The War for Car 2.0 Renault-Nissan: Betting the company

Transcription

1 The War for Car 2.0 Renault-Nissan: Betting the company " A new era is beginning in the global automotive industry. At Nissan and Renault, we are working together to lead the way to mass-market zero-emission mobility" - Carlos Ghosn, CEO Renault, CEO Nissan i This *$1.6 billion loan to Nissan North America+ is an investment in our clean energy future. It will bring the United States closer to reducing our dependence on foreign oil and help lower carbon pollution. - Steven Chu, US Secretary of Energy, January 2010 ii We must have zero-emission vehicles. Nothing else will prevent the world from exploding. - Carlos Ghosn, CEO Renault, CEO Nissan, May 2008 iii MBA 211 Game Theory Final Project Professor John Morgan Team Schachmatt - Angus Hildreth David Martin Laurie Reemeyer Elise Singer

2 On April 20, 2010 an explosion on the Deepwater Horizon offshore drilling rig, operating in the Gulf of Mexico off the coast of Louisiana, resulted in a fire that sank the rig, killing 11 workers and causing a massive-scale oil spill iv. On May 1, 2010, as the devastating environmental impact was becoming more apparent, President Obama, put all new offshore oil leases on hold pending a 30-day probe into the catastrophic Gulf of Mexico spill. v As US officials predicted the oil spill could become the worst in US history vi, eclipsing the 1989 Exxon Valdez disaster vii, the US $700 billion per year dependence on foreign oil viii and need for an alternative solution was yet again thrown to the fore of public awareness. Energy dependency is, of course, not a uniquely US phenomenon; nor is the increasing sense of urgency to finding alternative sources of renewable energy in a warming world. Perhaps, nowhere has this crisis of dependence and urgency been felt more keenly than in the auto-industry, where the economic impact of fluctuating oil prices ix x contributed to two of the Big Three US auto manufacturers, GM and Chrysler, filing for Chapter 11 bankruptcy in 2009 xi xii. Car1.0, the gas guzzling utopia of Big Oil appears dead in the water, but the ultimate form of its successor, Car2.0, is yet to be determined. The battlelines are being drawn, and to the winner the spoils the auto manufacturing market is currently worth $1.5 trillion per year, roughly the same size as the market for gas at the pump xiii. Our mid-term project focused on the emerging war for Car2.0 through the lens of Better Place, an electric vehicle (EV) infrastructure provider that is betting the future is green, as it grapples with the decision to enter the US market. In our final project we revisit Car2.0, but this time through the lens of a different group of players with much more skin in the game the auto manufacturers. Moreover, we focus on a company led by another inspirational leader, with a very definite greener vision of Car2.0 Renault-Nissan (RN). Using game theory principles, we analyze RN s current EV strategy and the likely responses of incumbent players, and we then consider what RN might do to improve its chances of success. Page 2

3 Background to the automobile industry Since the first practical automobile with a petrol engine was produced by Karl Benz in 1885 xiv, the automobile industry had grown into a $1.5 trillion a year behemoth xv with more than 800 million cars on the road and with more than 60 million new cars produced in 2009 xvi. Over the next 40 years the global fleet of passenger cars is expected to quadruple to nearly 3 billion xvii. China, Japan, the US and Germany currently dominate motor vehicle production, producing 14m, 8m, 6m and 5m vehicles respectively in 2009 xviii. The automobile industry is dominated by a few large American, European and Japanese manufacturers, notably Toyota, General Motors, Volkswagen, Ford, Renault-Nissan, and Honda [See Appendix 1 for details]. A maelstrom of unforeseen factors including the 2008 oil price shock [See Appendix 2] and the effect on escalating raw material costs; the global financial crisis xix of 2007 to the present and the tightening of consumer credit; and environmental politics and changes in consumer habits towards more environmental-friendly, fuel-efficient vehicles all contributed to a crisis in the global automobile industry during 2008 to the present xx. A more sustainable transportation solution xxi is needed, one that combines more renewable sources of energy with more fuel-efficient technology. However, the large auto-manufacturers have very different visions of a greener future from enhanced Internal Combustion Engine (ICE) Technologies xxii designed to increase fuel efficiency and hybrid electric vehicles xxiii that combine ICE and electric motor power, to fully electric vehicles. Background to the Electric Vehicle Industry The electric vehicle has been touted as a cornerstone in the industry s effort to reduce its environmental impact xxiv. Electric vehicles could potentially be powered using low-carbon electricity sources (nuclear, wind, solar etc), reducing emissions that contribute to climate change. The conditions needed to enable high penetration of electric vehicles include reliable batteries that enable reasonable vehicle range, a Page 3

4 significant shift in car manufacturing capacity to electric vehicles, and access to charging or battery changing locations as a replacement for current gas station infrastructure. Penetration would largely be determined by the economics of establishing and operating the new EV manufacturing and servicing infrastructure, compared with the status quo petroleum-based transport system. The main technical and economic risks relate to performance, driving range and the cost of the lithium ion batteries that power the vehicles. The Renault-Nissan Alliance The Renault-Nissan Alliance was formed on March 27, 1999 xxv between the French automaker Renault SA and the Nissan Motor Company of Japan. Once called a marriage of desperation for both parties the Renault-Nissan Alliance is now the most successful alliance in automotive history xxvi, in no small part due to the inspirational leadership of Carlos Ghosn xxvii xxviii xxix who became the CEO of Nissan in 2001 and CEO of Renault in By 2009, Renault-Nissan was the fourth largest auto-manufacturer in the world, behind Toyota, GM and Volkswagen but slightly larger than Ford xxx. Critical ingredients to the Alliance s success have been combined expertise and technology sharing between the two companies xxxi. Ghosn is a visionary and spotted the opportunity to take a leadership role in the emerging Car2.0 sustainable transportation war, betting the future of the alliance on electric vehicles xxxii. Ghosn believes that by 2020 purely electric zero-emission vehicles will represent 10% of the global car market, and plans to make RN the first big manufacturer of zero-emission vehicles xxxiii. Ghosn s bold vision has been met with a mixed response, and depends on three elements working in RN s favor: cooperation of governments, a rising oil price, and a change in habits of consumers, which is traditionally hard to predict xxxiv. Despite his critics, Ghosn is walking his talk and has committed more than $5.6billion to developing a range of EVs and investing in car and battery factory capacity. Page 4

5 Renault-Nissan s commitment to EV A key element of Renault-Nissan s commitment to EV is the Alliance s investment in battery technology. This is through a Joint Venture ( JV ) called the Automotive Energy Supply Corporation between Nissan (51%), NEC Group (49%) xxxv. One battery researcher claims that the Nissan battery is significantly better than the competition xxxvi. In addition, Renault-Nissan has demonstrated its commitment to the future of EVs through strong signaling and commitments. Since 2008, Nissan has made more than 60 agreements with governments, utilities, EV infrastructure providers and fleet car companies to advance electric vehicle mobility xxxvii. A detailed list of these agreements is shown in Appendix 3. Figure 1, below, shows the global extent of these agreements, demonstrating that Renault-Nissan is playing a global game. Figure 1 Renault-Nissan s global EV agreements xxxviii The large number of agreements, and the public way that Renault-Nissan has displayed these on its website is an example of social learning and trying to create a cascade. In addition, by being Page 5

6 transparent about the details of its agreements, and by choosing reputable and influential partners, Renault-Nissan can reduce the suspicion level of other parties that might consider joining the cascade. The cascade is a critical element of EV s future success. Consumer acceptance is a very real risk, particularly while uncertainty remains around EV range and battery technology, and if EVs have a different look and feel to the gas guzzling cars people are used to buying. However, if consumers recognize that many organizations are committed to an EV future, they will be more confident about deciding to purchase an EV. Renault-Nissan has also been smart about how it has interacted with partners in forming agreements. The agreements are flexible - official enough to be meaningful, but not too rigid so as to lock in particular performance targets. This avoids locking partners into commitments that they are unable to deliver on. In addition to the cascade of signaling agreements, Renault-Nissan has made specific commitments to capacity and R&D. In particular, it has announced car and battery manufacturing plants in Japan, Tennessee and the UK, and battery manufacturing plants in Portugal and France (see Table 1 below). This multi-billion dollar portfolio of investments shows Renault-Nissan s commitment to EV s massmarket success. Table 1: Renault-Nissan Commitment to EV Vehicle and Battery Production Capacity xxxix Page 6

7 In August 2009, Renault-Nissan unveiled the Leaf, an EV with a range of 100 miles and a top speed of over 85 miles per hour, the $25-30k Leaf also achieves 367 miles per gallon xl. RN plans to begin production in Japan in the fall of 2010 starting with 50,000 EVs a year xli. Nissan conducted an extensive road show with the Leaf, pre-signing customers and coordinating with announcements on EV charging infrastructure xlii. This created a complementary cascade of future EV customers in addition to the cascade of EV industry stakeholders. In January 2008, Renault-Nissan and Project Better Place (now Better Place ) signed a memorandum of understanding to catalyze the mass-market deployment of EVs in Israel xliii. This agreement represented one of the first credible commitments to develop an EV battery infrastructure industry standard, which would alleviate the battery range issues that have dogged the industry to date. Renault-Nissan s transparent and committed approach to EV investment is no doubt a deliberate effort to build momentum in the EV industry and influence other auto players to pursue an EV strategy. Renault-Nissan s Rivals Toyota, the world s largest automobile manufacturer, appears committed to continuing production of its plug-in hybrids, following the success of the Toyota Prius hybrid EV xliv. Toyota s President Masatami Takimoto commented in 2009, the time is not here for electric cars xlv affirming Toyota s strategy to wait until battery technology had improved before mass producing EVs. Honda, the other large Japanese manufacturer and hybrid EV evangelist xlvi also appears uncommitted to pursuing an EV strategy and does not plan to roll out mini-evs until 2015 xlvii. In 2009, the hybrid market was dominated by the US and Japan, and despite an overall reduction in hybrid sales in 2009 [see Appendix 4], some analysts predicted substantial growth in the market by 2015 xlviii. Page 7

8 General Motors and Ford, both big recipients of money from the American Recovery and Reinvestment Act xlix appear to be hedging their bets happy to take government subsidies to invest in EV and battery R&D, but less committed than Renault-Nissan in their pursuit of a greener future. GM s green solution, the Chevy Volt, is a plug-in hybrid and not fully electric, despite GM describing it as an electric vehicle l. GM appears to be hedging its bets on EV technology, pursuing a flexible but more expensive half-way technology solution. The danger for GM is that rather than getting the best of both worlds, the company instead risks getting the worst of each and being left behind once the green Car2.0 standard war is won. GM has been criticized for its insular and inward-looking culture, and its inability to innovate li. Therefore, some automobile commentators are skeptical about the Volt s prospects. In August 2009, Compact Power (LG) received a $151m Recovery Act award to develop lithium-ion batteries for the GM Chevy Volt lii, but GM is also partnering with A123 to supply batteries. Ford is producing a fully electric version of the Focus for launch in 2011 liii. Volkswagen, the other large auto-manufacture was dabbling in a number of greener technologies, from clean-diesel, neat ethanol vehicles, flexible-fuel vehicles, hybrids and EVs liv. In September 2009, Ulrich Hackenberg, Volkswagen s R&D boss commented that VW would be coming out with an Electric Vehicle in the US in 2013, but would not pursue a battery-swapping solution lv. In addition to vehicle manufacturing incumbents and new entrants, Renault-Nissan also needs to consider its rivals and new entrants in the lithium-ion battery sector. Chief among these is Sanyo- Panasonic, the world s largest lithium battery producer lvi, which is making moves to break into the EV battery market, initially through a supply deal with the niche brand EV Tesla lvii and potentially through its joint venture with Toyota that makes lithium batteries for the Prius hybrid lviii. Page 8

9 Framing the Game There are many players in the auto manufacturing industry with varying capabilities, strategies, and visions of the future. Before analyzing the strategies and responses of RN and its rivals, we simplified the game by grouping together players with similar visions: The EV evangelists including Renault-Nissan and smaller startups such as Tesla Motors etc; The hybrid evangelists including Toyota and Honda; and Those hedging their bets and adopting a middle of the road strategy between hybrid and EV, including General Motors and Ford For the purposes of this game we will refer to these 3 groups as Renault-Nissan, Toyota & Hybrids, and GM, Ford & Hedgers. Mental Models Renault-Nissan Renault-Nissan s mental model is that the future of the Car2.0 will be EV and that the RN alliance will be a leading player in this new green automobile paradigm. RN s strong belief stems from its inspirational leader s vision and the need for the alliance to find new growth opportunities after the companies have stumbled somewhat following their initial success together. RN believes that it has superior battery technology and the willpower to deliver a successful market leading EV entry within the next 2 years. The alliance sees EV as more than just a judo strategy in the automobile market, and that the time for mass market EVs is upon us. RN believes that alliances provide a great way for companies to share technologies and expand the pie. Page 9

10 Toyota & Hybrid Toyota, Honda and other hybrid players believe that hybrids represent a better solution for Car2.0 and that the world is not ready for EV yet. This relatively risk-averse strategy reflects the large risks and uncertainty they associate with battery technology and consumer adoption of EVs. Toyota s risk aversion around EVs is probably accentuated by the recent brake recall crisis lix that has led to a loss of confidence and management focus. Toyota likely views Renault-Nissan s investment in EVs as a judo strategy, not a mass market one, and will sit on the EV sidelines waiting to see if the technology proves successful. GM, Ford & Hedgers To GM, Ford and other automobile manufacturers, EVs present an opportunity to get government subsidies lx, both for technology and factory investment. For GM in particular, this presents a good time to try launching EVs again lxi. At the same time, as GM, Ford and others emerge from the auto-industry crisis of lxii, and for GM and Chrysler, in particular, emerge from administration, they do so with a degree of caution, hesitant to take large risks and make the large commitments that Renault- Nissan has made, while not wanting to be left behind. Therefore, their mental model is to adopt a hedging strategy, with EVs representing a judo strategy in the automobile market. Decisions and the Game Car2.0 is a complex dynamic game that will evolve over a period of years. To help simplify the game further, we considered three key phases during which the future of Car2.0 will evolve: Phase 1 Technology Uncertainty, defined by considerable risk and uncertainty as large investments are made into developing battery technology and capacity to support the future EV industry. Page 10

11 Phase 2 Doubling Up, in which critical decisions will be made by all players on whether to enter the market, continue investment in EV technology or quit. Phase 3 Ramping Up, where players must decide whether to commit to major production of EVs, or not. Phase 1 Technology Uncertainty [Present to c.2012] Phase 1 is already underway and auto-manufacturers have already placed their bets on battery and EV technology. RN has placed a large bet on EV and battery technology, while on the other end of the spectrum, Toyota & Hybrid have chosen to stay out of the game during this phase while the uncertainty surrounding battery technology remains. GM, Ford & Hedgers have placed smaller bets, hoping not to be left behind if the technology proves successful. Phase 2 Doubling Up [c.2012 to c.2015] Given the size of its commitments to date, Carlos Ghosn s strong vision and statements in the press, and based on past resolve in following through on difficult initiatives, we believe RN has effectively committed to pursuing EV manufacture in Phase 2, regardless of the success of EV technology development in Phase 1. However, RN will need to decide whether to offer its battery technology platform to other auto-manufacturers and under what terms the company will offer it. GM, Ford & hedgers appear less resolved to an EV future and their decisions in Phase 2 will be influenced by the success of their technology development in Phase 1, and the responses of other players. If Phase 1 is successful then GM, Ford & Hedgers will likely double up on their investments seeking to maintain their comparative lead over Toyota and other potential entrants. If Phase 1 is less successful then GM, Ford & Hedgers will need to decide whether to quit the market or perhaps stay in and possibly leverage RN battery technology if available. Page 11

12 Toyota & Hybrids must decide whether to enter the EV market or stay out, effectively for good. If Toyota & Hybrids enter the market they must decide whether to leverage existing battery technology or develop their own, hoping to learn from others mistakes and leapfrog the competition. Phase 3 Ramping Up All auto-manufacturers will then need to decide whether to ramp up production and if so, by how much. The decisions depend on actions taken in previous rounds. A summary of the critical decisions each group of players will make is shown in Appendix 5. Overview of the Game Tree and Payoffs A simplified version of the game tree is shown in Figure 2 below. The first node represents the uncertainty relating to battery technology. While there are a number of possible outcomes ranging from RN and its current EV rivals (GM & Ford etc.) succeeding in developing EV & battery technology to all players failing, our analysis focuses on those of interest to RN where the company is still in the game, but the success of its current EV rivals is less clear. While subsequent decisions in Phase 2 will in reality evolve over time and involve negotiations among players, we have considered them sequentially in a logical order. For example, Nissan must offer support with battery technology before another player accepts that offer, etc. Figure 2 Overview of the Simplified Game Tree Page 12

13 Overview of Potential Outcomes The top branch of the game tree represents the scenario in which both RN and its current EV rivals, GM, Ford & hedgers all succeed in developing EV and battery technology in Phase 1. Scenario A: Mass Market with a Nissan Platform represents the best of all worlds for RN. Battery technology is successful, and while current EV rivals will likely pursue their own technology platforms, RN proactively offers its EV battery platform as a means for Toyota and other new entrants to enter the market quickly. While RN has significant power in this partnership, they make the decision easy for entrants with low licensing or cost structures. Momentum behind EV grows, ultimately resulting in mass market adoption of EVs and RN is in a strong position as both an EV manufacturer and battery platform provider. RN also maintains a monopoly position using its EV battery platform. Page 13

14 Scenario B1: Mass Market with signaling dictates that RN does not capture significant profit from their battery platform. All players invest in EV cars and car battery technology, therefore EV cars achieve mass market penetration. Both RN and the rivals succeed, new entrants enter the market, and RN in turn proactively makes the offer to share EV battery technology. The entrants (Toyota and Honda) are concerned about the potential holdup by RN or negotiations breakdown between them and the entrants reject RN s EV battery offer potentially signaling confidence in their own technology. From a power perspective, the signaling and rejection of the offer demonstrate that RN and the entrants are on equal footing. This scenario results in more modest profits for RN because they must rely solely on partnerships and their own sales as channels for distributing their batteries. Scenario C: Multi-player Judo ensures relatively high profits for RN and rivals in a small market. Despite RN and rival s modicum of success, entrants signal they perceive it as a niche market by declining to enter. Rivals continue to use their own EV battery technology. Two sub scenarios exist where RN either offers or declines to share their battery technology with entrants. RN dominates the market and, due to their battery production capabilities, can lower their costs and either out price competitors or collect higher margins. Scenario B2: Mass Market without signaling guarantees high margins for RN. RN declines to offer their technology to the market and all players use distinct, proprietary battery technology and thus, there is no cooperation. Rivals are successful and entrants perceive the market potential and enter. Demand for EV vehicles grows and entrants have high fixed costs. RN obtains significant market share because of both its mature products and ability to compete on price. The lower branch of the game tree represents the scenario in which RN succeeds in developing EV and battery technology in Phase 1 but RN s current EV rivals, GM, Ford & hedgers fail. Page 14

15 Scenario D: Nissan wins the Standards War ensures high profits for RN based on their proactive sharing of their EV battery platform. Rivals fail and accept RN s platform. Nevertheless, entrants still perceive potential for the market, enter, and even adopt RN s platform as a way to quickly improve their competitiveness. This scenario offers a high degree of cooperation among players. RN has significant power in the sharing/licensing negotiations for two reasons: 1) the rivals have already adopted the technology as a proven standard and 2) the entrants are late to market. Scenario E1: War of attrition with the Entrant splits the landscape into two parties the entrants with an alternative battery technology and RN s proven platform. Rivals fail using their own technology and adopt the RN s battery. RN proactively signals desire for cooperation with entrants, but they reject the offer either out of fear of hold up or rolling the dice one too many times. RN dominates the car market because they have proven technology, are the biggest brand name, and the entrants are late to market. Scenario E2: War of attrition with the Entrant replicates scenario E1, except it is a slightly smaller market because the rivals exit. Scenario F: Judo with a Nissan battery improves on the multi-player judo strategy. Rivals fail and adopt RN s battery platform, while entrants signal they perceive EV as a niche market and decline to enter. RN dominates the smaller car market, has a monopoly over the EV car battery market, which the company proactively pushes into the market place, and then extracts profits accordingly. Scenario G: Leapfrog empowers RN to leverage their first-mover advantage and low cost structure against new entrants. Rivals fail and exit the market. Entrants adopt a new EV technology in an attempt to trump RN s EV platform. RN extracts most of the profits equally from the car and car battery industries, but the market is significantly smaller in size than mass market. Scenario E2: War of attrition with New Entrant splits the landscape into two parties the entrants with an alternative battery technology and RN. Rivals fail using their own technology and exit the market. RN Page 15

16 proactively signals desire for cooperation with entrants, but they reject the offer either out of fear of hold up or rolling the dice one too many times. RN shares the car market with entrants because they have proven technology, a significant brand name, first mover advantage, and potentially higher margins. Scenario H: Sumo-Judo enables RN to be a monopoly in a niche market. Their investments in battery technology allow them to operate profitably. Rivals fail and exit the market. Entrants observe rivals exiting the market, perceive the market to be too small, and decline to enter the market. Two subgames exist: either RN proactively offers the EV platform to entrants or does not. In both cases, they reject the offer. Special Note Scenario Z: Nissan Fails RN may also fail and exit the market, losing its almost $6 billion in investment. In which case, we assume that no other players will follow. Payoffs For each scenario above, we estimated the present value of future profits for each of the major groups of players based on the range of predicted Electric Vehicle penetration rates that industry analyst and commentators predicted and on potential margins that batteries and EVs are predicted to make. Gompertz curves lxiii, i.e. sigmoid functions that mathematically model time series where growth is slowest at the start and end of a period were used to model the future development of the EV industry under each scenario and the curves were fitted to the appropriate industry penetration predictions. An overview of the projected penetration rates under each scenario through 2020 and beyond is set out in Figures 3 and 4 below. Table 2 summarizes the estimated payoffs for each group of players under the different scenarios. For more details on the assumptions and calculations used in estimating future profits please refer to Appendices 6 and 7. Page 16

17 % of total Auto-market Figure 3 Projected EV Penetration Rates through 2020 Figure 3 EV Penetration Rates for each scenario through EV penetration A B C D E1 E2 F G H Page 17

18 Table 2: NPV Future Profits for the Three Players under each scenario NPV Future Profits ($bn) Scenario Description Nissan Rivals Entrants A Mass Market w/ Nissan Battery $178 $31 $42 B Mass Market $75 $25 $34 C Multi-player-Judo $68 $23 $0 D1 Nissan wins the Standards War $193 $15 $23 D2 Nissan wins the smaller Standards War $116 $0 $23 E1 War of Attrition w/ Entrants $51 $5 $8 E2 War of Attrition w/ New Entrants $36 $0 $12 F Judo with Nissan battery $101 $11 $0 G Leapfrog $111 $0 $16 H Sumo-Judo $31 $0 $0 Results in Table 2 reflect our best estimates based on available data. In practice, payoffs, particularly those representing non-mass market scenarios, may be more difficult to predict. All the payoffs in Table 2 are forward looking and do not include any losses that might be incurred if rivals exit and lose their EV development investments to date. Hence if either RN or its rivals fail, they will lose their investments, which are approximately $6 billion for RN and at least several hundred million dollars each for rivals. Those losses are not shown on the game tree as they are now sunk costs. Solving the Game Tree The game tree is solved by looking forward and reasoning back. We analyze the game assuming that industry analysts are correct in assessing that Renault-Nissan has the superior battery technology, and that through its heavy commitment to EV, becomes the EV leader. Renault-Nissan has recognized that payoffs for all players will generally increase if the overall EV market expands more rapidly. As more EV complementary companies (e.g. utilities, battery changing/charging companies such as Better Place) are established, and the product offerings in EV expand, consumer acceptance of EVs is also likely to grow through a cascade effect. There is also a network effect that Page 18

19 lowers the incremental cost of new consumers buying and driving EVs as economies of scale increase and infrastructure utilization also increases as the market expands. Therefore, it is in RN s interest to help grow the overall market. Because RN has invested more in the EV future than any other car manufacturer, it stands to gain more than other players, but also increases the payoffs for rivals and new entrants. RN wants the whole market to succeed, as long as it can maintain leadership in EV. The equilibrium in the game depends on two main factors. First, it is influenced by the ability for the current EV rivals (GM, Ford) to succeed. Given that GM and Ford have not invested in EVs as heavily as Renault-Nissan, and given GM s poor track record, it is quite probable that the lower branch (rivals fail) eventuates. The second main factor affecting the game is whether Renault-Nissan offers and whether rivals and new entrants agree to take up a Nissan battery platform or not. If the EV industry aligns behind Nissan s superior battery standard, this will improve consumer acceptance, help increase the overall market size, and increase profit for all the automotive players, especially Renault-Nissan. Hence we determine that the equilibrium cases are A (mass market with new entrants adopting Nissan standard battery) if the rivals initially succeed with their battery technology and D1 (rivals and new entrants adopt the Nissan standard battery in a smaller market) if the rivals initially fail. For a completed Game Tree with payoffs please refer to Appendix 8. Offering the Nissan battery technology would be consistent with the mental model of Renault-Nissan to strengthen and build the zero-emissions mobility mass market. However, Renault-Nissan would only seek to do this if it can extract some value, e.g. through a license agreement or by manufacturing batteries for a profit. It will probably be easier for the rivals to agree to take up the Nissan battery platform if the rivals initially fail. After their initial investment, rivals do not want to abandon their EV strategy altogether or Page 19

20 to be hamstrung by poor battery technology. Therefore, they would have a strong incentive to come to some agreement with Nissan to use its superior battery technology. If Nissan hopes to become the battery standard and platform for other vehicle manufacturers it needs to consider the mental models and behavioral aspects of rivals and new entrants. Table 3 summarizes the primary obstacles to rivals and new entrants taking up the Nissan battery platform, and ways that Renault-Nissan could overcome such obstacles. Table 3 Primary obstacles and potential solutions facing RN Primary Obstacle Lack of belief in EV by rivals and new entrants Ways that Renault-Nissan can Overcome Obstacle Continue to build a cascade of complementers and consumers, continue commitments to capacity and maintain extreme management focus on the successful launch of the Leaf. Economic risk of hold and value capture by Nissan. Includes R&D hold up on improved future generation batteries, and conflict of interest with existing battery supply partners (e.g. A123, Panasonic). Allow rivals and new entrants to take a stake in the battery company (e.g. The Great American Battery Co). Consistent with their alliance model. Also through structuring and negotiation of licensing agreement. Performance based payments. Some option and flexibility for competitors to get out. E.g Dolby model. Well-written contracts and favorable pricing to encourage adoption. Inability to customize to meet auto manufacturers own requirements, limiting design, features and performance of rival/new entrant EVs. HDK sell the battery components and allow the vehicle manufactures to adjust and customize the actual battery fit based on car type SUV, sedan, sports car, etc. Nissan needs to be flexible and the customers need to take ownership and Page 20

21 customize. Cultural/ego e.g. using Japanese technology in American cars. Brand image etc. Made in USA to persuade American manufactures. Don t make a big deal about Nissan inside create a different brand, e.g. the great American battery company. In contrast to Intel inside. Nissan should clearly demonstrate its ongoing confidence in its technology, continued strong signals and commitment and investment in preparing for Phase 3. If the rivals and entrants believe that Renault- Nissan s EV strategy is starting to work, they do not want to be left behind and will feel compelled to try to catch up and participate in the EV market. Risks Significant technological risk remains around batteries for EVs and integration of EV infrastructure, particularly battery charging and battery life. There is further risk of technology disruption that could act like a cold fusion event and render Renault-Nissan s EV investments obsolete. The payoffs determined rely on estimates of market growth and penetration and margins on units. Even without a disruptive technological event, it is possible that significant technological development by rivals and new entrants will occur in the medium to long-term future that will significantly change the payoffs for the players. Because the entire EV industry is relying on government incentives to stimulate R&D and investment, there is risk if the political climate shifts, or if macroeconomic conditions turn unfavorable. For example, under the Bush administration, the hydrogen fuel cell was widely cited as the green car of the future and it provided considerable R&D resources to advance the hydrogen economy, funding that was subsequently withdrawn by the Obama administration lxiv. Renault-Nissan has an agreement with the government of Portugal to help fund its battery factory there, but the looming European debt crisis Page 21

22 could potentially stall such initiatives. Government deficits across the world could reduce the capacity of governments to subsidize the roll out of EVs. Another macroeconomic factor that could greatly affect EV penetration is the future price of oil. BCG determined that the penetration of EVs will be much lower in a low future oil price scenario because this reduces the economic incentive to switch to EV lxv. For Renault-Nissan, a very real risk exists if rivals and new entrants try and fail badly in their efforts to launch EVs. This could damage the overall perception around EVs by governments, complementers in the EV value chain, and consumers. This could also potentially cripple the EV cascade and damage Renault-Nissan s EV strategy. This risk places more urgency on Renault-Nissan to support rivals if their technologies are faltering. In particular, Renault-Nissan must watch its closest competitor, Ford as it launches the Transit Connect and Focus EVs in The Focus appeals to the same segments as the Nissan Leaf, whereas the Chevy Volt is actually a more expensive plug-in hybrid. Renault-Nissan could reasonably distance the Volt from the wider EV sector, but this is not so for the Ford pure EVs. A real risk to coordination exists as Nissan and Ford start to partner with increasingly powerful companies regarding EV charging and infrastructure. For example, Ford recently teamed with Microsoft to develop smart-grid capability lxvi, while Nissan has really partnered with GE to develop smart-charging technologies lxvii. Renault-Nissan will need to watch the development of such partnerships and signal or communicate with rivals to avoid damage to the overall perceptions of the EV sector. All players, including GM, Toyota, and RN, must be conscious of the sunk cost fallacy and avoid making future decisions based on past investments however large. Strong signals increase commitment and the propensity to roll the dice again. Page 22

23 A final organization risk exists for Renault-Nissan. CEO, Carlos Ghosn appears to be the driving force behind the alliance s EV strategy. Without his leadership, the alliance could lose significant momentum and this could critically weaken the launch of the Leaf. Conclusions and Recommendations Renault-Nissan has played the game well to date. The company s cascading series of alliances engender trust with potential partners and create a positively reinforcing cycle that attracts more partners by the week. Additionally, RN s public relation s machine is on a rampage announcing the almost $6 billion in investments and partnerships including global investments in battery technology and electric vehicle manufacturing plants and sending clear signals to the industry. Moving forward, we propose short-, medium-, long-term strategies as follows: Short term, RN must successfully launch the Nissan Leaf in the eyes of consumers, existing partners and potential allies. This will establish RN as the leader of the electric vehicle manufacturers and create a proof point for their battery platform. Moreover, the Leaf s success will grow the market and encourage other players to enter the market. Medium term, RN must establish itself as the go-to-ev battery manufacturer by encouraging and providing incentives for other major car manufacturers to adopt their platform. RN must be flexible in achieving this goal and willing to adapt their business model to ensure successful adoption as mentioned earlier. A major partnership with Tier-1 car manufacturers will spurn on adoption by Tier-II manufactures and consumers. Long term, RN must consider the likely response of competitors and alternative technology manufacturers and where appropriate sacrifice shorter-term benefits, for longer-term gains, e.g. consider splitting off the battery platform as an independent company in order to gain market Page 23

24 acceptance and become the industry standard. RN must also remain cognizant of the potential for future disruptions in technology development and remain flexible enough to adapt and ensure that it remains at the forefront of automotive transportation. Page 24

25 Appendix 1 World Motor Vehicle Production in 2008 lxviii Page 25

26 lxix lxx Appendix 2 Oil price shock of 2008 Page 26

27 Appendix 3 List of Renault-Nissan EV Partnerships lxxi Page 27

28 Appendix 4 Hybrid market dashboard 2009 lxxii Page 28

29 % of total Auto-market Appendix 5 summary of key decisions in the simplified game Appendix 6 Summary of payoffs and key assumptions Key Assumptions Total vehicle sales in 2010: 70,000,000 Margin on Cars (excluding battery): $500 Margin on Batteries: $1,000 Growth rate: 3.50% Discount rate: 10% Range of Penetration rates % Range of Penetration rates % NPV Future Profits ($bn) Scenario Description Nissan Rivals Entrants A Mass Market w/ Nissan Battery $178 $31 $42 B Mass Market $75 $25 $34 C Multi-player-Judo $68 $23 $0 D1 Nissan wins the Standards War $193 $15 $23 D2 Nissan wins the smaller Standards War $116 $0 $23 E1 War of Attrition w/ Entrants $51 $5 $8 E2 War of Attrition w/ New Entrants $36 $0 $12 F Judo with Nissan battery $101 $11 $0 G Leapfrog $111 $0 $16 H Sumo-Judo $31 $0 $ EV penetration A B C D1 E1 E2 F G H Sources Electric cars: Charge!, Economist, The (London, England) - Saturday, September 5, 2009 Electric cars: A Netscape moment?- Economist, The (London, England) - Saturday, February 6, 2010;PJ Balducci "Plug in Hybrid Electric Vehicle Market Penetration Scenarios" US Department of Energy. September 2008 Electric cars: A Netscape moment?- Economist, The (London, England) - Saturday, February 6, 2010;PJ Balducci "Plug in Hybrid Electric Vehicle Market Penetration Scenarios" US Department of Energy. September 2008 Notes Sales of new cars were 79.9m in 2007 and more than 60m in We assumed 70m in 2010 Margins taken by averaging estimates taken from industry reports and comments from Auto-manufacturers Margins taken by averaging estimates taken from industry reports and comments from Auto-manufacturers The number of passenger cars is expected to quadruple in the next 40 years => 3.5% per year growth Penetration rates taken from industry reports and comments from Auto-manufacturers Penetration rates taken from industry reports and comments from Auto-manufacturers Page 29

30 % of total Auto-market Appendix 7 More detailed calculations Key Assumptions Sources Notes Total vehicle sales in 2010: 70,000,000 Sales of new cars were 79.9m in 2007 and more than 60m in We assumed 70m in 2010 Margin on Cars (excluding battery): $500 Margins taken by averaging estimates taken from industry reports and comments from Auto-manufacturers Margin on Batteries: $1,000 Margins taken by averaging estimates taken from industry reports and comments from Auto-manufacturers Growth rate: 3.50% Electric cars: Charge!, Economist, The (London, England) - Saturday, September 5, 2009 The number of passenger cars is expected to quadruple in the next 40 years => 3.5% per year growth Discount rate: 10% Electric cars: A Netscape moment?- Economist, The (London, England) - Saturday, February 6, 2010;PJ Balducci "Plug in Hybrid Electric Vehicle Market Penetration Range of Penetration rates % Electric cars: A Netscape moment?- Economist, The (London, England) - Saturday, February 6, 2010;PJ Balducci "Plug in Hybrid Electric Vehicle Market PenetrationPenetration rates taken from industry reports and comments from Auto-manufacturers Range of Penetration rates % Penetration rates taken from industry reports and comments from Auto-manufacturers NPV Future Profits ($bn) Scenario Description Nissan Rivals Entrants A Mass Market w/ Nissan $178 $31 $42 Battery B Mass Market $75 $25 $34 C Multi-player-Judo $68 $23 $0 D1 Nissan wins the Standards War $193 $15 $23 D2 Nissan wins the smaller Standards War $116 $0 $23 E1 War of Attrition w/ Entrants $51 $5 $8 E2 War of Attrition w/ New Entrants $36 $0 $12 F Judo with Nissan battery $101 $11 $0 G Leapfrog $111 $0 $16 H Sumo-Judo $31 $0 $ EV penetration A B C D1 E1 E2 F G H Share of No. of Electric Vehicle market in 2020 battery market batteries Size of EV market Share of EV market No. of EVS Profit ($m) New Nissan Nissan Nissan New Entrants Scenario Description % of car market No. of EVs Nissan Nissan Rivals New Entrants Nissan Nissan Rivals Entrants Batteries EVs Total Rivals A Mass Market w/ Nissan Battery 10% 9,874,000 70% 30% 30% 40% 6,911,800 2,962,000 2,962,200 3,949,600 $6,912 $1,481 $8,393 $1,481 $1,975 B Mass Market 8% 7,899,000 30% 30% 30% 40% 2,369,700 2,370,000 2,369,700 3,159,600 $2,370 $1,185 $3,555 $1,185 $1,580 C Multi-player-Judo 5% 4,937,000 50% 50% 50% 0% 2,468,500 2,469,000 2,468,500 - $2,469 $1,235 $3,703 $1,234 $0 D1 Nissan wins the Standards 5% 4,937, % 50% 20% 30% 4,937,000 2,469, ,400 1,481,100 $4,937 $1,235 $6,172 $494 $741 War D2 Nissan wins the Standards War 3% 2,962, % 50% 0% 50% 2,962,000 1,481,000-1,481,000 $2,962 $741 $3,703 $0 $741 E1 War of Attrition w/ Entrants 4% 3,950,000 70% 50% 20% 30% 2,765,000 1,975, ,000 1,185,000 $2,765 $988 $3,753 $395 $593 E2 War of Attrition w/ New Entrants 3% 2,962,000 50% 50% 0% 50% 1,481,000 1,481,000-1,481,000 $1,481 $741 $2,222 $0 $741 F Judo with Nissan battery 3% 2,962, % 70% 30% 0% 2,962,000 2,073, ,600 - $2,962 $1,037 $3,999 $444 $0 G Leapfrog 3% 2,962,000 70% 70% 0% 30% 2,073,400 2,073, ,600 $2,073 $1,037 $3,110 $0 $444 H Sumo-Judo 1% 987, % 100% 0% 0% 987, , $987 $494 $1,481 $0 $0 Projected penetration Terminal (EV as % of total Auto market) Penetration Scenario Description A Mass Market w/ Nissan Battery 50% B Mass Market 40% C Multi-player-Judo 20% D1 Nissan wins the Standards War 50% D2 Nissan wins the Standards War 30% E1 War of Attrition w/ Entrants 10% E2 War of Attrition w/ New Entrants 10% F Judo with Nissan battery 20% G Leapfrog 40% H Sumo-Judo 5% Total New Vehicle Sales (millions) Total number of EVs Scenario Description A Mass Market w/ Nissan Battery B Mass Market C Multi-player-Judo D1 Nissan wins the Standards War D2 Nissan wins the Standards War E1 War of Attrition w/ Entrants E2 War of Attrition w/ New Entrants F Judo with Nissan battery G Leapfrog H Sumo-Judo Nissan Profit ($millions) NPV Scenario Description A Mass Market w/ Nissan Battery $178, B Mass Market $75, C Multi-player-Judo $68, D1 Nissan wins the Standards War $193, D2 Nissan wins the Standards War $115, E1 War of Attrition w/ Entrants $51, E2 War of Attrition w/ New Entrants $36, F Judo with Nissan battery $100, G Leapfrog $111, H Sumo-Judo $31, Rivals profit ($millions) NPV Scenario Description A Mass Market w/ Nissan Battery $31, B Mass Market $25, C Multi-player-Judo $22, D1 Nissan wins the Standards War $15, D2 Nissan wins the Standards War $ E1 War of Attrition w/ Entrants $5, E2 War of Attrition w/ New Entrants $ F Judo with Nissan battery $11, G Leapfrog $ H Sumo-Judo $ New Entrant's profit ($millions) NPV Scenario Description A Mass Market w/ Nissan Battery $41, B Mass Market $33, C Multi-player-Judo $ D1 Nissan wins the Standards War $23, D2 Nissan wins the Standards War $23, E1 War of Attrition w/ Entrants $8, E2 War of Attrition w/ New Entrants $12, F Judo with Nissan battery $ G Leapfrog $15, H Sumo-Judo $ Page 30