2019/04/22

Big carmakers are placing vast bets on electric vehicles

From GM and Geely to Mitsubishi and Mercedes, giants of the industry are making battery-powered plans
In 1900 one in three cars on American roads ran on volts. Then oil began gushing out of Texas. Cheaper than batteries, and easier to top up, petrol fuelled the rise of mass-produced automobiles. Cost and worries about limited range have kept electric vehicles (evs) in a niche ever since. Tesla, which has made battery power sexy again in the past decade, produced just 250,000 units last year, a fraction of what Volkswagen or Toyota churn out annually. For every one of the 2m or so pure evs and plug-in hybrids, which combine batteries and internal-combustion engines (ices), sold in 2018, the world’s carmakers shifted 50 petrol or diesel cars.

ev sales are, however, accelerating as quickly as electric motors themselves. Some industry-watchers reckon that they will account for nearly 15% of the global total by 2025. By then, one in five new cars in China will run on batteries, according to Bloomberg New Energy Finance, a consultancy. The chief reason such optimistic forecasts no longer look outlandish is the entry into the electric race of the car industry’s juggernauts. A survey by Reuters in January put the industry’s total planned ev-related spending worldwide (including on batteries) at around $300bn over the next five to ten years. From gm and Geely to Mercedes and Nissan, big carmakers all want to turn out millions of such cars—and turn a profit doing so. Their strategies range from cautious to headstrong.


They had better, carmakers are hoping. Worries about climate change and air pollution are prompting authorities around the world to consider phasing out new petrol and diesel engines in the coming decade. In the absence of federal regulations under America’s climate-sceptical president, Donald Trump, some progressive cities and states there are tightening local rules. Fiat Chrysler (whose chairman, John Elkann, sits on the board of 
The Economist’s parent company) has just agreed to pay Tesla hundreds of millions of euros to count the Californian marque as part of its fleet, and thus avoid steep fines for exceeding average CO2-emissions standards for carmakers due to come into force in the European Union next year. In China, where half the world’s evs are already sold, the government sees the electrification of transport as a way to combat choking urban smog—and to overtake the West technologically.Making a profitable, mass-produced ev has proved elusive. A battery powertrain can be three times the price of an ice. But a combination of better technology and greater scale may soon allow evs to compete on price with petrol vehicles, and enable motorists to drive long distances without the fear of running out of juice.

Western premium brands appear best positioned to take an early lead. While batteries remain pricey, fancy marques can offset the cost with the higher prices that their vehicles command. Jaguar and Audi have already broken Tesla’s monopoly at the lucrative top end of the market. Daimler, which owns Mercedes, has committed €10bn ($11.3bn) to its eq range and wants 20% of its cars to be fully electric by 2025.

Daimler and bmw, which has been bruised by losses on its poorly selling i3 electric hatchback, are hedging their bets by backing platforms—the basic architecture of a car—that are able to accommodate petrol and diesel engines as well as electric motors. This should help them contain costs, by avoiding duplication, but involves compromises over battery size and layout. Sacrificing range and interior space in this way may dent brands built on luxury and technological prowess, says Patrick Hummel of ubs, a bank.

Many mass-market firms are likewise proceeding cautiously. Their thinner margins leave less room to absorb the cost of batteries. Renault of France and South Korea’s Hyundai are nevertheless toying with the idea of a dedicated electric-only platform. psa Group has said it plans to electrify more Peugeots, Citroëns and Opels. Fiat Chrysler has made similar noises, though the Tesla tie-up suggests its near-term plans are less ambitious. Toyota’s early bet on hydrogen fuel cells, which lag behind batteries on the road to widespread adoption, had long been a distraction. The Japanese giant has now acknowledged that buyers want battery power. It is planning ten models by the early 2020s.

The most daring by a long way is vw. The German group’s heft—it produces 10m cars a year—affords it economies of scale only Toyota could hope to match. The €30bn vw plans to spend on developing evs over the next five years, plus €50bn to fit them with batteries, leaves all other carmakers in the dust. In March Herbert Diess, its chief executive, promised 70 new electric models by 2028, rather than 50 as previously pledged, and 22m evs delivered over the next ten years. The company is contemplating a huge investment in a “gigafactory” to supply its own batteries rather than depending on outside suppliers.
vw is already developing a dedicated platform and converting entire factories to ev production. The first, at Zwickau in Germany, will eventually turn out 330,000 cars a year for the vw brand as well as Audi and seat. Its medium-sized id hatchback, to be shipped next year, will cost around €30,000, similar to an equivalent diesel-powered Golf, and travel 400-600km (250-370 miles) on a single charge. On April 14th in Shanghai Mr Diess unveiled a sport-utility vehicle to compete with Tesla’s snazzy Model x in China from 2021. Once the range of evs reaches full production in 2022, vw believes, such models will start breaking even. By 2025, when it hopes one-quarter of its output will be electric, they should be as profitable as petrol cars.

As Mike Manley, boss of Fiat Chrysler, observers, it is no longer a question of whether carmakers can supply a fleet of evs but whether people will pay for them. If governments withdraw generous subsidies which ev-owners have enjoyed, charging infrastructure fails to materialise or electric cars’ pitiful resale value does not increase, motorists may be reluctant to switch to battery power. Poor sales, combined with the large upfront investments, would hit carmakers’ margins, which for mass-market brands are already about as exciting as a Soviet-era Trabant in mud brown. The financial consequences could be “ugly”, warns Bernstein, an equity-research firm.

Electric field

At the same time, the big carmakers can expect more competition from rivals unburdened by complex ice supply chains and large workforces. vw has 40,000 suppliers worldwide and directly employs 660,000 people. Lower capital intensity, and the relative simplicity of evs, which use many fewer parts than petrol vehicles and are easier to assemble, is drawing in upstarts. They include Dyson, a British maker of vacuum cleaners, and a series of Chinese Tesla-wannabes, such as nio and Byton. Bigger Chinese carmakers, such as Geely and jac, have also developed expertise in evs. With domestic sales stalling, they are beginning to eye export markets.

Other technological bumps are meanwhile starting to test the industry’s chassis. Self-driving cars and ride-sharing are forcing companies to rethink their established business model. Investing in evs now leaves them with less to spend on adapting to everything else. They may be hoping that the electric race will serve as a practice lap for wider oncoming disruption.

www.economist.com

The Doctor Is in: What HIPAA Compliance Means for Amazon


Millions of people use Amazon voice assistant Alexa to play music, make phone calls or order a delivery of dog food. Now they can ask the device to help them find a doctor or check their blood sugar. The tech giant announced this month that Alexa is HIPAA compliant, which means it is allowed to receive and transmit information that is protected under the U.S. Heath Insurance Portability and Accountability Act (HIPAA) of 1996. Amazon is currently working with six business partners — Livongo, Express Scripts, Cigna Health Today, Swedish Health Connect, Atrium Health and ERAS, a program of Boston Children’s Hospital —  to help customers make appointments, access medical instruction, track a prescription and other services. It’s a big step for one of the world’s most powerful companies, giving it a stronghold in the $3.5 trillion health care industry.
While the potential for better health outcomes is huge, observers say there are still significant concerns about patient privacy and how Amazon plans to use the data. The Knowledge@Wharton radio show on Sirius XM invited two experts to discuss the topic. (Listen to the podcast at the top of this page.) Robert Field is a professor of law, and health management and policy at Drexel University and a lecturer at Wharton. Arnold J. “Skip” Rosoff is professor emeritus of legal studies and health care management at Wharton and a senior fellow at Penn’s Leonard Davis Institute for Health Economics.
Following are five key points from their conversation.
The Possibilities Are ‘Intriguing’
Both scholars think it was only a matter of time before voice recognition moved into the health care realm, and they’re not surprised that Amazon was the company to get there first.
“It’s an intriguing possibility,” Field said. “You now have a box on top of your kitchen counter that is essentially your doctor talking to you. The question is, will it be a technology in search of a purpose?”
He pointed out that what Alexa can do is no different than what can be done with a keyboard. Currently, the technology offers the same basic functions as a web search. Alexa can’t yet connect users directly with physicians or other health care providers, but that’s expected to change over time.
Field thinks the future capabilities raise a “fascinating psychological dimension” about how much private information people are willing to share with a device, especially elderly patients. That cohort did not grow up with smartphones and laptops, so they may be less comfortable speaking to Alexa about their personal health issues.
“It’s one thing to say, ‘Alexa, play ‘60s music for me.’ It’s another thing to say, ‘Alexa, I think I have diabetes,’” Field said. “Maybe with time we’ll get used to the idea that this box in our kitchen is our friend, is our physician. But maybe not.”
Rosoff offered a different take, dismissing the stereotype of older people as Luddites who fear technology. Rather, they may have physical or mental obstacles that prevent them from typing, for example.
“I’m not sure that Amazon’s checking off the regulatory box on HIPAA compliance begins to answer the privacy concerns that we ought to have.”Arnold J. Rosoff
“If all they had to do was talk, they’d be much more willing to share information,” he said. “You go into the kitchen in the morning to get your coffee, and Alexa says, ‘Good morning, did you remember to take your pills?’ I can see how you can form a bond with Alexa, especially if your spouse has passed on and Alexa is the only [voice that] talks to you.”
HIPAA Compliance Isn’t Adequate
Amazon had been working for some time to develop software that would meet federal HIPAA regulations, and it even created a health team within its Alexa division a year ago to work on the project, according to Business Insider. Meeting HIPAA standards is important, but the professors questioned whether it is enough.
“I’m not sure that Amazon’s checking off the regulatory box on HIPAA compliance begins to answer the privacy concerns that we ought to have,” Rosoff said.
He explained that the regulations make a sharp distinction between data that identify patients and data that do not. De-identifiable data are often shared with third parties, including academic researchers and pharmaceutical companies. Identifiable data have to be guarded far more carefully.
“In the evolving digital world, the ways that we can re-identify data have gone up dramatically, and I don’t know that HIPAA compliance adequately addresses that concern,” Rosoff said.
Field agreed, saying the compliance that Amazon has achieved is narrow. As a business associate, Amazon is promising to abide by the same regulations as the health care providers, but that stipulation was originally intended for something like an employee of a copier company seeing a medical record when he or she services the machine or delivers copy paper.
“This is kind of turning the notion of HIPAA privacy on its head. It’s data coming in through the business associate,” Field said. “I’m sure their lawyers have scrutinized this and approved it, but going forward they’re going to have to be very careful to stay within the box because it’s going to be very easy for data to leak out, and then this narrow compliance will no longer protect them.”
“We can speculate about what it’s going to do to industry structure, and there are some fascinating possibilities.”–Robert Field
What Happens to the Data?
Concerns about privacy are intertwined with worries about data. Amazon may be the world’s largest retailer, but it’s really a tech company that has been built on the bedrock of data generation and analysis.
Under HIPAA, patient consent is required for the release of data to anyone except for clinicians treating the patient, the insurer or payer, a clearinghouse that’s collecting the data, or for the operations of the provider. “Amazon would be bound by this as well, which raises the question: What are they going to do with the data?” Field said. “If it’s patient-identified data, can they use their traditional business model of targeting people for advertising? They answer should be no. But they must have some idea in mind, because that’s the way they do things. “
Rosoff mentioned Xealth, a Seattle-based health care platform that is integrated with Amazon. The platform works with physicians to put together a list of products and services that may benefit a patient’s specific condition, such as knee replacement surgery. The doctor can offer the list to the patient through Amazon, which links the patient directly to web pages to purchase the items, such as an ice pack for the knee. What happens if those items start appearing as pop-up ads on a patient’s smartphone or computer, or if Alexa verbally offers the product?
“That’s very much like having detail men — salespeople … who go to doctors’ offices to pitch products and services,” Rosoff said. “We’ve got laws governing that because it’s regarded as a risky thing. This is maybe an end-run around the anti-detail men regulations.”
Field also wondered about data that don’t fall under HIPAA, such as asking Alexa general web search questions about antihistamines or diabetes drugs. If Amazon collects and sends that data to a hospital, pharmacy or provider, it then becomes protected health care data.
“Right now, the data are controlled by the doctors, perhaps the hospital that they’re affiliated with, and the company that maintains the software,” Field said. “Now, we’ve got one of the nation’s largest retailers in the mix as well, and the retailer is interested in specifically advertising and marketing. That adds a new element to the mix that is potentially combustible.”
Amazon Leads, Other Tech Companies Follow
The professors expect that other tech companies will scramble to follow Amazon’s lead into HIPAA compliance. But they may have trouble catching up.
“We have to be careful that our excitement about the positive potential doesn’t blind us to the risk.”–Arnold J. Rosoff
“If you look at the innermost concentric circle, you’ve got the competition between Amazon, with their Echo and Alexa, and Google,” Rosoff said. “Amazon’s way ahead with Alexa at this point, and this gives them a tremendous advantage in the short run for being able to recruit other partners in the industry so that they can come up with all kinds of applications.”
Amazon is also on a parallel track to refine its artificial intelligence, which has implications for both the service aspect of health care, as well as advertising and marketing.
“We can speculate about what it’s going to do to industry structure, and there are some fascinating possibilities,” Field said. “For example, if you want to communicate with your local hospital and doctor, will you have to use one product or the other? Will there be antirust issues? I think we’re seeing a whole Pandora’s Box of issues here.”
Nevertheless, there is plenty of money to be made in the sector. Health care makes up nearly one-fifth of the nation’s economy. If Amazon or other tech companies can claim even a “tiny slice of that,” it’s a win, Field said.
“I think they are testing the water here, but the potential is so huge that my guess is they’re willing to take some risks,” he noted.
Privacy Concerns Persist
If Amazon wants to be first in the voice-assisted health care space, then it needs to get it right. The professors said the company will be under pressure for how it handles patient privacy, how well it safeguards data and how it uses data for advertising and marketing.
“The challenge for the Amazons or the Googles or the Apples is going to be to do the targeting and still get around HIPAA. That is supposed to be prohibited,” Field said.
As an example, Rosoff compared an HIV-positive patient who relies on Alexa to give daily verbal reminders about taking maintenance medication vs. a diabetic who does the same.
“Revealing to Alexa that your A1C is up a little bit is one thing; having Alexa remind you that you didn’t take your HIV meds is another,” he said. “I’d feel very different if one of those got out into the world than the other.”
The example shows that there is still so much to explore in the intersection of health care and technology.
“I think there’s a tremendous amount of positive potential there, but there’s also risk,” Rosoff said. “We have to be careful that our excitement about the positive potential doesn’t blind us to the risk.”

Alan Greenspan: Can the U.S. Economy Stay on Top?


The markets are jittery about a possible recession. The U.S. Federal Reserve’s decision earlier this year to ease off further interest rate increases in 2019 as it keeps a watchful eye on economic signals — after doing four hikes in the previous year — has only buttressed those fears.
The markets are jittery about a possible recession. The U.S. Federal Reserve’s decision earlier this year to ease off further interest rate increases in 2019 as it keeps a watchful eye on economic signals — after doing four hikes in the previous year — has only buttressed those fears.
But former Fed Chairman Alan Greenspan does not see a recession on the horizon, based on an indicator his firm constructed and tracks. “Right at the moment, that particular series shows we’re still deleveraging. It’s very difficult to envisage that sort of economy going into a recession,” he said during an interview with Wharton professor Kent Smetters, faculty director of The Penn Wharton Budget Model, at a forum focused on Greenspan’s new book, Capitalism in America: A History, which he co-authored with Adrian Wooldridge of The Economist.
Greenspan’s consulting firm developed an indicator that tracks a company’s capital appropriations at the time its board authorizes an investment, instead of waiting for the decision to be reflected in the expenditures report months later. This signal has been an “extraordinarily effective leading indicator of recessions,” Greenspan noted.
Market watchers are concerned about a coming recession because the yield curve has inverted, which is when short-term Treasuries have higher yields than longer-term Treasuries. In a normal yield curve, long-term Treasuries have higher yields to reward investors for holding on to the debt. When this relationship inverts, it historically has served as an early warning signal for recessions, although there have been false signals.
While Greenspan believes that a recession might not be imminent, he nonetheless sees the economy slowing. Not helping matters is the trade war with China. Both sides already have imposed tariffs and threaten to assess more. “Let’s remember what a tariff is. A tariff is a tax,” he said. “If you impose a tax on your border, who’s paying? Your citizens [are paying]” because it makes imported goods pricier.
“Taxes withdraw purchasing power from an economy,” Greenspan continued. “To say basically that we beat China in a trade war essentially means both of us lost in terms of GDP because we put tariffs on our own imports and … the economy will go down.”
“There is no doubt that we cannot keep moving at a $1 trillion deficit without inflation ultimately emerging.”
At least, inflation is under wraps, said Greenspan, a famous inflation hawk. Asked what he thought of the Fed’s 2% inflation target, he said measuring inflation can be complicated. “When new products go on the market, they come in at relatively higher prices. Remember that Henry Ford’s Model T came in at a very high price, and the price went down as technology improved.”
When measuring inflation, “you don’t start to pick up the first level [of higher prices] until well into that declining phase, so there’s a bias in the statistic,” Greenspan said. If inflation is measured at 2%, it’s actually zero for consumers, he added.
But if the U.S. continues to run a big budget deficit, all bets are off. “There is no doubt that we cannot keep moving at a $1 trillion deficit without inflation ultimately emerging,” Greenspan said. “If you print a lot of money, you will get higher prices.”
Looking to Sweden
Social Security is another bugaboo for the U.S. economy. Greenspan pointed to the stark warning in the back page of the Social Security Administration’s annual report: “They basically say right out that in order to get an actuarially sound permanent Social Security system, we have to cut benefits by 24% every year from now on out.” That’s tough because cutting retirement benefits is something no politician wants to do.
Sweden had the same problem in the 1990s. “They were doing exactly what we were doing,” Greenspan said. But in 1994, the Swedish parliament switched to a combination of a defined benefit plan — like a pension — and a defined contribution plan — like a 401(K) where citizens put money into and manage their own accounts, according to a report by the OECD.
The U.S. uses a defined benefit system that periodically has run out of money only to be replenished by general revenues, Greenspan said. “They made the Social Security requirements essentially an application of the American taxpayer,” he noted. That means “you’ve got a new entitlement without a means of funding it.” To make Social Security solvent, the U.S. should move to a defined contribution plan. “Sweden did. Sweden is doing very well,” he said. “If we follow their pattern, we would do fine.”
People might argue that what worked for Sweden might not work for the U.S., which has a much larger economy. But Greenspan disagreed. “Whether you’re a larger economy or you’re a smaller economy, it has to do with the form of your pension fund. If your pension fund is defined contribution, it would never run out of money.” The solution to fixing Social Security’s shortfalls is not “a great mystery,” he added. “The issue … is political will.” Even a democratic socialist nation like Sweden was able to do it, he noted.
“If we follow [Sweden’s] pattern, we would do fine.”
U.S. Resilience
Despite its many challenges, the U.S. economy remains on top. China may be coming close to taking the title, but that will not happen in the near future, if it does so at all, Greenspan said. The total market value of China’s goods and services is “marginally higher,” but on a per capita basis, China is still a third of the level of the U.S., he pointed out. “We had China’s per capita GDP back in 1960. What did we produce back then? Steel, aluminum, coal — all of the things that are essentially obsolescent in today’s markets.”
These key industries withered when technologies related to the transistor emerged. “That is a hugely different concept of what market value is,” Greenspan said. “And so the question is, can China close the gap? The answer is that it is closing the gap, but slowly.” And while China is boosting capital investment to goose its economy, this only serves to increase productivity and living standards at a “very gradual pace,” he said. “I don’t want to say that China will pass us at one point. If they do, [because of the] pace in which the gap is closing, it’s pretty well in the future.”
What has kept the U.S. economy the most resilient in history among large nations? “I say it’s the [U.S.] constitution,” Greenspan said. “The constitution was constructed to maintain a set of rights, basically individual rights, and as a consequence property rights, that gave all sorts of incentives — and in a very short period of time … we bypassed Britain.” By the end of World War II, the U.S. economy “stood alone by an extraordinary gap” above all others, he said. The U.S. even helped Germany rebuild, instead of imposing penalties on a defeated foe, Greenspan said.
The end of the Cold War also put a lid on the debate over which economic system was better, Greenspan said. After the Berlin Wall came down, “East Germany was so obviously inferior to West Germany even when they both started at the end of World War II in a sort of tabula rasa” or a clean slate, he said. Back then, East Germany was the “jewel” of the Soviet system, but achieved only a third of West Germany’s standard of living.
“I don’t want to say that China will pass us at one point. If they do … it’s pretty well in the future.”
As such, Greenspan said it was interesting to see the current socialist tilt in the U.S. Americans are essentially engaging in the same debate that has taken place for decades when the reality is that capitalism raises the standard of living, he added. Fueling the socialist talk is rising income inequality, which Greenspan said “bears a very significant negative on society. It doesn’t work. It’s a major problem.” When new technologies emerge, he said, a small segment of the population master them so they accumulate wealth. Society has to find a way to train those left behind.
But handing out entitlements is not a viable, long-term solution. Greenspan sees the “entitlement expansion in the U.S. as a contractionary force because what the data and statistical analysis show is that every dollar of entitlement increase reduces gross domestic savings in the U.S. by $1. … That’s what the data shows, and the outlook has not fundamentally changed.” Meanwhile, as the population ages “it is draining savings out of the system.”
Political wrangling is blocking solutions from taking root. Lately, politics is even encroaching on the Fed’s independence. But Greenspan pointed to the central bank’s legislative protections that have served it well for decades. “Let’s understand what the Federal Reserve Act in 1913 (which created the Federal Reserve system) really stipulated. It considered the question of politics involved.”
The Act shielded the Fed’s monetary policy decisions from ratification by the president. Congress does not fund the Fed, although it has oversight, and members of the central bank’s board of governors serve 14-year terms to make sure they last longer than any administration. The goal is to keep politicians from using the Fed for political gain. “Policy is working if politics managed to get itself straightened out,” Greenspan said.

Why Toyota Is Betting on Hybrid Technology


Wharton’s John Paul MacDuffie and Michael Lenox from the University of Virginia discuss Toyota’s move to offer free patents on hybrid technology to other automakers.

Toyota Motor Corp. could score on several fronts with its move earlier this month to offer free licenses to its patents on vehicle electrification, especially hybrid vehicles.
Toyota’s announcement had two parts. One was that it will grant royalty-free licenses on nearly 24,000 patents it holds for vehicle electrification-related technologies. Second, it will offer fee-based technical support to other manufacturers developing and selling electrified vehicles when they use Toyota’s motors, batteries, PCUs, control ECUs, and other vehicle electrification system technologies as part of their powertrain systems.
Toyota hopes to advance the use of hybrid vehicles around the world. Its Prius was the first mass-produced hybrid car and contributed to the 13 million hybrids the company has sold over the years. However, Toyota has been slow to embrace all-electric vehicles, and has over the years emphasized that hybrid technology will be more effective than electric vehicles. It said in its press statement that it wants to promote the widespread use of electrified vehicles, “and in so doing, help governments, automakers, and society at large accomplish goals related to climate change.”
The company’s game plan may be to position itself in the right places to extract the maximum gains possible from its technology and to also secure its place as new technologies emerge. Michael Lenox, business professor, associate dean and chief strategy officer at the University of Virginia’s Darden School of Business, framed Toyota’s strategy against the backdrop of a secular transition to all-electric vehicles. “Toyota might be making this play in part to leverage the assets they already have in hybrids as that technology shifts.” It may also want to sell excess capacity in that hybrid vehicle technology to others, especially in China, he added.
A transition to all-electric vehicles would occur in the battery-powered electric and fuel-cell platforms. Toyota has publicly stated that it is betting on fuel cells, Lenox noted. The company has already offered 5,680 patents related to its fuel cell electric vehicles since January 2015. Its latest move “might be in part to try to win a standards battle as we move forward with 100% electric vehicles,” he said.
As automakers like Tesla and BYD (Build Your Dreams) are taking the lead in battery-powered vehicles, Toyota’s move “may be an attempt to try to bring fuel cells more into play than they currently are,” Lenox said. In May 2015, Toyota and 10 other companies set up Japan H2 Mobility, a joint effort to set up hydrogen stations throughout Japan.
“I’m pretty confident that Toyota’s knowledge of this technology is deep enough that they can bring electric vehicles to market as quickly as they want to.”John Paul MacDuffie
John Paul MacDuffie, management professor at Wharton and director of the Program on Vehicle and Mobility Innovation at the Mack Institute for Innovation Management, read Toyota’s free-licensing of hybrid technology as a way to also monetize it as much as it could. “They are leveraging something that they’ve already got in the bag, which is undisputed dominance in hybrids,” he said. “And why not see if they can get some more leverage out of that by selling the components, selling some consulting services, et cetera?”
MacDuffie agreed that alongside, the company is also securing its place in fuel cells. “Toyota thinks fuel cells are the more promising future technology, and hybrids are the transitional technology,” he said. “There’s no other automaker I can think of that’s as bullish on fuel cells as Toyota, but certainly others are looking at it as well.”
Lenox and MacDuffie discussed the business strategies behind Toyota’s free licensing of hybrid vehicle technology on the Knowledge@Wharton radio show on SiriusXM. (Listen to the podcast at the top of this page.)
Toyota has been bullish also on hybrid vehicles, but it is not taking chances with how the market seems to be shaping up for all-electric vehicles. “Toyota has had a genuine belief that hybrids are a better transitional technology from internal combustion to whatever their future is,” said MacDuffie. “They went on record for a while, fairly boldly, to say that they thought fully electric, battery-powered vehicles were not ready for prime time – that there just were too many ways in which they weren’t going to provide everything that customers wanted.” Jim Lentz, CEO of Toyota North America, had told the Automotive World News Congress in Detroit this past January, “I think we’ve overstated our belief EVs will take over the world,” according to The Detroit News.
However, the company has since modified its stance on full battery electric vehicles, and is partnering with Subaru Corp. to put a battery electric car on the market by 2021. Plans include a Europe launch of electric SUVs and vans, according to a report in Automotive News. MacDuffie attributed that apparent change of heart to “the surge of interest and competitor action” in that space. He thought Toyota was well prepared for the electric vehicle market. “I’m pretty confident that Toyota’s knowledge of this technology is deep enough that they can bring electric vehicles to market as quickly as they want to.”
Hybrids vs. Full-electric
Lenox felt Toyota should have enough reason to worry about the threat to its hybrid vehicles from electric vehicles. “The value proposition for electric vehicles can be quite strong because [of what] they offer in terms of performance and acceleration that maybe adds value even beyond just the cost,” he said. “It’s not clear to me what the advantages of the hybrid over an electric vehicle are.”
“Toyota might be making this play in part to leverage the assets they already have in hybrids as … technology shifts.”–Michael Lenox
Toyota should be worried also because electric cars are getting cheaper to make. “They are simple machines – they’re basically a battery and an electric motor,” said Lenox. “The cost element is driven by the battery price. As battery prices have come down greatly in the last year or so, there is the potential there that just swamps the hybrid market.”
MacDuffie predicted that it is too early to write off hybrid vehicles, and that they will continue to see demand in the foreseeable future. He went on to evaluate the pros and cons of hybrid vehicles versus battery electric vehicles. Hybrid vehicles involve “a more complicated design,” and that is one reason why many other automakers did not go that route, he noted. Toyota, however, had mastered that technology and figured out how to build it at scale, he added. “They’ve figured out how to take it out of just one branded product – the Prius – and put it in pretty much their whole product line.”
Electric vehicles, on the other hand, haven’t seen sufficient consumer demand as yet, MacDuffie said, and pointed to a bunch of hurdles there. Even as costs have fallen thanks to cheaper batteries, “there’s got to be a convenience factor or some offsetting performance benefit for people who aren’t already enthusiasts about the technology.” Charging battery electric vehicles may not be an issue for those who live in the suburbs and have a garage, “but it’s a big deal in a lot of other situations,” he pointed out.
“So, I’m not quite as optimistic … about seeing a surge in demand for EVs,” MacDuffie concluded. “If you bring them to market and they don’t sell, then it’s going to be tough for these companies to keep on that ambitious timeline. I predict hybrid sales will stick around for a little bit longer – not growing, but providing that transitional product for quite a while.”
Meanwhile, Toyota continues to be bullish about the U.S. market. Last month it raised its planned investment in the U.S. from $10 billion to about $13 billion through 2021. Those investments will go to make new car models and to expand capacity at existing plants.
“Toyota tends to be slow getting going on things. But they can execute very quickly when they decide it’s necessary.”–John Paul MacDuffie


Although those plans include manufacture of its Lexus and RAV4 hybrid vehicles, Lenox said they also underscore the continuing importance of the market for gasoline-powered cars. Clearly, it will be a while before electric vehicles can truly edge gasoline-powered vehicles out of the fast lane. “As optimistic as I am on electric vehicles, this isn’t going to happen tomorrow, right?” Lenox said. “There is going to be a transition phase here that will last years – [even as] we are seeing a decline in hybrid sales.”
Will Toyota’s Strategy Work?
Will Toyota’s hybrid tech offer attract many takers? MacDuffie said it is not clear that the company will see “a rush to buy these components.” However, a potential market could be China, where the government’s high priority on electric vehicles may accommodate hybrid vehicles as well.
Toyota did not have a big success with its 2015 offer of some 5,680 patents related to fuel cell electric vehicles. “My guess would be that since other manufacturers aren’t doing a lot with fuel cell – at least visibly – they haven’t picked up on it in a big way,” said MacDuffie.
Tesla, too, offered to open up the patents for its charging technology a couple of years ago, MacDuffie noted. “It was certainly a bid symbolically to look like a tech company that pursues open standards and wants to advance the future of this technology for everybody. That certainly also looked like an effort to get a jump on the standards for charging in the future. The more the people that would adopt Tesla’s charging technology, the more Tesla would kind of control where that charging standard would go in the future.” However, the impact of that move on “the general technology competition” is not clear.

“As battery prices have come down greatly in the last year or so, there is the potential there that just swamps the hybrid market.”–Michael Lenox

In any event, Toyota has more to gain and little to lose with its latest free tech offer, according to MacDuffie. “If they can in any way increase public willingness to move beyond internal combustion, and if [the public views] hybrid as a first step, that helps Toyota,” he said.
Many of the hybrid tech patents Toyota is offering are old and their usefulness may be limited, MacDuffie suggested. Some of them could be relevant to a purely electric vehicle because some of the components are probably usable in either format, he said. He also doubted if all the roughly 24,000 patents on offer relate to the hybrid feature of the drivetrain, the mechanism that transmits power to the driving wheels in a car.
Overall, MacDuffie said Toyota is well positioned as the market evolves. “Toyota tends to be slow getting going on things. But they can execute very quickly when they decide it’s necessary. So, if battery electric really took off, Toyota could put some models on the market that would be quite competitive. They might stumble for a while, but they would not be out of the game.”