Russ Roberts

Rauch on the Volt, Risk, and Corporate Culture

EconTalk Episode with Jonathan Rauch
Hosted by Russ Roberts
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Jonathan Rauch, of the Brookings Institution and the Atlantic Monthly, talks with EconTalk host Russ Roberts about the evolution of the Chevy Volt, GM's planned electric car. Due to the transparency of GM's effort, Rauch was able to spend a great deal of time on site at GM writing a piece for the Atlantic Monthly on GM's plans and hopes. Rauch discusses the huge risks, GM's past failures, and GM's hopes that the Volt might change the company's culture. The conversation closes with a discussion of competitors and the implications for energy policy.

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0:36Intro. Volt is a plug-in electric car. Have to charge $100,000 for an enormous battery or have to compromise severely on the range. General Motors (GM) aims for sweet spot: car drives 40 miles, plugs in at night; after 40 miles it has an onboard generator that charges while it's on the road. Gasoline used to charge the battery. Most days drivers drive under 40 miles. Talking about 50 miles per gallon. Tough to do or someone would have done it already. Big problem with electric cars has always been the battery. Originally 1/3 of cars were electric, 1/3 steam, 1/3 internal combustion. Now lithium ion batteries. GM want to get this car into showrooms by late 2010. Ambitious to try to do it 2 years from now. All started in 2005, GM hemorrhaging money, terrible reputation on environment, fiasco EV1.
5:06Common idea: that car producers could create an electric car but because it would hurt their gas powered cars they have destroyed their creativity and ideas. Back in 1988 GM's engineers entered an international electrical car challenge and won with Sun Racer. Decided to build an electric car; regulators in California mandated that carmakers had to make electric cars. GM produced the EV1 but its range was 70-80 miles, never more than 110; takes 8-10 hours to charge. GM loses their shirt every time they make one. Practically a hand-made car, but no market for them. Leased the cars, experimental program, 5000-6000 of them. Killed the program. At that point gasoline was pretty inexpensive, as well. Public relations fiasco. Spokesman said we're not destroying the car only to have the car being destroyed, making them look like liars. Within GM they are very proud of the EV1; told by lawyers they had to destroy them if they didn't have an ongoing program. Technological marvel. No good deed goes unpunished. Killed their hybrid program. In 1998 Toyota launches inside Japan without fanfare a little internal combustion car that recaptures energy and recharges its battery, used to extend its gas mileage. In 2000 they quietly bring it to the U.S., and starts become viable. Third generation it starts becoming a hit--the Prius. Toyota lost money on it at first, but has deeper pockets than GM. GM looks at it but can't see a way to make money and kills their hybrid program, walking away from the program just as it becomes viable. Their technology could have kept pace with Toyota. People in the company are kind of desperate. Do focus groups, people like their cars better if you take the name-tag off. Decide they have to do something bold. Churchill: Americans always do the right thing once they've exhausted every other option.
14:12Early 2006 they put a team together. Bob Lutz, famous marketing executive, worked at all the big three, spent time in Europe, retired from auto business a few years ago, became chairman of Exide, a car battery maker. Golf carts are electric cars; cart-like cars. When you turn an electric car on you get full torque right away, smooth, clean, quiet. Dependence on gasoline is seen as the bottleneck in making the car industry grow. Lutz goes back to GM after Exide, decides he wants an electric car. Company keeps saying no; invested in fuel cell program. Takes hydrogen, catalyst to power the car. A fuel cell car is just an electric car. In 2005, small startup company called Tesla announces its going into production with an all electric roadster, two-person car, superfast, lithium ion battery. Old batteries were too big and too heavy. Lutz lost it in meeting. Calls in his guys and says "I want an electric car." EV1 had too small range, 60-70 miles. Engineers hook up Kawasaki motorcycle engine, put in trailer, hook up to generator and hook that up to the EV1, which can be driven around the test track all day. Zero-emission car; even an electric car has emissions; mandate distorted the market. In 2006, remember experiment, idea for onboard recharger, hybrid. Call it the I-Car, like I-pod. Repackaging. Plug-in with 10 mile range, decide that's not enough; have to do a car that will go so far on the battery that a lot of drivers won't even perceive it as a gasoline car. Decide to go for a 40 mile range. Very complicated software, 20-mile battery would have been much easier to do. Detroit Auto Show: Announced the Chevy Volt at convention, expect it to succeed as a public relations venture. Few concept cars ever get to the showroom, science projects. Volt looked like that; reaction astonishing. GM wins both North American car and truck of the year; attention on the Volt. Now they have to build the car by 2010. Say they are still on time.
25:26Apparent transparency of GM. How honest were they with you? In article, very honest. Series of discussions over time, iconic company, in 2005 in such deep trouble. Technological challenge is the least of what they are doing. In order to make this car, GM has had to shred the rule book. Did this with the Saturn. From the beginning they have liked to take big gambles, only rarely pulled on off. Using the Volt as a way to increase their risk-taking metabolism. Risks are enormous. Have to train dealers across the country to service this car, etc., what do you do about people who don't have a garage to park in? Keep it quiet is the usual strategy. First make battery, full of software, if one cell doesn't work you compromise the whole thing; normally start with the battery, but with the Volt they are building the whole car. Also, throwing the doors open, going public; this time going to show the world what we are doing so world will at least understand they are doing everything they can. Usually battery lab is top secret, this time gangs of reporters. Production version doesn't look like a sports car, inappropriate for every day driving car. Pulled the sheet off the car without having to ask. In commercials have revealed the front corner, grill. Got to be extremely aerodynamic to squeeze everything out of the battery. A lot of people think they will fail; if so they will fail in full public view. Talked with engineers, who were honest about the challenges. In their interest to explain the challenges. Price point is very ambitious, could do car if you sell it for $50,000; initially were going to sell it for $30,000, now maybe $40,000; will lose money. Financial gamble: if the car is a hit, financially it is a strain. Car for one-car family. Branded it Chevy, brand for the masses. Worldwide. If they sell a lot they lose a lot of money; betting that cost curve on production and the battery will come down fast enough and that gas prices stay high.
35:52Size of resource commitment: how many engineers, is project growing? Yes, couldn't get precise numbers, ropes in resources from all over GM including pre-Volt research. Half a billion to a billion dollars. Miracle of capitalism that a single automobile ever gets built. Mind-boggling to get everything to the end of the assembly line. Moved to the execution phase, drive something around on a track. Development vehicle: Take shell of existing car, Chevy Malibu, and put the new systems in it. Prototypes, tooling up factories; will be built in same plant from Michael Moore's movie, "Roger & Me."
38:50Saturn, similar amount of hoopla. Attempt to change the corporate structure at GM. Did not affect GM the way it was intended to. Story is really about the organizational hurdle of changing a corporate culture and commercial hurdle of breaking through with a new product in a market that may not be ready when you may be financially weak. More a business risk than a technology risk. GM does have a pattern of getting behind and trying these Hail Mary technology passes. Roger Smith: massive plant modernization program, robots, money went down the drain. Toyota was slogging ahead of incremental improvements, no big gambles. Saturn: in 1970s when gas prices spiked, GM discovered it couldn't build a good small car. Went into a joint venture with Toyota and launched the Saturn. Whole new car to be designed in record time, 3 years; whole new dealer network, no more haggling; they were going to take what they learned from that and spread it around GM. When the cars came out they succeeded, waiting lists by 1992, 1993, good ads, good cars. Then GM dropped the ball. Follow-through lacking. Cars were successful in terms of numbers sold but struggled to break even. Let program languish, let the cars get boring and mediocre, let it die on its feet. Only now getting its act together again. You can make the Volt, but you have to stick with it past the first few years when it's losing money. Took Toyota almost a decade with the Prius. Have to be patient, hard for GM. GM knows it. By doing it openly, GM is making the price of failure too high.
44:50Out of GM's control: price of gasoline, public perception of global warming. Cold year this year. Mike Munger podcast, chemistry professor owned a Prius even though it has no effect on global warming. But Volt is being rolled out when it seems to be getting a little cooler. Price of gasoline is now trending downward again. Corporate balance sheet, would not do this car. Born of dire need to change its image and culture. Ironic surprise: CAFE standards, mileage per gallon, standards raised from 25 to 35, years in the future, 2020; corporate fleet on average has to reach that goal. Neither they nor any carmaker in the world knows how to meet that goal. Handed the Volt a business case. If it's very fuel efficient, they have breathing space for other cars. Peak oil. Volt could be a car that no one needs or wants. GM will probably also be ramping up its lobbying department so that the CAFE standards are interpreted in their favor. Electricity infrastructure; can charge cars at night. Battery in car becomes storage for electricity that would otherwise go to waste. After several hundred thousands of these cars, though, there will have to be more electric plants. Coal power: plug-in electric does slightly better than a gas car. Easy to make an electric car that gets great mileage--golf cart. But safety issue. Heavy battery combined with lighter materials for the car may run up against the national highway administration safety tests. Tesla car late in part because of meeting these safety standards; and also transmission problem. Tesla is now out, in showrooms. Also developing family sedan. Better Place, totally different approach, standalone charging stations or swap batteries. Lots of innovation going on, creativity. Big part of business risk for the Volt is that they are not working in a vacuum. Toyota is aiming for competition before the end of 2010; Nissan is in the race. Going to be a horse race. GM is iconic American company, always used as the embodiment of big business. In 1979 at peak of its employment, 600,000; now about 100,000; no longer as big a part of the U.S. economy. We will all benefit from that competition. GM now thinks of itself as something of an underdog. Naderites. Playing catch-up, trying to reproduce a startup mentality right in the center of this enormous 100 year old bureaucracy.

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COMMENTS (16 to date)
Bob Kozman writes:

Thank you for this very interesting interview. This answers some questions and puts to rest some myths concerning the failed EV1. After hearing about GM's strategy described as being almost desperate as compared to Toyota's strategy of being slow and steady, I'm left feeling a little dubious about GM's success with the Volt.

Knowing that the federal government is willing to bail out the biggest corporations maybe GM feels there is a financial safety net. Surely its reputation would suffer severely if this project failed, but it seems failures are part of GM's pattern.

kent beuchert writes:

Obviously Rauch doesn't understand magnitudes. "We'll need more power plants after a couple hundred thousand of these plug-ins are on the road.." A couple hundred thousand plug-ins amounts to zilch. Even a million would have zero detectable effect on the demand for crude. Rauch needs to learn simple mathematics and quit talking about things he obviously knows nothing about. The first think he needs to do is to ask someone with math skills to calculate how much electricity a fully electrified private transportation fleet of cars would need. The yearly increase in electrical demand is roughly 2%. A fully electrified fleet would need something like 15% to 18% of current electrical
production. We always have excess capacity during the nighttime hours and have a lot more during Spring and Fall. Does Rausch have a sense of exactly how long it would take to create 260 million electrically propelled vehicles? Concerns about electrical capacity are absurdly premature.

Clear Channel writes:

It is very interesting to note that we have excess electrical capacity during nighttime hours, which is, of course, the time period most relevant to a plug-in hybrid.

I think this opens the door even wider for discussion on the role of nuclear power in this country. If you power your plug-in using a coal plant the environmental question is a little more complicated. Nuclear plants can easily produce a consistent power over a 24-hour period, unlike other sources which may be considered alternative technologies, such as wind, tidal, and especially solar. Of course, we have a great excess of nighttime power capacity as it is.

However, nighttime capacity may play a considerable role in our future fuel production, especially if we develop an infrastructure for hydrogen electrolysis. In this case, I would argue that nuclear power would play a very important complimentary role. From a political and social standpoint, this issue appears to be very broad.

Russ Roberts writes:

kent beuchert,

Not sure what you think was Rauch's mistake, but I suspect I'm guilty of the same mistake. If the Volt electrifies (sorry) consumers, and GM sells a few million, won't the cost to the consumer be more than it would be if GM only sells a few hundred thousand because of the increased demand for electricity?

Ethnic Austrian writes:

So why did they hype the Chevy Volt so much? Looks like GM's next public relations fiasco in the making, if they fail to deliver.

The Chevy Volt doesn't look like an Ipod to me. There have been numerous electric cars before, all suffering from the similar problems. Range is limited because of weight and cost of batteries, so suburbanites and people who go on longer trips can't use them. That wouldn't be a problem for city-dwellers, since they travel shorter distances and could get a nice rental car for trips. But they couldn't connect their cars to the grid.
Li-ion only makes electric cars suck slightly less, but at a considerably higher cost.

So the kludge GM came up with, which is hardly new, is to have a gas powered generator on board. It would be more efficient to connect the gas engine directly to the wheels. But wait, that is what a hybrid is.

So the Prius is really the IPod. Toyota has just announced that their next Prius will come in three options. With NiMH, Li-ion or Li-ion plus the ability to plug into the grid to charge your batteries.
That is the right way to go. They are doing incremental steps and let the market place decide what is the right way to go and how to charge the plug-in version.

Another problem is that the response to rising oil prices looks exuberant. We aren't running out of oil tomorrow. Peak oil predicts a plateau, followed by a decline, similar to the bygone increase in production. So there is no need to go all electric in two years, nor does ist look economical to do so. Even the Prius is hardly economical for everybody at current prices.

Ak Mike writes:

Prof Roberts: Wasn't Mr. Beuchert saying that the overall demand for electricity is so much larger than the amount needed for a few million Volts, that the effect on price and capacity will be essentially undetectable?

I thought the interview was great, but it left me with the impression that the Volt will be dead on arrival, because it will be enormously more expensive than a comparable internal combustion automobile, plus less capable. Even if gasoline continues to rise in price, the Volt will only save about $2,500 a year in fuel costs (because it can only save 40 miles a day), while also increasing electricity costs. I bet the net saving is small. Also, there was no discussion about when the battery would have to be replaced - probably after ten years or so, maybe for half the cost of a new vehicle.

I know the focus of the interview was on the corporate culture of GM and its response to change, and not on the viability of the Volt, but these are important issues for those thinking about the long-term viability of GM. It would be interesting to further pursue, in a later interview, the question whether older corporations in fast-changing industries can really survive, or whether the corporate culture inevitably ossifies and dooms them.

Ethnic Austrian writes:

I don't understand the strategy of the Big Three anyway.
They keep these ancient brands around, which are largely overlaping. I can understand the difference between a Toyota and a Lexus, or a Volkswagen and a Bentley and a Skoda (all owned by Volkswagen), even though these cars share a lot of technology and are even built in the same plants.
It does make sense to keep national brands, since car markets are patriotic.
GM does that with Opel(Vauxhall) and Saab. But why isn't GM selling Opel Astras and Vectras in the US under the Chevrolet brand to compete against the popular Toyota Camry and the Honda Civic?

Their strategy seems to be about maximizing brand confusion and minimizing cooperation between subsidiaries.

Floccina writes:

Today base power is produced more fuel efficiently than peak power. One of the dynamics here is that if EVs would tend to even out the power consumption so it will pay to provide more electricity with the most efficient and most expensive power plants.

Norm writes:

Whats a name, other than battery, for device that can very efficently store a large amount of energy? Bomb.

Hydrocarbon fuels are relatively safe because the oxidizer (air) is not pre-mixed with the fuel source. Crush a car and the fuel leaks out and catches fire.

This is not the case for a battery where all the agents needed for reaction are stored in a single container. If the container is crushed or its safeguards disabled, the result is an explosion.
The more energy stored in the battery, either through efficiency or size, the bigger the explosion.

There is no free lunch.

jayson writes:

I would just like to add that as a dealer technician that deals with hybrid powered vehicles all the time, the jump in technology from the technician standpoint is very small, just more battery pack. This sound like a 2 mode hybrid system like many brands already have. The fear of the amount of time to train the dealers is overblown. We already work on them. Great podcast as always. Thanks Professor Roberts, you keep economics interesting, and remind me why I am going to college for my degree.

Asa writes:

I was the Telemetry leader for the Principia Solar Car Team in the NASC 2008 race. There is one technical thing said that was incorrect. One bad cell in the battery pack should not make it non-functional. If designed properly it should just bring down the capacity of the pack and this can be monitored easily and replaced.

Jon writes:

Asa - I was on a "Future Truck" team in 2000 when we had a single cell failure in our Ni-MH battery pack as described in the podcast. Supposedly there was a single short, but in the end the entire battery pack went up in smoke and the local HazMat team had to be called out to the GM test site.

I don't doubt that there are much better ways to do things - the fact that Toyota has thousands of these out on the road with 168-cell packs testifies to the fact that it can be done safely - but at one time, it was possible for such a failure to occur.

Russ - I loved that you pointed out that ultimately, while GM is an icon, people other than employers and shareholders don't really have a stake in its success or failure.

Roy writes:

Great podcast, thank you for the exciting look forward. Unpredictable spikes in gasoline prices have been a serious challenge for the auto industry. It is understandable that car manufacturers want to sever the link to petroleum and diversify to other energy sources. An additional incentive is that consumers throughout the world are willing to pay a premium to reduce personal hydrocarbon consumption. (Last I checked, the savings in gasoline costs would not justify the premium for a hybrid at any reasonable discount rate - yet they are very popular.)

It is refreshing to see a company take big risks, not groveling for public funds (contrast this to the ethanol program). Especially interesting was Bob Lutz's rationale - not based on global warming or even environmental considerations - just a desire to find a way out of the oil boom/bust cycle and greater independence (with perhaps a bit of nationalism thrown in). I admit that I do not have a good grasp of the scale of the potential impact – but if this idea works-out, it seems that the demand destruction for hydrocarbons could be huge.

Imagine the thrill of being part of that team – each of them must have earned their ticket and I wish them great success.

R.A. writes:

> Even the Prius is hardly economical for
> everybody at current prices.
Right. And what is more: The ecological balance sheet of the hyped Prius is a shambles.
Its production and its disposal creates much more ecological damage than that of a normal car. The effects of the slightly less consumption are more than cancelled out.

The Prius sells only because people ignore that fact, they want a status symbol proving their ecological virtue.

But there are not so many people caring for that sort of nice feeling. The ecological disadvantages of a Volt with its battery will be discussed much more than with the Prius - GM will never get a bonus for being nice and popular.

The idea of the Volt sounds interesting - but this will not be the future of transportation.

Ed writes:

It seems GM's desire to have the Volt project out in the open is a public relations move. If the Volt succeeds, it succeeds. If it fails, GM can say to the conspiracy theorists and to the government regulators that we tried our best but couldn't make the technology work.

rubemode writes:

I realize this may fall on deaf ears as I came to the conversation late but...

To AK Mike

The pace of technological innovation is exponential. The earliest airplane (Wright Bros) was not really a viable contraption, but after it launched, new models came out to replace the old. We now have 747s et al. All marvels of human achievement.

Since GM is building this car on the idea that it breaks some new ground, all GM has to do is get the "Volt" rolling. If a battery needs to be replaced 10 years after that point, the technological lanscape will be so much more improved that the replacement battery shouldn't cost half of the Volts original purchase price. That doesn't even take into account the economies of scale in production. If GM finds a market in 2010, by 2020 they ought to have plenty of production capacity. Plus as we get better at it, the price naturally falls, holding quality constant.

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