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 / Winter 2004 / Issue 37(originally published by Booz & Company)


Bridging the Breakthrough Gap

There’s another common barrier to technological advance: a lack of what economists call complements. It took more than Henry Ford and his assembly line, for example, to make the automobile a mass-market product. Critical complements, such as highways and gas stations, had to be built as well. Even after a new technology is well established, its spread is often hampered by the slow development of necessary complements.

The next great shift in automotive technology — from gasoline to hydrogen power — promises again to be held up by the absence of complements, in particular the lack of a broad distribution system for hydrogen. For hydrogen-fueled cars to appeal to a large set of buyers, hydrogen stations will need to become as commonplace as gas stations are today.

The complexities inherent in the shift to this new motive technology present a major challenge to carmakers, and it’s instructive to look at the very different approaches being taken by two of the largest of them, General Motors and Toyota.

All the major automobile manufacturers know that they will need to move away from gasoline-fueled vehicles. Growing environmental and political pressures to reduce the use of petroleum will be impossible to resist. GM has taken the technological lead in the race to a new generation of clean automobiles, investing heavily in perfecting the hydrogen fuel cell as a replacement for the internal combustion engine. GM has announced that it plans to introduce hydrogen-fired passenger cars by 2010. Many experts, however, believe that GM is overoptimistic. They predict that, even if the basic technology is refined by then, it will take much longer to roll out the complements required for hydrogen cars to be attractive to drivers.

In the meantime, Toyota is taking a very different course. Rather than focus on pioneering the next great technological advance, it has positioned itself as a conservative innovator, creating a hybrid car that combines an old automotive technology (the internal combustion engine) with a new one (the electric engine) in a way that provides near-term market opportunities. The products of its strategy, the popular Prius and other forthcoming hybrid models, use some of the power produced by their gasoline engines to recharge their batteries. They’re able to reduce emissions and increase fuel efficiency by shifting from gas to electric power whenever possible.

Because they use gas rather than hydrogen, the hybrids do not require either the fine-tuning of a radically new technology or the emergence of a new set of complements to support them. Average people can drive hybrids immediately without having to change any of their habits. The Prius may not be as “green” as hydrogen cars promise to be, but it is considerably cleaner than traditional cars — and environmentally minded consumers don’t have to wait another decade to buy one. Today, the Prius moves off dealers’ lots faster than any other car model in the world, a distinction it has maintained almost since its U.S. debut in 2000.

It’s been said that, because of high manufacturing costs, the Prius is not yet profitable. But that argument misses the larger point. As Toyota has gained experience in building hybrids, manufacturing expenses have fallen steadily, and at the same time the company has created a strong brand and a large and loyal clientele. When the shift to hydrogen cars finally arrives, it will have already established a dominant presence in the market for clean vehicles as well as a store of practical knowledge about the products and their buyers.

GM, meanwhile, is also spending heavily to create its technological breakthrough, but it’s not pulling in any revenues to defray those costs. It’s probably no surprise that the company recently backed away from its single-minded commitment to hydrogen power, announcing that it would begin to offer hybrid models even as it continues its work in pioneering the new technology. Belatedly, GM is joining the ranks of the conservative innovators.

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