Economic surplus

Economic surplus

Better Place: how the ‘chicken and egg’ problem can kill technological change

Better Place car. Wikimedia

The demise of Better Place, shows the difficulty of moving between idea and commercial success. In particular, it illustrates how ‘radical’ change can be defeated by the ‘chicken and egg’ problem.

Better Place developed battery replacement technology for electric cars. It raised around $850m to commercialise the technology, focusing first on Israel, Denmark, the US and Australia. But it burnt through the cash. It ‘turned over’ CEOs twice in the last year.And it exited the US and Australia. Late last month it went into liquidation.

The idea behind Better Place was seductive. Electric cars have a relatively short battery life and take a long time to recharge. But if drivers can quickly and easily have a low battery replaced with a fully-charged one, with no more fuss or time than filling a petrol car, then a major deterrent to electric cars can be overcome. Better Place’s technology offered this solution.

Better Place’s demise has been blamed on a variety of factors – poor management, overly optimistic projections, an inability to capture ‘car makers imagination’, failure to gain standardisation of batteries, and competition. However, Better Place essentially failed because it could not overcome a hurdle that has killed many other ‘good ideas’. It failed to overcome the ‘chicken and egg’ problem.

The ‘chicken and egg’ problem refers to multi-party coordination. To succeed, Better Place needed the cooperation of producers and consumers. It needed car manufacturers to accept its technology and build cars that worked with its battery replacement technology. It needed replacement stations to be built in sufficient numbers to satisfy customers that they could buy a compatible car and not be limited in its use. It needed to convince customers that it had a long enough future so that customers would be willing to invest in a Better Place compatible vehicle.

To succeed Better Place needed to convince each party – car markers, replacement station owners and consumers – that all the other parties would invest and make the technology a success. But Better Place failed to coordinate these parties.

It had one carmaker. Renault, built a car that was compatible with its technology. But:

“Better Place struggled partly because it only had a few dozen battery-switching stations in Israel and Denmark”.

So:

“Better Place initially ordered 100,000 cars from Renault but the auto maker has so far sold only about 2500.”

After all, why would a consumer buy a car when there are few ‘changing stations’ that the car can use? And why will entrepreneurs invest in battery swapping stations unless there are plenty of compatible cars? And why would other automakers design and build relevant cars without consumer demand?

Many technologies fail to commercialise for these exact same reasons. New technology requires simultaneous investment by producers and consumers. But no-one wants to be first because, if the other side of the market doesn’t follow then they have wasted their money. This is the ‘chicken and egg’ problem.

The history of technology is littered with ‘chicken and egg’ failures. Remember the Picture phone? How about Betamax video cassettes or the mini-disc? No! Then what about digital compact cassettes or videodisc players? Still no? These are all relatively recent technologies that failed because they could not build a supplier and customer base at the same time.

So what are the lessons from Better Place for the future of electric cars?

First, few revolutionary ideas translate to practice. To overcome the ‘chicken and egg’ problem requires business skill and luck. It also requires clever marketing, as success will often be driven by capturing the imagination of the public.

Second, businesses need to think about their strategies and how these impact the ‘chicken and egg’ problem. One strategy is to integrate and ‘make the egg’. This is the Apple strategy. They overcome the supplier problem by being the supplier. The alternative is the approach adopted by Microsoft with the original DOS operating system or Google with Android. This alternative involves licensing and coordinating suppliers.

Third, if you adopt the ‘intermediary’ approach, you need a champion. You need a key player to adopt your technology to give confidence to the other side of the market. In the case of Microsoft, they started with IBM, the world’s most significant maker of computers at the time, adopting their software. In comparison, Better Place and Renault did not cut the mustard.

Fourth, history matters. If you want to have battery replacement stations then you are more likely to be successful if you work with existing technologies. In Australia, LPG powered cars have been successful because it is easy to adapt existing petrol stations to also supply LPG. Further, there was a champion in the form of taxi fleets. For Better Place to succeed it needed to be able to put replacement stations in existing petrol stations at a relatively low cost.

Because history matters, the immediate future of electric cars is likely to be socket-based recharging together with hybrid-motors. Consumers already have access to electric power-points and these are relatively easy to install. Having a hybrid engine avoids the issue of recharging times and so effectively avoids the chicken-and-egg problem.

In the longer term, improved battery life also avoids the chicken-and-egg problem.

In contrast, more radical approaches, such as hydrogen-fuelled vehicles, which may be better for the environment, will face a ‘chicken and egg’ issue. They will need filling stations and dedicated cars. Unless they can either work with existing petrol stations, or cheaply build new filling stations, while simultaneously convincing car makers and consumers that the technology will take off, then the co-ordination problem will spell their failure.

While the future is uncertain, it is very unlikely to involve Better Place or other battery exchange technology. But it will be filled with failed chickens and eggs!