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strategy and business
 / Summer 2006 / Issue 43(originally published by Booz & Company)


Engines of Change

This is the fundamental dilemma. The challenge of energy supply cannot and should not be faced by automakers (or the energy industries) alone. Why should they be expected to manage the demand for mobility? Already, the automotive industry is among the most regulated on earth, in terms not only of safety and environmental protection but also of how its products are used. Only government has the regulatory responsibility and authority needed to manage the demand side and set environmental and safety standards. Only a governmental authority can set the technical standards for vehicles, provide most of the road infrastructure, regulate access to that infrastructure (more or less efficiently), and levy taxes on vehicles and their use, notably fuel taxes. Governments alone can institute plans, standards, and means of persuasion and enforcement that can mediate among the public good, techno-economic feasibility, and political acceptability.

But for governments to help manage the transition to a post-oil world effectively, they need a long-term perspective, much longer than customary political cycles. The democratic governments of the past 10 years — whether in Europe, the United States, or Asia — have largely failed to rise to the challenge. One recent European Commission–sponsored report, Cars 21, was a tepid corporatist rehash of conventional wisdom, ducking an opportunity to spark an epoch-making shift in environmental and design practice for the European automotive industry, which might have given it a first-mover competitive advantage.

Might an authoritarian state do better? China Shifts Gears is billed as an analysis of technology transfer between U.S. automakers and China. The book follows the fortunes of three Sino-American joint ventures: Beijing Jeep, Shanghai GM, and Chang’An Ford. The People’s Liberation Army never got its new Jeep, which was the original purpose of the first venture. Only the second became a major success, once GM transferred into it a European product better suited to the emerging Chinese mass market. The third venture appears stalled by cultural conflicts between its partners. Author Kelly Sims Gallagher somewhat naively wonders why the U.S. automakers initially transferred only their most conventional and not very energy-efficient vehicles and technologies. The answer: Mass-producing cars is complex, difficult, and driven by experience and know-how, so one would naturally transfer the simpler solutions to novice partners. Unlike telecommunications, the automobile industry is not an area in which technological leapfrogging is seen in nascent markets.

In the end, Dr. Gallagher correctly places the onus on the Chinese authorities. Only the Chinese government has the political power to impose order on its automotive industry, thereby managing the impact of changes in the fuel supply (and gaining a first-mover advantage for its own automotive industry). But, as Dr. Gallagher points out, because the Chinese government lacks the counterbalance of an informed and consulted public, its decisions probably won’t be any more effective than those of its democratic rivals.

The ideas of Mr. Jaccard and Mr. Lovins may buy us time — a century, perhaps? But we will still have to face reality: The two successive ages of cheap coal and the steam engine, and then of cheaper and more convenient oil and of the all-conquering automobile, are over. How shall we deal with the new era of rising energy costs and tightening environmental constraints? Even with the highest possible level of technological acumen, clear vision, and honest analysis, we need a shared willingness to reconceive and redeploy our transportation and energy infrastructures. These works show how difficult that transition will probably be. They don’t — and perhaps they could not — identify the solutions, or the institutional mechanisms through which we will achieve those solutions. But we as individuals, businesses, and nations must base our decisions on objective reality and a sufficiently long time frame, not on blind belief and short-term expediency.

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Resources for Understanding
Energy and Automobiles
Works mentioned in this review.

  1. Alfred W. Crosby, Children of the Sun: A History of Humanity’s Unappeasable Appetite for Energy (W.W. Norton, 2006)
  2. Kenneth S. Deffeyes, Beyond Oil: The View from Hubbert’s Peak (Hill & Wang, 2005)
  3. Kenneth S. Deffeyes, Hubbert’s Peak: The Impending World Oil Shortage (Princeton University Press, 2001)
  4. European Commission, Cars 21: Competitive Automotive Regulatory System for the 21st Century. Final Report (E.U. Directorate General for Enterprise and Industry, 2005)
  5. Kelly Sims Gallagher, China Shifts Gears: Automakers, Oil, Pollution, and Development (forthcoming from MIT Press, July 2006)
  6. Peter W. Huber and Mark P. Mills, The Bottomless Well: The Twilight of Fuel, the Virtue of Waste, and Why We Will Never Run Out of Energy (Basic Books, 2005)
  7. Mark Jaccard, Sustainable Fossil Fuels: The Unusual Suspect in the Quest for Clean and Enduring Energy (Cambridge University Press, 2005)
  8. Amory B. Lovins, E. Kyle Datta, Odd-Even Bustnes, and Jonathan G. Koomey, Winning the Oil Endgame: Innovation for Profits, Jobs, and Security (Rocky Mountain Institute, 2005), Click here.
  9. Matthew R. Simmons, Twilight in the Desert: The Coming Saudi Oil Shock and the World Economy (Wiley, 2005)
  10. World Business Council for Sustainable Development, Mobility 2030: Meeting the Challenges to Sustainability — The Sustainable Mobility Project, Full Report 2004. Click here.
  11. World Health Organization, World Report on Road Traffic Injury Prevention, Geneva, 2004. Click here.
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