Weekly Insider (Electric Cards from Lux Research)

Here’s the latest inside scoop from the stellar team at Lux Research:

ELECTRIC VEHICLE MARKET GROWTH REQUIRES PRICEY OIL

Demand-side projections for electric vehicles contradict the hype, says Lux Research.

Boston, MA – October 7, 2009 – Environmentalists, automakers, entrepreneurs and politicians all argue that the next generation of electric vehicle cars will be a boon for the economy and the environment alike. Despite the hype, however, the final judge will be consumers, who will be voting with their wallets – and electric vehicle enthusiasts might not like the returns, according to a new report from Lux Research.

Titled “Unplugging the Hype around Electric Vehicles,” the report takes a hard look at the economics of electric cars, including today’s hybrid electric vehicles (HEVs), as well as hotly anticipated plug-in hybrids (PHEV) and all-electric vehicles (EV). In preparing its report, Lux Research developed a demand-driven market model that calculates how fuel savings could counterbalance the higher price tags on electric vehicles. It includes projections for how the costs of these vehicles could fall as auto and battery manufacturers scale up production, and figures in the impact of oil prices using scenarios in which oil reaches $70/bbl, $140/bbl, or $200/bbl through 2020.

“Our model showed the HEV market doing well in every scenario,” said Jacob E. Grose, Ph.D., an analyst for Lux Research, and lead author of the report. “The markets for PHEVs and EVs, however, will remain small unless oil prices skyrocket. Even in the scenario with $200/bbl oil in 2020, only about 4% of the vehicles sold worldwide will be PHEVs or EVs, due to the high costs of the battery technology for these vehicles.”

Lux Research’s report is required reading for automakers, Li-ion battery suppliers, and even utility executives, who will find realistic projections of future demand for their products and services. The report also provides solid footing for government officials charged with drafting strategic policy and subsidies for their domestic EV industries.

Among the report’s key conclusions:

Oil prices are a key determinant of adoption of electric vehicles. HEVs are the only winner if oil prices hold steady at around $70/bbl. But regardless of oil prices, sales of these vehicles should reach roughly 3 million units annually by 2020. PHEVs, by contrast, will require oil prices around $200/bbl to achieve a similar level of success, and EV sales will be a factor of ten smaller, even in this scenario.

Geography and subsidies figure prominently in the adoption of PHEVs and EVs. With oil at $200/bbl, light PHEVs could be the best-selling electric vehicle in the U.S. by 2020, with over one million units sold. At those oil prices, Japan could generate the biggest demand for electric vehicles, due to the country’s high gasoline prices and generous government subsidies. Meanwhile, a lack of subsidies in Western Europe and China spells poor adoption rates in those markets for either class of electric vehicle.

Regardless of the scenario, Li-ion battery technology is a clear winner. Even relatively modest success for the PHEV and EV market will be an enormous boon for the global battery market. Costs for automotive Li-ion cells will drop from over $720/kWh today to between $405/kWh and $445/kWh in 2020 depending on oil prices. Moreover, sales of Li-ion batteries for electric vehicles in 2020 range from around $510 million at $70/bbl, to over $9 billion at $200/bbl. The market for NiMH batteries for HEVs, meanwhile, changes little in any oil price scenario, ranging between $1.3 billion and $1.6 billion in 2020.

“Unplugging the Hype around Electric Vehicles” is part of the Lux Alternative Power and Energy Storage Intelligence service. Clients subscribing to this service receive continuous research on the industry, as well as market trends and forecasts, ongoing technology scouting reports, and proprietary data points in the weekly Lux Research Power Journal, and on-demand inquiry with Lux Research analysts.

Weekly Insider (Airbrushing Airwaves & The Adjacent Possible)

Happy New Year, Welcome Back.

First off: the “adjacent possible”. Then: “airbrushing airwaves”.

For many years in this column I’ve applauded and espoused Nassim Taleb’s philosophy (as put forth in “Fooled by Randomness” and “The Black Swan”) of not only not knowing what we don’t know, but not knowing (or accepting) that it isn’t possible in many instances to know the future. We mistake luck for skill and often mistakenly attribute success to genius when it’s mere luck.

Being pattern-seeking mammals (remember: the non-pattern seekers got eaten by tigers, having sat still when the bushes rustled), we’re uncomfortable processing randomness. We look at puffs of clouds and see faces and animals. We’re hardwired for it. We can’t help ourselves.

Now I bring to you another idea that I consider as important. It’s from complexity theorist and physicist Stuart Kauffman and it’s called “the adjacent possible.” In my words it’s this: Stuff happens. That stuff might be useless. Until it isn’t.

In longer form: Some stuff (whether in nature or business or science) might randomly get invented (either by accident or byproduct of an original intent) and that stuff might have an attribute that has absolutely no apparent use, you can’t even predict a use way into the future for it. But then lo and behold, sometime in the future, something happens and suddenly a use for that attribute, by itself or in combination with another thing, gets discovered.

Some of you immediately are thinking: Ah, it’s evolution! Random mutation and natural selection. And that’s true. But it’s more than that. The idea of the “adjacent possible” is about the possibility space of all the things that might happen as some new biological trait, technology feature, molecule have pathways that might one day be taken.

Here’s Stuart Kauffman in his own words:

“You might look at a heart and ask, what is its function? Darwin would answer that the function of the heart is to pump blood, and that's true—it's the cause for which the heart was selected. However, your heart also makes sounds, which is not the function of your heart. This leads us to the easy but puzzling conclusion that the function of a part of an organism is a subset of its causal consequences, meaning that to analyze the function of a part of an organism you need to know the whole organism and its environment. That's the easy part; there's an inalienable holism about organisms.

“But here's the strange part: Darwin talked about pre-adaptations, by which he meant a causal consequence of a part of an organism that might turn out to be useful in some funny environment and therefore be selected. The story of Gertrude the flying squirrel illustrates this: About 63 million years ago there was an incredibly ugly squirrel that had flaps of skin connecting her wrists to her ankles. She was so ugly that none of her squirrel colleagues would play or mate with her, so one day she was eating lunch all alone in a magnolia tree. There was an owl named Bertha in the neighboring pine tree, and Bertha took a look at Gertrude and thought, "Lunch!" and came flashing down out of the sunlight with her claws extended. Gertrude was very scared and she jumped out of the magnolia tree and, surprised, she flew! She escaped from the befuddled Bertha, landed, and became a heroine to her clan. She was married in a civil ceremony a month later to a very handsome squirrel, and because the gene for the flaps of skin was Mendelian dominant, all of their kids had the same flaps. That's roughly why we now have flying squirrels.

“The question is, could one have said ahead of time that Gertrude's flaps could function as wings? Well, maybe. Could we say that some molecular mutation in a bacterium that allows it to pick up calcium currents, thereby allowing it to detect a paramecium in its vicinity and to escape the paramecium, could function as a paramecium-detector? No. Knowing what a Darwinian pre adaptation is, do you think that we could say ahead of time, what all possible Darwinian pre adaptations are? No, we can't. That means that we don't know what the configuration space of the biosphere is.”

The more tinkering society does, the better the chance that someone else will pick up that tinkered thing and run with it in a way never imagined. Kevin Kelly founder of WIRED has made a persuasive argument that there’s a moral imperative to invent. Consider if the piano hadn’t been invented by the time of Mozart. Consider if organized basketball leagues hadn’t been invented before Michael Jordan. Or what if the PC hadn’t been invented before Bill Gates? The more “instruments” we invent, the better the odds that a genius picks one up, tweaks it or masters it and carries it further, advancing society.

Sometimes the uses of an instrument end up being even more useful in a completely different field. Someone recently shared with me how a geophysicist used sound waves to map oil wells in the 1990s. A singer friend new this geophysicist was an expert with sounds waves and asked him to tune her singing. Not only did it work, it worked so well, the music industry has now been secretly using it for a decade, it’s called “AutoTune”. Cher's hit song "Believe", Madonna's "Music", current rap star T-Pain. The pitch for the technology: correct your pitch, or tweak it. What about hip-hop’s mantra of "Keep it real"--yeah, right. It’s now airbrushing the airwaves.

Viewed through the lens of history, you shouldn’t be surprised by this. The history of technology has been one of displaced labor. New jobs are birthed as old ones die. Talent is embedded in technology. And technology gets further embedded in advanced materials. Where the molecules are the device I’ve long called this “Simplexity”.

Consider Hollywood and videogame developers who use CGI. They are eliminating the need for actors (or at least managing egos of live ones). Olympic athletes are stripped of medals for doping and enhancing. Milli Vanilli were fully mocked (one of them attempted suicide) for lip-synching. Will discovery of digital doping lead to stripping Grammy medals? Unfortunately, it’s probably no more likely than false economic ideas will lead to stripping Nobel medals.

As Tom Clancy said, “The difference between fiction and reality? Fiction has to make sense.” Art imitates life. The science fiction of Blade Runner with Replicants now seems a future possibility.

In the music business I can envision lyrical Luddites leading a cultural revolution against the inauthentic and engineered while demanding the analog, true and slightly out of tune. Where will true talent come from? Statistically speaking: Asia. As a case in point: see Charisse, 15 year old Phillipine phenom discovered by Oprah, promoted by David Foster, already doing duets with her own hero, Celine Dion.

A once obscure girl in Asia, with a once randomly invented technology (webcam) on a once obscure website (YouTube), that gets randomly watched by another once obscure woman, Oprah Winfrey. As I always say, we cannot predict the future, we can only invent it.