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Exploring innovation in the automotive industry: new technologies for cleaner cars Clovis Zapata a,b,*, Paul Nieuwenhuisa,b aCentre for Automotive Industry Research CAIR, Cardiff Business School, Cardiff University, Wales, UK bThe ESRC Centre for Business Relationships, Accountability, Sustainability and Society BRASS, Cardiff University, Wales, UK a r t i c l ei n f o Article history: Available online 17 September 2009 Keywords: Innovation Automotive industry advances Brazilian ethanol experiences Biofuels Ethanol New automotive powertrains a b s t r a c t The concept of innovation has been used in a wide range of contexts and the theoretical development has proven to be extremely valuable to provide important insights into intra-market competition, strategy and regulatory policy. The automotive industry offers a fertile terrain for progress of the uncompleted theory building process of innovation, especially with the introduction of alternative fuels and alter- native powertrain technologies. This paper investigates the concept of innovation in the context of the modern automotive industry, by focusing on the notion of regulatory innovation of alternative fuels and alternative powertrain tech- nologies. For the purpose of analysing this issue, special attention is given to the concepts of radical and incremental innovation, which are applied to existing alternative fuels and alternative powertrain technologies, including hybrids, biofuels and hydrogen power. The article explores these three categories looking at representative case studies: the Brazilian ethanol experience with biofuels, the development of the Toyota hybrid vehicle and the technological development of hydrogen fuel cells. These categories have been selected because they represent the most important advances in cleaner production for the automotive industry. ? 2009 Elsevier Ltd. All rights reserved. 1. Introduction Despite of the economic importance of automobile, incumbents have been suffering from pressures that threaten the economic long term sustainability of the majority of traditional automobile manufacturing fi rms. Not only has the product been questioned on environmental and safety grounds but the fi nancial and economic situation of incumbent fi rms has been the subject of great concern. Despite the fact that this paper focusses upon the application of alternative fuels and alternative powertrains to the innovation discussion, the economics of producing vehicles, in large scale, plays a fundamental part in the modern competitive terrain. The mass production automobile is characterized by the all- steel-body structureandthe useofpetrol fuelledinternal combustionengines.Thesetechnologiesconstrain fi rmsto extremely large initial capital investments, which are mostly sunk costs that need to be recovered with the annual sale of high numbers of units. This constitutes a trap as each competitor has to sell a large amount of vehicles in order to reach a break even point. Another fundamental point is that the global automotive market has very high barriers to entry for new competitors, making it a high concentration market. The recent trend of acquisitions and mergers has contributed to form larger groups that blindly rely on the economies of scale. 2. Innovation The wide variety of defi nitions of innovation has resulted in vagueness of terms and explanations 9. With the intent of avoiding misunderstandings, we had opted to build on the core approach originally presented by the Motor Industry Research Unit within the detailed state aid regulatory context of the European Community 2. The well established notion of the Christensens effect is illus- trative of the potential threat that incumbent fi rms are exposed in a market with innovations 7. Christensen work is focused on a description of how successful fi rms fail with the introduction of disruptive innovations. In this context the distinction between sustaining and disruptive technologies is crucial. Sustaining tech- nologies are the ones that improve the performance of established products, along the dimensions that mainstream customers in major markets value. Disruptive innovation refers to a new * Corresponding author. The ESRC Centre for Business Relationships, Account- ability, Sustainability and Society BRASS, Cardiff University, Wales, UK. E-mail address: zapataccardiff.au.uk (C. Zapata). Contents lists available at ScienceDirect Journal of Cleaner Production journal homepage: 0959-6526/$ see front matter ? 2009 Elsevier Ltd. All rights reserved. doi:10.1016/j.jclepro.2009.09.009 Journal of Cleaner Production 18 (2010) 1420 technology that emphasizes innovative attributes and qualities that are signifi cantly different from those valued by the mainstream market segment. When disruptive innovations are fi rst supplied to the market, they only appeal to a small share of consumers. With furthertechnologicaldevelopmentandgreaterinformation, mainstream consumers change their preferences and the conven- tional products that once were the most satisfying ones become less attractive 6. This process leads, in due course, to the inno- vators dilemma, where incumbents have to decide if they should allocate their resources to the traditional processes and technolo- gies that theyare familiar with or toinvest in new technologies that could be potentially disruptive. Another fundamental concept is radical innovation. Utterback 22 defi nes radical innovation as a discontinuous change that sweeps away much of the fi rms existing investment in technical skills and knowledge, designs, production techniques, plant and equipment. The signifi cance of radical innovations is that they do not address a recognised demand but they create a demand previously unrecognized by the consumer, resulting in a new market infrastructure 5. Radical innovations present both macro level innovativeness characteristics as the product is new to the world, the market and the industry, and micro level characteristics, as it is novel to the fi rm and to the consumers 9. Rogers 24 presents aspects that distinguish disruptive inno- vations from those that are radical in nature but are not disruptive. The radical nature of the innovation is related to the technological dimension while the disruptiveness is related to the market effect to the incumbents. Disruptiveness can be technologically less- radical or technologically more radical but is necessarily related to the phenomenon of the consumer changing tastes and switching from the mainstream product to the new one. Christensens early work, for instance, was focused on low-end disruptions 7. In this respect, there is a clear diffi culty to use analytical tools to identify disruptive technologies since the measure of disruptive- ness is ex-post in nature. Danneels 8 points out that it is not possible to clearly provide ex-ante defi nitions of disruptiveness, following all the characteristics defi ned by Christensen. The defi - nition is fundamentally infl uenced by the organizational-level abilities and competences. The most important models do not provide rigorous forecasting capacities 10. In this sense, in this paper we opted to conduct the analysis on the observable ex-ante characteristics of the nature of the innovations focusing on the radical innovation concept. 2.1. Regulatory innovation The concept of innovation has been the subject of some debate in the political and regulatory realm. A specifi c example involves the interpretation of state aid regulations in the European Community in the late 1980s and early 1990s. In this situation, while state aid was permissible to support innovation, it was not permissible for supporting mere modernisation; member states could be challenged if they were found to be in violation of this proviso. An attempt was made by the research team at the Motor Industry Research Unit 2 on behalf of the European Commissions Directorate General IV (Competition policy) to defi ne innovation within the specifi c state aid regulatory context of the European Community, inparticularhowthis applied tothe automotive sector. The European car industry, at that stage, was thought to be suffering from a competitive disadvantage vis-a -vis the Japanese car industry. A catching up exercise was in progress whereby European car makers gradually adopted lean car manufacturing technologies and methods as exemplifi ed by the Toyota Production System (cf. 4,26). The defi nition used in this context was: The operation, on an industrial basis, of a new system or process which, in whole or in part, represents a signifi cant step forward fora particular industry in terms of product quality, cost savings, or the safety of the workforce. 2 (p. 2). This defi nition, which was broadly accepted by all stakeholders, allowed the EC automotive industry to be identifi ed as a particular industry, allowing it to be treated as a special case. This then also allowed the adoption of innovations from outside the EC (e.g. Japan) to be interpreted as innovative within the context of the EC automotive industry, but only in so far as they constituted a fi rst applicationwithin the EC. However, it was also recognised that two competing EC fi rms may be working on introducing the same innovation at the same time. It was considered unfair if only the fi rm who managed to introduce it even a day before the other was able to benefi t from being classed as innovative under the state aid rules. For this reason, the report proposed a period of twelve months within which such innovations could be considered as being concurrent, while beyond this period the next introduction would be classed as modernisation rather than innovation 2 (p. 4). This approach represents a more practical notion of innovation since it moves beyond the pure academic and theoretical into the regulatory and policy-making areas. Such notions are important when it comes to explaining the behaviour of the automotive industry in the face of more sustainable alternatives, as we explore in subsequent paragraphs. In order to assess the extent to which regulations may actually have played a role in the introduction of new automotive tech- nologies, we have tracked a number of key technologies in more or less widespread use on modern cars. Most of these originate in the motorsport arena, so we located them at an historical motorsport event or specifi c vehicle in their pioneering form and track the process whereby they are adopted by production cars in Table 1. Technologies have made the transfer from motorsport to road cars for a variety of reasons. Most commonly these involve improved performance or safety which itself can often help to enable cars to be driven faster (e.g. four wheel brakes). However, there is a persistent strand particularly since the 1960s of technologies that made the transfer as a result of governmental regulations. This applies, in particular, to tightening emissions legislation. Multivalve cylinder heads and the related technology of double overhead camshafts can be traced directly to the need to improve control over the combustion process in order to improve the toxic emissions performance of cars. Other related technologies include variable valve timing, while more obvious examples of new technology introductions in this area include the catalytic converter and the particulate trap, although these cannot be traced back to motorsports technologies. Turbocharging also started life as a motorsport technology, although it was pioneered in the aeronautics sector and made the transfer as a result of the need to extract more performance from an engine without having to enlarge the engine. It is now being proposed as one of a number of possible solutions to the regulatory need (in the EU) to reduce engine sizes in order to reduce their CO2emissions without loss of performance. The more widespread adoption of this technology over the next ten to twenty years could therefore, become another example of such regulation-induced technology transfer. An interesting case is that of disc brakes, a technology pioneered for aircraft in the aftermath of World War II and fi rst used on a road car by Chrysler in 1949. It was withdrawn in 1950 after the fi rm noticed that none of its competitors followed this innovative move. It required the motorsport demonstration by Jaguar to make it credible enough for other fi rms to adopt it for road cars. C. Zapata, P. Nieuwenhuis / Journal of Cleaner Production 18 (2010) 142015 2.2. The cost of innovation If we now focus on our chosen topic of the introduction of alternative fuels and alternative powertrain technologies, specifi cally within the context of the automotive industry, these points become crucial. The mass production car industry is a highly capital intensive sector and decisions are made largely on their capital intensity. This also means that the existing cost consequences and amortisation of sunk costs are key elements in any decision regarding future technology choices. Thus if an alternative auto- motive energy source requires either the creation of very high new capital intensive systems, or the premature abandonment of existing high capital intensive systems, it is likely to meet consid- erable resistance from the car industry. If on the other hand, such an alternative energy source can be used within the existing capital investments, its chances of being accepted by the industry are much higher. We are here using a broad defi nition of capital investment, which also includes investment in skills and expertise in both the R reaffi rm the gradualist policy of infl ation prevention; sustain the equilibrium of the balance of payments; to foster economic development without deploying natural resources 3. The Proalcool had three phases. In the initial phase, ethanol was blended with gasoline in a 20%25% proportion; a few distilleries participated at this time. In July 1979, after the second oil crises and positive feedback from the press, the government decided to provide larger support to the program. The second phase of the Proalcool was launched where more ethanol producing plants were established and further fi nancial subsidies where distributed to producers and consumers. The goal was to launch vehicles that would run solely on ethanol. In order to do so, the government involved local automobile producers, which were mainly repre- sented by Ford, General Motors, Volkswagen and Fiat, in the development of the necessary engine modifi cations to adapt the internal combustion engine. A specifi c line of credit was imple- mented to do so. Fiat was the fi rst automaker to launch a vehicle that would run on 100% ethanol The FIAT 147. Other models were soon launched including the Volkswagen Beetle, the Volkswagen Gol, the Chevrolet Chevette and the Ford Escort 27. The role of the state owned oil company Petrobras was funda- mental in this process. It was responsible for the logistics of the distribution to supply ethanol in everysingle gasoline station in the country. The combination of governmental subsidies, high inter- national oil prices and the new locally produced vehicles consti- tuted the perfect ambience to make ethanol a great commercial success. In 1984, 94.4% of new vehicles sold in Brazil would run solelyon ethanol. Atthatpoint in time, theprogramwas considered by the government as a great achievement 23. In the last phase of the Proalcool, the governmental subsidies began to decrease. By 1986 oil prices had fallen and in 1989 there was an ethanol shortage, because sugarcane producers preferredto produce sugar instead of ethanol. In 1998 the subsidies were fi nally eliminated totally so the market could function freely. A recent introduction of the Flexi-fuel technology provided further stimulus for the ethanol producers in the country. The technology allows the vehicle to run on ethanol, gasoline or any mixture of both. The engine is equipped with a system that is able to analyse the fuel blend and control the fuel injection system and adapt all the different settings to optimize performance. Basically, the fl exi-fuel engine is based on the ethanol engine but with the necessary electronic equipment. The initial developments took place in the Brazilian branch of the Bosh group in 1994. But it was not until 1999 that Magnete Marelli announced the development of the new type of engine with the appropriate software. The system was then launched to the public in 2003. In 2005, more than 75% of the new vehicles sold in Brazil were Flex-fuel 1. Additionally, some models were also supplied with the LPG system, which can provide an economically feasible solution for fl eet vehicles and taxis. In short, we can say that the Brazilian ethanol accomplishment is the result of the allocation of a large quantity of governmental subsidies distributed to the ethanol producers, consumers and to the automotive industry. Other factors were also fundamental for the establishment of the Proalcool including: the role of the state owned Petrobras company, the technological developments of the petrol fuelled engines, the vast labour force available in the country and the strong political infl uence of sugar cane producers. In the aftermath of the governmental intervention, it became clear that the economic viability of the ethanol vis-a -vis petrol depends on the international price of oil and on the international price of sugar. However, the calculation of the net benefi t to the country is not a trivial one. Some of the costs which include not only direct fi nancial expenses but also environmental costs have not been completely assessed. There were a vast amount of nega- tive environmental externalities related to the sugar cane produc- tion, which was gradually minimised by the ministry of agriculture and the ministry of the environment. On the oth