Electricity 2.0

Clean Technology and Competitiveness 2.0

Clean technology clearly holds great promise for future economic growth.  However, as development of new clean technologies accelerate in the United States, it remains an open question whether US firms and workers will capture the economic activity or whether the bulk of the benefits will flow elsewhere.  The issue cropped up in the recent passage of the cash for clunkers law which will reward consumers for trading in clunkers for newer fuel efficient cars.  The law will benefit American consumers and carmakers but also benefit carmakers and overseas suppliers selling into the US market.  And, indeed, it shadows the entire issue of clean technology driven growth. While the transformation to a clean economy will pay important environmental and security dividends no matter what, how the economic promise of clean technology ultimately gets divided will vary by country. 

Call it Competitiveness 2.0.  It is the subject of a penetrating article in the current Harvard Business Review by two Harvard professors, Gary Pisano and Willy Shih entitled "Restoring American Competitiveness: Why America Can't Make a Kindle". The professors examine a wide range of technologies from computer equipment to software to clean technology and find America at a growing competitive disadvantage. Both the data they cite and the case studies they include should serve as a wakeup call to anyone thinking about clean technology and the future of the US economy.

While innovative ideas continue to flourish in the United States -- think Twitter, Ning and Facebook--the US has become a technology laggard among the OECD countries in critical measures. The US trade deficit is old news but the authors point out since 2002, the US has been running a deficit even in high tech goods and services. The main export of the US is capital.  And there are precious few bright spots in the technology firmament. 

In the case of the Amazon's Kindle reader, which the authors examine in detail, though engineers in California designed the product, there is simply no US capacity to make the components.  (If the US lacks the capacity to make a Kindle could it make a military computer in a pinch?)  In aircraft, Boeing continues to lead the world but it now relies on a network of global suppliers and has cut its American workforce.  Managing this complex supply chain led the company to delay delivery of its Dreamliner.  All but the highest end computers are now made abroad. And even complex software tasks, from writing software to using it for engineering, are moving overseas.

In clean technology, leadership in battery technology lies abroad. GM's Volt, scheduled for introduction next year, for example, will source batteries from South Korea. While a few companies such as Tesla are developing advanced auto technologies, the US lags Asian and European companies in hybrid and other technology.  With most growth in the world's auto sales likely to take place in China, India and the developing world, companies like Tata and Chery (originally a Chinese knockoff of Chevy) will have a homefield advantage. Chinese, Japanese and Korean companies dominate all PV production of solar cells except in thin films -- the most advanced and promising technology where US firms still lead the way. In smart grid technologies, US companies face roadblocks in the form of an excessively complex and highly regulated utility industry.  Installing new smart grid meters and retrofitting old buildings only gets you so far in terms of new jobs and new businesses.  All told, while the US has the potential, thanks to our still- unmatched system for financing innnovation, to develop the technologies of tomorrow we are, all too often, behind in the technologies of today.

What are the sources of our competitiveness problem? America continues to lag in primary and secondary education. Our universities may be the best in the world, but most of the spots in top PhD programs now go to more motivated students from overseas.  (Community colleges are a US strength that can be scaled as Rob Shapiro has argued and the President recognized today in calling for their expansion.)  The relentless search for low wages continues to send capital out of the US. American firms still can receive tax breaks for moving jobs overseas. Short term thinking, driven by the next quarterly results dominates corporate strategy.

On the macroeconomic level, the US continues to stress consumption over production. This bias, which derives from a strong dollar that keeps imports cheap as long as others lend us the money to buy them, encourages overseas instead of domestic production. A weaker dollar and shift toward a producer and investment-led economy would temporarily lower standards of living, but may be what is required to create the foundation for long term growth. Recently, former NEC head, Laura Tyson, proposed just such a shift in national priorities. While these are complex questions, a real debate over our priorities -- toward consumption--or production is in order. 

In the 1990s, the US made major strides in reversing its competititiveness deficit so that by decade's end it was leading the global economy. However, as Pisano and Shih make clear, those strides were temporary and the problem has returned.  The competitiveness issue, the authors show, is far more problematic today than  at any time in American history.  And if this issue is not satisfactorily addressed, the US will not see wages, standards of living or other metrics of welfare rise. As NDN has long argued and as the HBR authors note as well, stagnant wages combined with rising expectations led to the absurd borrowing that precipitated the latest financial crisis.

In short, if the US is to reap the economic rewards of a clean technology revolution, we need to seriously examine our competitiveness posture and take the steps needed to put us back on track to leading, not lagging the global economy.

 

The Stimulus So Far

New York City--This past weekend, Vice President Biden made news when he said that the economy was probably in worse shape at the beginning of the year than anyone thought.  Although he told George Stephanopoulos that it is premature to speak of a second stimulus, the implication of his remarks is that more economic aid may be needed.  Indeed, Democratic-leaning economists such as Paul Krugman and Laura Tyson have floated the idea of a second stimulus.  Meanwhile on the other side of the aisle, Republicans are already campaigning against a second stimulus.  What is driving the talk of a second stimulus is the poor jobs number last month that suggested the green shoots are turning brown.  This, therefore, may be an appropriate moment to look at what has happened to the first stimulus.  Is it working?  If not, is another one needed?  Is anything impeding the flow of funds.  Alternatively, should policymakers be looking elsewhere for more economic fuel.

During the initial debate over the stimulus, I argued on behalf of a board--an idea first suggested by Dick Ravitch, former head of the New York MTA--to accelerate infrastructure spending.  We did get a board but its focus is to track the stimulus not carry it out and a website, Recovery.org that President Obama said would provide unprecedented transparency regarding the stimulus.  Here is my take on the stimulus so far.

First, the website and accounting surrounding the recovery package really does provide unprecedented transparency for a large government initiative, even allowing readers to comment on and discuss recovery projects.  The good news is this allows us to debate the stimulus on the basis of thorough data.  The bad news, however, is that six months into the Administration, the data show that only about $65 billion worth of projects have been started, or about 8% of the total two year budget.  A far smaller amount of money has probably been actually dispensed.  As I anticipated, the strategy of moving the money through the normal bureaucratic channels as opposed to an emergency board has slowed its disbursement and therefore moderated its stimulative effect.  On the other hand, using existing channels provides a degree of oversight.  In the inevitable tradeoff between speed and oversight, implementation of the the recovery package has erred on the side of oversight.

In many ways the most interesting portion of the stimulus--the part I first proposed last year--was that directed to clean energy.  The success of these funds in stimulating clean energy innovation is important to America's future, but for the most part, it is too early to measure their effect.  DOE recently announced procedures for giving out the approximately $4 billion in smart grid funds.  However, companies have been hampered in applying pending agreement on smart grid standards.  The Administration is doing everything right in this respect, spearheading a drive to accelerate the development of open standards.  However, this money, therefore, has yet to be spent. 

As another indicator of the development of renewable energy, the price of photovoltaic panels has dropped this year.  The rate of decline about 1% per month, however, cannot be attributed with certainty to any one factor and probably is more related to Spanish policy than what we have done in the United States.

Around the country, work is beginning on numerous infrastructure projects.  However, the normal delay in government contracting--even for "shovel ready" projects means that the bulk of stimulus funds remain to be spent.  In contrast, as the New York Times reports today, the French have been much more successful in rapidly deploying stimulus funds.  However, they are able to do this, in part, due to their more centralized governmental structure.

In its first months in power, the Administration framed its policy response to the economic crisis as consisting of three key initiatives: first, pass a recovery package to stimulate demand, second stabilize financial markets to leverage financial activity around that demand and finally, address the mortgage crisis.  This framing was in my view correct.

So how are we doing on each?  The first policy response, the recovery package to spur demand and create a multiplier effect is underway but money is entering the economy slowly so that we won't really feel it until the end of the year.  There is a silver lining to this timing.  It will hit at about the time that some are afraid we may be approaching a double dip.  However, the slow pace will keep us on tenterhooks well into the fall.  The rescue package for the banks has been reworked a number of times, but the fact that the large banks have been making profits and that some have repaid their loans from the TARP indicates progress has been made on this front--most due to the effect of reversing the mark-to-market rules that were forcing massive market-roiling markdowns of illiquid securities--and the high tailwinds for the industry provided by low cost money from the Fed.  Finally, the mortgage industry remains largely as it was in February with the combination of initiatives suggested by an interagency taskforce yet to really take effect.  People are still losing their homes to foreclosure.

So does this mean we need a second stimulus?  On the contrary, it means that as of now the stimulus funds have yet to really hit the economy and talk of a second stimulus is, as the Vice President stated, premature.  What would be more useful is to try to accelerate the spending of the funds already allocated.  Much progress has been made on banking.  More should be done to reduce the cost of mortgages and keep people in their homes.

While retrofitting buildings is leading to some new green jobs, clean energy which I believe must be an important driver of future growth has yet to impact the economy in a major way.  To fulfill the President's goals, it is time to think seriously about roadblocks to the development and uptake of new technologies in the energy sector as well as the deployment of renewable energy.  The American Clean Energy and Security Act recently passed by the House and now slated for consideration in the Senate provides some incentives to modernize our electricity grid.  Key to the process is opening up the close-knit industry to innovation.  One of the subjects we are researching most aggressively at NDN is how to remove roadblocks in the energy industry that block innovation, open markets to new players and technologies and unlock the full economic potential of the energy network. 

In short, as I argued last year, how recovery money is spent and how quickly it is spent--not whether we do a "second" stimulus--will ultimately determine the speed of recovery.

DOE Turns on the Money

Last week the Department of Energy released part of the $25 billion in loans provided for through the Advanced Technology Vehicles Manufacturing Loan Program, included in Section 136 of the Energy Independence and Security Act of 2007. The delay in releasing these funds had been one of the longest running scandals in clean tech policy. Upon taking office, the Obama Administration vowed to expedite their release and Secretary Steven Chu had made finalizing rules needed to administer the program a key priority. In the first installment of the loans, Tesla, the VC-backed California maker of an all-electric sports car, founded by Ebay veterans, will receive $465 million to make its compact, all-electric Model S sedan. Ford will receive $5.9 billion to retool 11 factories across five states to improve the overall fuel efficiency of its fleet.  Finally, Nissan will receive $1.6 billion to retool a factory in Smyrna, Tennessee, to make an electric vehicle that is being developed and initially manufactured in Japan. The remainder of the money will be released next year.

DOE's announcement comes on the heels of the release of its formal $3.9 billion smart grid funding solicitation last week. The Funding Opportunity Announcement spells out the conditions and terms for those seeking funding for smart grid investments under the American Recovery and Reinvestment Act, the offical title of the stimulus bill signed into law earlier this year. These two developments, coming one after the other, are evidence that the DOE is moving rapidly on the President's goal not only of getting money out into the economy to create jobs and drive demand, but also of making investments critical to a clean energy future.

In the case of the auto loans, they could not be more timely. Autos are a capital intensive business and with credit markets still impaired, it would have been very expensive or impossible for Tesla, for example, to borrow this money on its own. However, that does not mean that the loan is not good business for the government and Tesla. CEO Elon Musk indicated he thinks that Tesla may be able to repay the loan ahead of schedule. Tesla, despite some speed bumps in its early phase, is now profitable on a unit basis, meaning the approximately $120,000 price of its sleek sports car -- which has a long waiting list -- exceeds the cost of components.  Having also recently sold a stake to Daimler Benz, the company is now reasonably well capitalized. Recently, investor Steve Wesley indicated that Tesla's sales are on track to pass $100 million, a common bar for conducting an IPO. If Tesla continues on its current track, it may be the first home run of the clean transportation industry. In any case, the DOE funding puts it on track to move from the sports car niche to the mainstream where it hopes to leverage the glamour associated with the roadster. While Ford and Nissan have greater access to the capital markets, these loans -- provided for in the 2007 energy legislation in exchange for a commitment to higher fuel efficiency -- will help achieve that goal.

In the case of the smart grid, the major barrier to moving forward has been undeveloped standards.  Normally, standards evolve slowly as industry players forge alliances and choose standards that already enjoy market adoption. In this case, the desire to stimulate the economy has accelerated this process. Secretary Chu and Commerce Secretary Gary Locke are overseeing an effort led by NIST to fast track standards for the grid to facilitate adoption. The disbursements made by DOE will indeed help establish standards insofar as the money spent will validate standards and increase adoption.

It is important that standards be as open and uniform as possible to create the broadest and fairest playing field for innovators to enter the smart grid technology market.  Because a smart grid is necessary to get clean energy online and also to drive the creation of new energy products and services, this is an area I believe is absolutely critical to determining whether clean technology can live up to its promise. 

While it remains to be seen how the smart grid will develop, these two announcements from DOE show that the Administration is on the case. These developments should be encouraging to anyone concerned about America's clean energy future.

Putting the Green in Green Shoots

A new wave of pessimism seems to be washing over the economy.  Its source is hard to pinpoint but there is no shortage of candidates: rising unemployment (if a declining rate of rise), second thoughts about the recovery of the stock market and even the Administration's rhetoric which in recent days has shifted away from a relentless focus on jobs.  I would like to suggest another potential cause, however.  So far there is little evidence of an igniting factor in the economy, in other words, a new engine of economic growth.  Replacing the tens of thousands of jobs lost in auto manufacturing, finance and construction to this recession will require more than a modest uptick in consumer spending.  It will require new innovation and new industries.  One such igniting factor might be clean technology and infrastructure.  However, green jobs have yet to materialize in substantial numbers so much so that Democratic pollster Stan Greenberg recently called on Democrats to stop talking about green jobs to lower expectations.

I do not share Greenberg's pessism about green jobs.  However, I do believe that to realize their full potential as a job creating machine, enough to power a new wave of prosperity, clean energy and clean technology will require important policy changes, changes that have yet to occur.

Why?  The energy industry, in particular, electricity, at the center of the clean technology promise, remains perhaps the most regulated industry in America. Its very potential as a catalyst for economic growth is a function of its slow rate of adoption of new technology for decades.  Over the last thirty years, a series of industries underwent regulation, including transportation, telecommunications and financial services and all became engines of economic growth.  Energy, in particular electricity, however, remains frozen in a largely transitional state of deregulation that came to an abrupt halt in the 1990s.  Before clean energy can realize its full potential, it is likely to require a new regulatory framework to unlock its economic potential.

One policy reform that many believe can help accelerate adoption of clean, renewable energy and clean technology is putting a price on carbon.  Legislation to do just that in the form of the American Clean Energy and Security Act (ACESA) is now working its way through Congress, however, its impact will not be felt for a number of years.

Another type of policy reform likely to be equally critical is revisiting the state of our electricity network.  Currently, the grid whose very name reflects its creaky status is too often outdated, undersized for today's energy needs and dumb, making inadequte use of information technology.  Legislation to improve security, expand transmission capacity and upgrade the grid's information capability is also making its way through Congress and many provisions are part of the ACESA bill.  However, measures as seemingly straightforward yet critical to creating clean technology jobs as creating a common interface for solar hookups remain controversial.  Congress has yet to pass a national Renewable Electricity standard.

The problem with our highly regulated electricity network is that it leaves the decision to deploy new clean technologies to a small group of buyers, utilities who may in their area be the only customer in town.  Trade in electricity, meanwhile, is hindered by lack of transportation capacity.  While electricity can cross the country in about 1/60th of a second--the same speed as computer bits at the speed of light--it is impossible, currently to buy electricity outside one's immediate area, due to capacity constraints.  Compare that with the global growth unleashed by being able to purchase everything from softballs to software globally.

To be sure policy changes must be well considered.  The examples of Enron and the banking crisis on Wall Street show that not every regulatory change is good.  On the other hand, to hold to the past is no answer if it impedes innovation and job creation.

In short, to ignite not only the immediate economy but also the economy of the next ten years, the Administration and Congress need to move forcefully to remove barriers to the clean economy.  Truly green shoots may be the key to truly robust recovery.

Envisioning the Future of the Auto Industry

Later today, the Senate is likely to consider legislation, already passed by the House to provide about $1 billion to encourage people to trade in old cars for new ones.  If Senator Judd Gregg (R NH) does not prevent its passage, the so-called cash for clunkers bill--at this level of funding, down from the initial request--would take about 250,000 jalopies off the road and replace them with new cars.  Though a 250,000 increase in new car sales will have only a small impact on overall US car sales which have virtually halved from about 18 million cars to under 10 million cars this year, the bill will bring people into showrooms.  In addition, if passed, the bill will improve overall gas mileage and reduce overall emissions.  The cash for clunkers idea is a good one that NDN has long supported.

However, coming on the heels of the bankruptcies of GM and Chrysler and unprecedented government intervention in the auto sector it also serves to underscore the challenges and uncertainty that surround the auto business. Have Americans stopped buying cars because of the financial crisis?  Or does the decline reflect uncertainty following last year's gas spike?  Why are Toyota and AUdi gaining market share from US companies despite higher wages in Japan and Germany? Are all electric, hybrid or batural gas cars the answer to the challenges of climate change and energy security? What will the American and global auto industries look like in the future?  In the last six months, the US government and Wall Street have focused unprecedented attention on the auto industry.  Yet for the most part, no one has answered or even asked these questions. 

With the US auto industry likely to employ about half the people at the end of this year as at the end of last, there are plenty of reasons to be a pessimist.  But, no crisis occurs without opportunity.  When we consider that companies like Apple, Microsoft and Google went from nothing to billion dollar companies employing tens of thousands of people in a decade or less, it is not unreasonable to think that smart people could potentially reinvent the transportation industry in more sustainable form.  Indeed, some innovative companies are working to do just that.

One such company with a potentially transformative vision of the future is Better Place, a Palo Alto startup founded by Shai Agassi, formerly the chief operating officer of the software giant, SAP.  Better Place is not only working with car makers to develop all electric cars, it is also developing the infrastructure to easily charge them and create new leasing models that leverage the ability of car batteries to store power for the grid.  Better Place is one of a number of innovative companies working at the intersection of transportation, smart grid technology and the reinvention of the world's electricity infrastructure.  And it is doing this not only in the United States but around the world in Israel, Denmark, Australia and Japan. 

Just how America and the world address the challenge of the auto industry will be critical not only in determining our economic future but also in how we meet the challenges of climate change and energy security.

To advance discussion of this vital topic, tommorrow, I will have the pleasure of hosting Better Place CEO Shai Agassi at NDN in Washington for a conversation on the future of the global auto industry.  I invite you to attend this special event.

Envisioning the Future of the Global Auto Industry with Shai Agassi
Thursday, June 18, 9:45 a.m.
NDN: 729 15th St. NW, First Floor
A live webcast will begin at 10 a.m. ET

To register for this event, click here.

If you are not in Washington, the event will also be webcast.

Please join me for this important and exciting discussion.

 

Thursday, June 18: Envisioning the Future of the Global Auto Industry with Shai Agassi

As the U.S. auto industry undergoes dramatic restructuring and the global auto sector retools for the future, new technologies, players, and energy challenges are remaking one of the key drivers of the global economy. Just how the industry reinvents itself and what role the United States will play in the auto industry of the future remain unknown, yet the consequences of this change may greatly determine future economic growth.
 
ShaiNDN is pleased to announce that on Thursday, June 18, Shai Agassi, Founder and CEO of Better Place, a Palo Alto based electric car start-up, will lead a discussion at NDN on the future of the global auto industry. He will discuss Better Place's business, the potential of electric vehicles, and the future of the global auto industry.

Better Place's vision of what may be possible for automobiles is transformative, offering an electric car with unprecedented new services, including the ability of consumers to trade electricity with the electricity grid. He has been featured on the cover of Wired magazine (right), Rolling Stone magazine recently named Agassi one of the 100 People Changing America, and his company is active in Israel, Australia, Denmark, the United States, Canada, and Japan. Agassi last spoke to NDN at the Moment of Transformation conference, held in March 2008.

Envisioning the Future of the Global Auto Industry with Shai Agassi
Thursday, June 18, 9:45 a.m.
NDN: 729 15th St. NW, First Floor
A live webcast will begin at 10 a.m. ET

RSVP  :  Watch webcast

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