should be the ones moving to EVs for both environmental and economic reasons as they generate the most emissions and spend more money on fuel than other users. For Agassi, this data was enough to convince him of the business opportunity in the mass deployment of EVs. To do so, however, it was necessary to bypass two major hurdles: the lack of infrastructure for EV recharging and the cost of batteries. For that, he needed a radically new approach to the business of personal mobility. Agassi developed a business model that relied on existing technology but reworked the value proposition in personal transportation: from cars (the product) to mobility services (the value). By installing and operating an electric car-charging network, Better Place would supply the technology and the infrastructure to enable EVs to be bought and driven in a similar fashion to traditional cars. As a mobility operator, Better Place would provide the hardware (grid, battery and car) and software (the operating system that connects the car to the company’s network and to the electricity grid), making EVs as convenient – or even more convenient – than ICE cars. Hence, at least in theory, customers could be eco-friendly without giving up convenience or paying more 2 3

Agassi, Shai. Projecting the Future of Energy, Transportation and the Environment, Better Place white paper, October, 2007. Agassi, Shai, Op Cit.


2

09/2009-5630


Electric Vehicles: The Partnership with Renault-Nissan When Agassi met Carlos Ghosn, only Nissan had an electric car. Designed for postal services and company fleets, it was produced in small numbers. Ghosn was looking for a market for alternative powertrains but he did not want to follow Toyota’s strategy with hybrid cars. Rather, he was convinced that Renault-Nissan should move into “pure” battery electric vehicles. Since the plans of Carlos and Agassi converged almost naturally, the partnership between Better Place and Renault-Nissan was easily established. Agassi’s business would allow Ghosn to capitalise on the investment in electric cars on a large scale, so RenaultNissan committed to supplying the vehicles needed for the launch of the model in Israel and later in Denmark.4 To prove that electric cars could look like traditional gasoline cars, Better Place converted a Renault Megane into an “eMegane”. The first prototype debuted in Tel Aviv in January 2008 (see Exhibit 1). The eMegane was powered by a lithium-ion battery pack, which gave the car a range of around 160 kms.5 Renault committed to manufacturing 100,000 of these cars to be on the market by 2011. In the fall of 2008, Better Place unveiled its second prototype vehicle: a Nissan Rogue crossover SUV, or “eRogue”. The intention was to gradually expand the supply of EVs in the future via a wide range of car manufacturers so that consumers had more choice and the competition would itself promote technological development.

The Batteries Lithium-ion batteries have long been used in mobile phones and laptops and their efficiency and lifespan have increased in the recent past. Earlier batteries of this kind were unstable, eventually overheating and even exploding. Today’s technology, however, is more advanced and safer. Overall, it is widely available and robust enough to be safely used in EVs.6 Batteries replenish approximately one minute of driving with one minute of charging. Today, the cost of a battery pack for an average EV is between $7,000 and $10,000. Under the Better Place model, the battery belonged to the network infrastructure. The company bore the initial cost and residual value of the batteries – two factors that had deterred drivers from investing in EVs in the past. This was good news for consumers but a major cost for Better Place. In order to manage such costs, the company worked with the Automotive Energy Supply Corporation (AESC), a joint venture between Nissan and NEC of Japan, and A123 Systems of Boston, allowing Better Place to be at the forefront of the development of the technology. Economies of scale could push costs down and make EVs an affordable solution in comparison to ICE cars but not before major production hurdles were overcome. In the next five years, Better Place’s success would require yearly battery production to increase 100 fold to meet demand. This represented a huge task for battery producers. Further along in the value chain of battery production, some experts feared that the industry would face a scarcity of raw materials. Agassi, however, did not seem worried: 4 5 6

Driven – Agassi’s Audacious Plan. Online article from www.wired.com, accessed October 2008. www.betterplace.com accessed November, 2008. www.betterplace.com accessed November, 2008.


3

09/2009-5630

Social Innovation Centre “When you increase capacity, it takes you one to one and a half years to get in line and then you get an over-capacity in the market and then it all stops and we sort of go through that cycle. It is a normal micro-economic cycle of every good in the world. We have seen it in chips, we have seen it in (computing) memories we have seen it in LTVs and in any kind of hardware industry that we have seen in the computer industry.”7 Agassi may be right but strong demand for batteries may cause another curious dependence. The main sources of lithium – the key component of today’s batteries – are located outside the US, in Chile, Argentina and Bolivia. Extraction and production are fairly well developed in the US and in Chile but are only just starting in Bolivia, where the majority of the world’s lithium reserves are located. Investors estimate that the total market for lithium-ion batteries will be around $10 to 15 billion by 2015, potentially growing to $30 to 40 billion by 2020.8

How will it Work? The Consumer Experience The client signs up to a mobility package, which will vary according to location (country and area). In broad terms, the mobility package defines the number of kilometres per month that the client is entitled to drive for a given payment. This is very similar to signing up with a mobile phone operator for a certain number of hours, which will cost, say, €100/month. Similarly, a typical frequent driver may sign up for 25,000 kms/year, for which (s)he will pay a certain amount, depending, once again, on the contract location. The electric car is bought in parallel with the mobility package. In the beginning, for consumers to take advantage of Better Place’s charging network they would need to buy the Renault-Nissan EV model directly from a car dealer or from Better Place sales outlets. This is because the model is adapted to the battery switch stations. Again, as in the mobile phone business, more expensive contracts entitle clients to higher discounts, even to the point where certain phones may even be given for free. Although pricing will depend on location and electricity prices among other factors, frequent drivers can expect to pay less upfront for an EV than they currently pay for a conventional car. This is because they do not pay for the battery pack, which is owned by Better Place. In practice, the system, schematically presented in Exhibit 1, will work as follows. At Home The subscriber will start the day by unplugging the car from the home charge spot, set up by Better Place. The vehicle’s onboard computer (supplied by Better Place) will identify that the charging occurred at home and, since customers pay miles only (not electricity), the energy costs will be automatically refunded in the customer’s bill sent by Better Place. For the customer it will be a seamless experience, as (s)he will be buying miles rather than electricity. The onboard computer and software are the key to controlling energy consumption and distance driven, which also helps drivers to use EVs as efficiently as possible. For instance, prior to leaving home, the user may decide to enter the travel plan for the day into the onboard 7 8

Shai Agassi, CEO Better Place, notes from interview, 29 September, 2008. Deutsche Bank Special Report: Electric Cars: Batteries must be included, 9 June 2008, page 27.


4

09/2009-5630

Social Innovation Centre computer, which will then provide directions and parking information, with charging facilities near or at the destination. The EV computer also serves as an energy monitor, GPS, help centre and can be even used as a PDA. At a Recharging Spot The vast majority of driving occurs in transportation ‘islands’ – geographic areas encompassing a major city or economic region within a 160 km radius, (100 miles), where most people drive less than 70 kms a day commuting to work, school or for leisure. Hence, the majority of drivers will not have to recharge their cars during the day.9 Standard 4KW electric ‘charging spots’, which are about the same size as a parking meter and use the same voltage as most regular home sockets (220-240 Volts), will blanket the parking lots of these transportation islands, allowing the driver to recharge the battery wherever the car is parked (see Exhibit 1). There will also be a Better Place charge spot near the subscriber’s workplace. Once again, the onboard computer will register the kilometres driven by the car and the amount of recharging that occurred in that location – a seamless experience to the customer. At a Battery Exchange Station If the total drive is longer than 160 kms (100 miles), it will be necessary to “refuel” the car during the journey. In this case, for EVs to be as convenient as traditional cars, the recharge has to be as fast as in a petrol station. Since fast charging is still on the technological ‘wish list’, Better Place has created a system innovation: battery switching. Because the battery is a component of the network and the property of Better Place, EV users do not have to worry about exchanging an old battery for a new one. In the early days of the system, the battery exchange will probably occur in the context of a traditional gas station. The driver will be directed by the onboard computer to a convenient battery switch station. Once at the station, the car will enter a track similar to that of a car wash and, as a system moves the car forward along the track, a mechanical battery shuttle will automatically lower the depleted battery and a second shuttle will replace it with a recharged one. The whole operation should take around three to four minutes (see Exhibit 2). The driver never gets out of the car and receives instructions from the onboard PC when the switch is completed. A prototype of the battery exchange station was presented in Yokohama (in Japan) on May 13, 2009, representing a milestone in the history of Better Place. The battery switch technology, entirely developed by the Better Place R&D team, is completely automated and combines technologies developed in the aerospace and car industries.10

9 10

Better Place: internal survey on transportation patterns. Info from factsheet handed out to participants at the battery switching demonstration.


5

09/2009-5630


The Pilot Project: Israel Israel is a transportation ‘island’ in itself. The country can be compared to an (artificial) island surrounded by water and hostile territories, where the distance people drive in any given direction is less than 250 kms. The government was interested in Agassi’s business model and saw geopolitical opportunities in Better Place’s mission – namely to end oil imports. Israel has since put in place a policy that includes a 10% tax on EVs and a 72% tax on ICEs. However, after four years under this tax regime, the sales tax on electric vehicles will rise sharply. The infrastructure in Israel is being deployed in several phases. By June 2009, Better Place had installed 900 charge spots there, mainly in parking lots in Tel Aviv, and had pre-sold cars to 19 corporate fleet owners. Prior to the testing phase the company expects to open a visitor centre, where prospective customers will be able to “try, touch, feel and drive the offer”. A prototype of the operating system was ready by the end of 2008. By the end of 2010 hundreds of EVs will be supported by thousands of recharging spots and a few battery switch stations. The year 2011 will mark the mass deployment of EVs with the diffusion of the EV infrastructure across the country.11 In Israel – and in other countries in which it will operate – Better Place will sell miles rather than fuel to subscribers. This feature of the business model transforms the company into a major buyer of electricity. Sourcing electricity is, therefore, a major concern. Its long-term goal is to buy only clean energy (mainly wind and solar) to power EVs, thus creating a zeroemission system. However, in countries in which renewable energies are a minimal component of the energy matrix (see Exhibit 3), Better Place company will work with electric utilities to move towards clean energy. Nonetheless, the net result of shifting to EVs is positive even in today’s Israel, where 99% of electricity comes from fossil fuel (i.e., less CO2 emissions). Overall, the Danish case suggests that EVs could become a central element in the optimisation of energy production and consumption.

Denmark: The European Launch-Base The Danish energy giant DONG (Danish Oil and Natural Gas) is the largest distributor of wind energy in Denmark and the main investor and shareholder of Better Place in that country. DONG is a well-established business that is collaborating with Better Place to ensure a seamless experience for the customer. By supplying green electricity to power EVs, DONG is also helping itself, since it is partly solving a problem in the management of wind energy. Wind and sun are unpredictable, providing discontinuous power. Electricity is also difficult to store, resulting in unused offpeak production going to waste. Since the majority of EV drivers are expected to recharge their car batteries at night, they will help DONG solve the problem of energy storage and the handling of peak demand during working hours. The result is a win-win scenario for DONG and Better Place, and the bright prospect that EVs can solve a major problem in the storage of alternative energy. 11

Moshe Kaplinsky, CEO Better Place Israel, notes from interview, 28 October, 2008.


6

09/2009-5630

Social Innovation Centre Indeed, in the near future the SmartGrid12 technology will allow EVs to become a major component of the network for energy storage. Better Place will introduce Vehicle to Grid charging in Denmark, whereby the EVs of Better Place subscribers can be used for energy storage. The cars will mainly be charged during the night, when there is excess wind power. At times of peak demand, the grid will be able to temporarily “borrow” electricity from Better Place’s cars. The timing of the charging and borrowing between the cars and the grid will be managed by Better Place, and software in the car will communicate with the grid and make sure batteries are fully loaded when needed. Denmark will serve as a base for further business development in Europe. CEO of Better Place in Denmark, Jens Moberg,13 has been talking to people in nearly all European countries about market expansion.

The Communication Plan Better Place’s communication plan has three distinct phases. During 2008, the vision of the project was widely communicated: that Better Place was doing something major to combat climate change by reducing dependency on oil. During the second phase (2009), Better Place developed relationships with governments that showed an interest in adding the infrastructure, and with potential strategic partners such as electric utility companies and investors. This was the engagement phase, devoted to building relationships with the clear intention of investing and deploying its infrastructure and services. Although its communication approach will vary according to region during 2010 – the year before the launch of EVs (2011) – Better Place will focus on the marketing of EVs, with an emphasis on the driving experience and what it means for clients to own an EV on a daily basis. Joe Paluska, vice president of communications, insists that there is a lot of prejudice about EVs, such as the inconvenience of recharging and the high costs involved, requiring that Better Place embark on a major educational effort to communicate the positive experience of owning an EV. Prospective clients need to perceive the advantages of driving a silent EV and be reassured about recharging and travelling further than 160 kms.14

Market Expansion Vantage Point Venture Partners, which contributed to the start-up capital, partnered with Better Place to raise $1 billion for the deployment of a recharging infrastructure in the San Francisco Bay Area in California.15 As shown in Exhibit 4, agreements were also signed with local governments and businesses in Hawaii, Canada (Ontario) and Australia during 2008. Overall, in order to scale up the enterprise, fundraising will be the main challenge in the

12

13 14 15

Coll Mayor, D., Paget, M., Lightner, E., 2007. Future Intelligent Power Grids: Analysis of the vision in the European Union and the United States. Energy Policy 35 2453-2465. Lund, K., Kempton, W., 2008. Integration of Renewable Energy into the Transport and Electricity Sectors through V2G. Energy Policy 36, 3578-3587 March 2009, Jens Moberg, notes from interview, 25 March, 2009, Copenhagen. Joe Paluska, Vice President Communications Better Place, notes from interview, 11 September, 2008. Press Release Better Place “21st Century Initiative in California Defines Roadmap for Sustainable Transportation, Green Job Growth and Opportunity to Reinvigorate Region’s Competitive Advantage” 20 November, 2008.


7

09/2009-5630

Social Innovation Centre coming years. Better Place has set huge goals for a relatively small company. Whether it will reach those targets and be able to expand remains an open question.


8

09/2009-5630

Social Innovation Centre Exhibit 1 How it Works?

The Better Place System: How it works?

2. The Charge Spots and the Energy

1. The Car (first prototype of the eMegane)

3. The Battery Switch Station 4. In Car Services (the picture does not resemble the real onboard computer)

Source: Better Place Picture and INSEAD Scheme


9

09/2009-5630

Social Innovation Centre Exhibit 2 The Battery Switch Station Model

Source: Better Place and INSEAD Scheme


10

09/2009-5630

Social Innovation Centre Exhibit 3 Grid Energy Use Better Place Markets

Grid Input ‐ Better Place Markets 100 90 80

Percent

70 60 50 40 30 20 10 0

US Electricity from fossil fuels

Israel

Denmark

Electricity from Hydro

Australia

Electricity from Nuclear

Canada Other sources

Source: INSEAD chart based on figures from Nationmaster.com/ accessed November, 2008.


11

09/2009-5630

Social Innovation Centre Exhibit N°4 Better Place Milestones

Business Development (idea and market expansion) 2005

2006

2007

2008

2009

2010

Agassi attends the Global Young Leaders Forum in Davos, Switzerland. Agassi develops the Better Place business plan while working at SAP. Agassi and team raise $200 million as start-up capital. Better Place is launched. Better Place signs agreement with Renault Nissan, which agrees to massproduce EVs for the Better Place system by 2011. Better Place signs agreements in: o Denmark o Australia o California o Hawaii Better Place signs agreements in Canada/Ontario. Better Place launches the business in Denmark and raises $135 million with local partner DONG. Better Place launches the business in Australia, with a mission to raise funds with Macquarie Bank. Better Place signs sales agreement for company fleets with 19 companies in Israel. Better Place envisions introducing more partnerships with 2 new car companies.

Design of infrastructure in Better Place Centre in Israel.

Deployment of recharging system starts in Israel.

Better Place showcases the prototype of battery switch station in Yokohama, Japan. Recharging spots are installed in and around Tel Aviv. Israeli media expresses disappointment with failed initial promises.

2011


Implementation (deployment and operations)

12

Mass deployment and delivery of EVs to Israel.

09/2009-5630

To order INSEAD case studies please contact one of the three distributors below: ecch, UK and USA

ecch UK Registered Office: www.ecch.com Tel: +44 (0)1234 750903 Fax: +44 (0)1234 751125 E-mail: [email protected]

ecch USA Registered Office: www.ecch.com Tel: +1 781 239 5884 Fax: +1 781 239 5885 E-mail: [email protected]

Boulevard de Constance, 77305 Fontainebleau Cedex, France. Tel: 33 (0)1 60 72 40 00 Fax: 33 (0)1 60 74 55 00/01 www.insead.edu Printed by INSEAD

Centrale de Cas et de Médias Pédagogiques

www.ccmp-publishing.com Tel: 33 (0) 1.49.23.57.25 Fax: 33 (0) 1.49.23.57.41 E-mail: [email protected]

1 Ayer Rajah Avenue, Singapore 138676 Tel: 65 6799 5388 Fax: 65 6799 5399