Competitive warfare The impact of electric cars on the oil & refinery industry and their countermeasures

Models

Source: Tesla Motors, Inc., www.teslamotors.com/buy/buyshowroom.php

4. Battery system

5. Environmental benefits and incentives

• 
  Tax rebate of $ 5,000 for vehicles purchased/leased after March 15, 2010
  
• 
  Single occupancy of High Occupancy Vehicle (HOV) lanes
  
• 
  Free parking in several areas, e.g. Sacramento
  
• 
  Reduced charging rates.
  

7. Initiatives and Incentives for Electric Vehicles – Selected National Cases

   1. Austrian Mobile Power

2. Austrian Federal Ministry for Traffic, Innovation and Technology

8. Theories

1. Porter’s Five Forces

• 
  Rivalry: Rivalry amongst contestants can take many different forms. A very simple form of course is price competition (i.e. “be cheaper”), but may also be found as marketing and advertisement campaigns, introduction of new products or extended warranty periods and services.
  

• 
  Many/equally equipped competitors
  
• 
  Growth within a certain economy
  
• 
  High fixed costs and high costs of storage
  
• 
  Differences between the products
  
• 
  Exit barriers (i.e. sunk costs)
  
• 
  Market entry of new competitors: New competitors are often equipped with large amounts of capital to successfully penetrate the market by lowering the price, increasing the cost for existing producers thus reducing the profitability. Yet this implies that a new contestant has to overcome the (often very high) market entry barriers. There are numerous factors that may cause or result in a market entry barrier:
  
  • 
    Economies of scale
    
  • 
    Product differentiation
    
  • 
    Capital requirements
    
  • 
    Access to market channels
    
  • 
    Cost advantages
    
  • 
    Governmental policies
    
  • 
    Retaliatory measures
    
• 
  Threat of substitution: Fear of substitution is a very common issue in many businesses, predominantly due to two reasons. (1) Substitutes may limit the profitability within an economy, thus setting a price cap to products and (2) are able to reduce the market share of existing companies. This is usually a longer procedure though, because the consumers need some time to find out about a substitute and then have to switch their consumption habits.
  
• 
  Negotiation power of the consumers: The target group of a certain product can, if of sufficient size, have a major impact on the behaviour of a company. They can demand lower prices or higher quality or performance and hence play the competitors off against each other.
  

• 
  Large share of total sales to a certain group
  
• 
  Sold products are of significant amount/value
  
• 
  Standardised products
  
• 
  Low conversion costs
  
• 
  Negotiation power of the suppliers: By taking advantage of their market power suppliers may threat to raise prices or, on the other hand, lower quality.
  

• 
  A few suppliers dominate the market and hence hold enough market power
  
• 
  Substitutes are not available
  
• 
  Volume of sales to a certain party is considerably small, therefore market power can be opposed on the buyer
  
• 
  High influence of suppliers goods on the buyer’s cost structure
  
• 
  High conversion costs for the buyer
  

2. Transaction Cost Economics

• 
  Specificity: The higher the specificity of a certain asset, the more resources have been invested by the supplier, making the asset highly tailored to the needs of one certain party.
  
• 
  Uncertainty: High uncertainty shows that a company is operating in a market environment marked by high turbulence and risk.
  
• 
  Frequency: A certain raw material or other component is purchased at a high frequency and therefore many similar transactions have to be dealt with.
  

The opposite happens with an increase of the third factor (frequency). In this case the more often a certain transaction has to be done the more likely it is that the purchase can be standardised and know-how can be protected by a so called blanket contract, thus reducing transaction costs (Averyt & Ramagopal, 1999).

• 
  Local Content Regulations: LCRs are regulations imposed by a governing entity ensuring that certain quotas for the use of domestic goods are fulfilled during production.
  
• 
  Rules of Origin: RoO are, like LCRs, imposed by governing entities. Their function is to regulate the amounts of goods/raw materials in terms of origin. Not only do RoO show how big the proportion of domestically produced goods has to be, they show from which other country goods may come from.
  

9. Strategies

• 
  turn its gas station network around into e-loading stations; to cover the cost of changeover and “sunk costs” the industry might demand public support (direct) or additional leeway for turning its gas stations in to full-fledged supermarkets (indirect)
  
• 
  try to lobby against e-cars (and their public support)
  
• 
  monopolize the necessary technology by e.g. acquiring the battery producers, patents, resources necessary to build these etc.
  
• 
  team up with the successful new e-car producers (following the strategy “if you can´t beat them, join them”)
  
• 
  Pay for studies (media articles…) that discuss the overly high cost of e-cars, their disadvantages (e.g. accidents because you do not hear the cars approaching; high societal changeover costs; job losses; rising electricity prices; lack of supply…)
  
• 
  Improve the energy efficiency of conventional petroleum & diesel engines, and favour/pay for research in this area to raise the “hurdle” for e-cars
  

1. Entry barriers

“If an industry earns a return on capital in excess of its cost in capital, it will act as a magnet to firms outside the industry. If the entry of new firms is unrestricted, the rate of profit will fall toward its competitive level. […] An absence of sunk costs makes an industry vulnerable to ´hit-and-run´ entry whenever established firms raise their prices above the competitive level. In most industries, however, new entrants cannot enter on equal terms with those of established firms” (Grant, 2008).

Creane and Miyagiwa (2009) describe two situations. In the first situation a market entrant develops a new technology in order to enter a market. The market leader, in this case a monopoly, therefore has a strong incentive to invent and patent the new technology before its contestants do. Otherwise the monopoly risks that the new entrant, who uses a new technology, might be able to produce at lower cost and therefore be able to replace the prior market leader.

The second situation describes a situation in which the market leader acts oppositely. Whereas the standard case is to promote innovation in order to hinder competition through new technology, Creane and Miyagiwa (2009) argue that there is another possible approach. In this case the market leader, even though facing research and development costs of zero, is tempted not to promote innovation. The general thought is that by blocking innovation, and thereby making new technology unavailable to potential market entrants, the cost of innovation would have to be taken over by the entrant. This is referred to as “raising –the-rival’s-cost-strategy” (Creane & Miyagiwa, 2009).

2. Strategic Disruption

According to the theory of Transaction Cost Economics summarized earlier, companies can impose policies of strategic disruption against the governance structure of their opponents. This was also the case in the US, when the powerful car manufacturers, i.e. Ford, Chrysler and GM – also known as the Big Three, felt endangered by Japanese OEMs entering the market.

Averyt and Ramagopal (1999) examine two specific examples of this method of strategic disruption. Local Content Regulations and Rules of Origin were imposed by the US government. The effect of these regulations was that Japanese OEMs had to (1) move their plants to the US instead of importing their vehicles from Japan and (2) furthermore had to make sure that a specific threshold of the raw materials and parts used was of US origin. Consequently they were no longer able to profit from their traditional network of suppliers (known as kyoryokukai) and had to turn to domestic, i.e. American, suppliers.

Both, Local Content Regulations and Rules of Origin, aim at one goal precisely: Shifting the cost equilibrium of possible outside contestants and hence reducing their profitability. In other words: Making the production of goods more expensive for the outside contestant. Although it is not a matter of innovation or technology, the aim and outcome of this strategy is very similar to the strategy discussed above – increasing the competitor’s cost or reducing his profitability in order to force the competitor out of the market.

3. Diversification

In May 2001, Vice President Cheney acknowledged that US oil production would fall 12% over the next 20 years. Subsequently US dependence on foreign oil would continue to rise, and foreign oil imports would reach approximately two thirds of US oil demand by 2020. (Karoui, 2006) Very similar was the core statement of the French Prime Minister De Villepin in 2005. He stated that it was necessary to implement a new energy policy and to strive for energy independence due to increasing energy demand world wide, also triggered by the economic upswing in the BRIC-countries. De Villepin’s concept aimed at technological innovation and energy independence and was built on three pillars (Karoui, 2006).

The first pillar was massive investment in energy policy. De Villepin called for the French oil company Total to invest in more refining capacity. The second pillar was renewable energy, with a special focus on hydroelectricity and bio-fuels. The third pillar of his program were energy savings and the promotion of energy saving, low-consumption cars, solar heaters, etc. (Karoui, 2006).

The US and France were not the only countries to have noticed these problems. The governments of Kuwait, Abu Dhabi and Alaska for example have a fund for future generations which is supposed to provide revenue when oil runs out (Karoui, 2006). Saudi Arabia, the holder of the world’s largest oil reserves, also is planning on diversifying its petroleum-dependent economy to secure revenue in the future. “To diversify the economy is a matter of life and death for Saudi Arabia,” says Saudi economist Ihsan Bu Hulaiga in The Wall Street Journal. A statement which may be confirmed true when looking at Saudi Arabia’s export statistics: 90% of export revenues and 80% of budget revenues are generated in the petroleum sector. Their future aim is to boost their industry, reaching 20% of GDP by 2020 – twice as much as today (The Wall Street Journal, 2010). “Much if this growth has come from energy-intensive and hydrocarbon-based industries such as petrochemicals, which have thrived on the availability of cheap natural gas. Today, Saudi Arabia is one of the world’s biggest producers of basic and intermediate petrochemicals such as polyethylene and polypropylene, which are exported to Asia and used to make plastic consumer goods. […] But they need to not just produce the feedstock and the basic petrochemicals; they need to move into the advanced petrochemicals that have a very high added value component. […] While petrochemicals have been a cornerstone in the ongoing diversification process, other industries have taken on increasingly prominent roles in recent years. Mining in particular has emerged as an important pillar because of the country’s large bauxite, phosphate and gold resources” (The Wall Street Journal, 2010).

Increasing fuel prices and environmental regulations have made gas guzzlers quite unpopular for most consumers. Therefore, even US carmakers have started to offer smaller, more fuel efficient cars (The Economist, 2010). Apart from fuel efficient engines carmakers have also introduced many other concepts to react to current developments and try to remain in a stable position. But not only OEMs have faced these different economic times, their suppliers and oil companies have taken certain measures too. In the following three examples shall be discussed briefly.

The Austrian based oil and gas company OMV has set up a project called “Future Energy Fund” under which it presents new projects and technologies for the development of renewable sources of energy. Three main goals have been set out, these are:

• 
  Development of new business opportunities for OMV in the renewable energy field;
  
• 
  Acquisition of know-how and experience in the renewable energy field;
  
• 
  Achievement of reductions in greenhouse gas emissions (OMV, 2010).
  

Total, a French oil company, which is quite known for its lubricants and special fuels, also took a similar step like OMV. Their approach, apart from offering a broad variety of different lubricants, which may be used in various types of machinery and appliances, was to cooperate with the Danish company Vestas, producers of wind turbines (Total, 2010). Since wind turbines need a lot of lubricant and wind energy as a form of alternative energy is up and coming, cooperating with Vestas makes perfect sense and gives Total the opportunity of developing a good revenue base for the future.

Automotive supplier Bosch of Germany has also read the signs of time and is keen on reducing their dependence on the car industry. Although Bosch is the largest supplier in the automotive industry and has regularly introduced important innovations to the market, their goal, like OMV and Total, is to shift into other businesses. According to Handelsblatt (2010) Bosch is seeking to use the growth potential of business models that combine the internet and software applications that would connect and control various devices in the energy, mobility, health and environmental sector. Bosch plans to invest €2 billion in acquisitions in the next years. In recent years Bosch has invested €2 billion in acquisitions in the field of solar power, (Handelsblatt, 2010) which is a very interesting move. Apart from supplying parts and modules to the car industry investing in solar power opens the door to supplying electricity, also to electric vehicles. This attempt secures revenue from the car industry by using two approaches – one; supplying parts to the automotive industry as they did before and securing their market share in this field. Two: Providing solar panels that will also be erected to produce electricity which then can be used in electric vehicles. As seen before this is a strategy of diversification, like OMV and Total, combined with a strategy of acquiring businesses to broaden (by buying) know-how.

4. Prolongation

This clearly shows that at time great attention is paid on maintaining competitiveness in the energy sector is on exploring and developing new sources of crude oil. This might be due to the fact that oil companies may have the position that the electrification of traffic will be a long way down the road and may be dealt with intensively a little later.

Source: The Boston Consulting Group, The Comeback of The Electric Car?, 2009

10. Conclusion

The evidence for the necessity of different power sources is clear, the statistics on oil consumption show this very clearly. Even though oil and gas companies currently might not see this threat as the biggest, moving into the business of solutions for electric vehicles and alternative power sources will become much a bigger issue in the upcoming years. Other risks and problems might be more important and challenging to these firms today, but the importance of reducing the global dependence on oil will rise constantly.

From applying concepts like competitive advantage (Porter, 1981), transaction cost economics (Williamson, 1981) and strategic disruption (Averyt & Ramagopal, 1999), we find that oil companies react in a dual mode to the threat of substitution of gas engines by e-cars by (1) using strategies like diversification and prolongation in trying to turn the threat into an opportunity and by (2) trying to delay the switch to e-cars. Whereas oil and gas companies are trying to improve efficiency of their products and try to provide substitutes of a similar kind (e.g. natural gas instead of gasoline) – which in this paper is referred to prolongation – they will also need to constantly diversify their field of business and consequently their source of revenue. Regarding EVs, oil companies might try to reduce the success of EVs by trying to change their governance structure. The reason is that oil companies will have to fear losing governmental support (e.g. tax benefits in the USA), monies that most likely will flow into the support of EV-technology and also infrastructure suitable for EVs. Two aspects might be a powerful argument in this discussion. The first is that oil companies could state that charging EVs at the same time (in the evening) might affect the power supply for different sectors. Secondly, they might argue that currently used batteries do not offer sufficient range for daily traffic and have to be disposed of correctly at the end of their life time.

On the other hand it is quite clear that the electrification of traffic will be a slow, gradual process - a process with which the power suppliers will have to deal with by enlarging capacities and improving efficiency. As argued by Maass (2009), national stakeholders naturally also play a role, “Though oil provides fuel for our cars and warmth for our homes, it undermines most countries that possess it and, along with natural gas and coal, poisons the environment. We need to find another way”. This issue could be investigated in further research e.g. applying stakeholder analysis.

http://www.whitehouse.gov/the-press-office/remarks-president-economy-carnegie-mellon-university