Listen to the audio interview with Andy Grove and comment on it.

Rik Kirkland: Andy, there’s a growing buzz in Washington within the auto industry over making a big shift to more electric vehicles, either all-electric or hybrids. As you noted in your article for McKinsey, there are already a hundred prototypes on the road now. Most major manufacturers have announced plans to push into this area, and President Obama has called for getting one million electric vehicles on the road by 2015. But you propose a different way to get us on the road to the electric mile and to do so faster – one that’s less talked about. Could you explain that, please?

Andy Grove: I’m proposing that we take some of the gas guzzlers and convert them so that they can partially run on electric power, and the advantage of that is that, at a lower total cost, you can achieve more than you will with original cars. This was very much a desirable thing before the roof fell in on the car industry and the car industry’s customers. The idea that we’re going to achieve this conversion with thirty/forty thousand dollar new cars in the current and probably near and intermediate-term economic climate is very, very dubious to me.

Rik Kirkland: So you’re saying if you just go new vehicles, it was going to be slow anyway, but if you do, given that annual sales are falling off a cliff, you’re far more likely to get pickup if you retrofit the existing fleet?

Andy Grove: That’s exactly right. It would be so in any case, but it is particularly so when people go for cost-effective items in all types of consumer behavior.

Rik Kirkland: So what do we need to retrofit existing SUVs or big gas guzzlers? What does it take to get this done? And what is a reasonable target?

Andy Grove: First, you need the same buzz that is exclusively on new cars today to spread and make the possibility of retrofitting old vans or old pickup trucks equally well-recognized as a possibility and equally serviced in real-life garages that are capable of doing this, that are licensed by the manufacturer so the customer doesn’t have to worry about the warranty being pulled. So you need that first.

Secondly, you need batteries available in reasonable quantities but at a substantially lower cost than the battery costs are today. And the chicken-and-egg situation here is there is no electric car industry that is going to be fast enough, in the first place; consequently, the battery industry is not going to grow. The retrofit industry cannot get started until the batteries ramp up and reduce cost. So the virtual cycle between volume and cost is not about to get started unless something, somebody, in some fashion primes the pump and starts that revolution.

Rik Kirkland: And that somebody would be, what, the government, through some kind of subsidy?

Andy Grove: Well, the venture capitalist of last resort, the mortgage insurance provider of last resort, and on and on and on, might as well be the battery provider of last resort.

Rik Kirkland: The government as battery provider of last resort, eh? Okay. You put a number on what you thought would get us to, I think, one million retrofit vehicles in three years, which is pretty fast.

Andy Grove: It is much faster than the president’s goal. But I did that when the economic conditions and the car industry conditions were not as dire as they are today. I think that was an ambitious goal then and what we call a stretch goal, and in today’s climate that is very unlikely to come close to happening.

Rik Kirkland: Would you still advocate some kind of intervention, though, to subsidize — what, is it the cost of the battery that’s the main barrier?

Andy Grove: I absolutely advocate it today, yesterday and tomorrow because you need to put some forward investment into this cycle to subsidize the batteries, to get their volume higher and, if the volume is higher, then the cost reduction on whatever form of learning curve you believe is going to take place.

Rik Kirkland: Now, there’s another barrier you mentioned in your piece, which is that right now most of the battery industry, if not all of it, is overseas. So it’s not just that we need to give people an incentive to buy these batteries and install them in their cars but we need to help foster the creation of a domestic battery industry. Is that a separate line of spending? How would you go about that?

Andy Grove: That would have to be a separate line of spending. I can kind of look at this as the car industry, at some point or other, is going to convert increasingly rapidly to electric basis because the energy availability favors that, the energy cost favors that, the environmental pressures favor it. So all forces are going to make that happen at some point.

The most expensive item in those cars is going to be the battery, even when it’s going to be much less expensive than it is today. The performance, the range, the characteristic of the car that is today determined by the horsepower of the internal combustion engine, is going to be determined by how much battery you have, what kind of battery you have, which, in turn, determines what kind of electric motor you can count on and what kind of range you’re going to get.

So the winner in the electrified car industry is going to be the company that does the best battery or has access to the best battery and develops the necessary electronic circuits that control the output of that battery in an optimal fashion and drives the engine.

I think we’re in pretty good shape in terms of technology for control systems, electronics, and we are in no shape for controlling the battery part. And it is going to be easier and less expensive for Japanese, Korean or Chinese manufacturers to equal our capability in control electronics than it is going to be for us to catch up with decades of not building batteries even while the consumer electronics companies were building batteries for our laptops and consumer items by the millions.

Rik Kirkland: And is your argument that we need to do that, in part, because, you look at this, this is not just an issue about controlling carbon but it’s also an energy security issue, and so if you deal with the security issue by not being able to supply it, at least to some extent domestically, it doesn’t solve the problem? Is that the way you look at it?

Andy Grove: That is absolutely the initial driving force that an industry’s economy’s circulation, blood circulation, is the transportation system. And if the transportation system is going to go mostly electric for us, not to have some manufacturing and technology domestically would render us far too dependent on a critical element on foreign sources, again.

But the second item is, what I said earlier, assuming we will have a car industry, a domestic car industry, when all this happens, they will have to compete with foreign car industries, with a product of foreign car industries. The means of competition is going to be range, acceleration, safety, space, all determined by battery. Do we want to have a domestic car industry that’s at a disadvantage at the element that determines its competitiveness? The answer is if we had somehow a car industry that’s still alive then, they will die unless we put them on, at a minimum, equal access and capability – preferably at an advantageous capability – to our most imported cars.

Rik Kirkland: So let me ask you, Andy, when you take this idea out — you’ve been talking about it. You talked about it for McKinsey; you raised it in an earlier piece earlier in the fall. What kind of reaction are you getting, and what are you seeing out there in the political landscape in the VC world that gives you either optimism or pessimism that we can actually move toward the kind of target you’ve set?

Andy Grove: If you had asked me this question three months ago, I would have given you a modestly pleased answer. As you pointed out, the idea has legs, has buzz; the buzz has legs. People talk about electric cars, even the throwaway supplements in the Sunday paper; the car section has shifted over to discussing electric vehicles. So the awareness happened.

None of the issues, battery manufacturing, retrofitting, have gotten much attention in the ensuing months. It does not require elaboration that the car industry is living on a day-to-day basis on bail-out money, what it must be like for them to allocate that bail-out money to the existing product line that sells in the dealership today as compared to preparing for a bigger ramp-up of a product line that’s not going to even start for a year, year and a half, the manufacturing. It looks pretty bad.

And when they come out — these cars at the moment are more expensive than their gasoline counterparts. So, going back to the earlier discussion, what you need to have is a low-cost way to get started in this business, which is the retrofitting. And retrofitting does not have that buzz. The venture capital industry at this point — probably the riskiest thing to do that they do these days is buy treasury bonds. They’re not going to go into that business. That is the pivot that can propel this business, and it’s not getting any attention.

Rik Kirkland: Well, let me get you, just, if I may, for a second, because I know you’ve been studying this broad topic, let’s just — let’s table the idea that the retrofitting, as interesting a proposal as it is, as you say, may not be getting traction. When you look broadly across the landscape, you said yourself, there’s a lot, as I said at the beginning, there’s a lot of buzz about this, people are talking about it. Are there things out there that do excite you in terms of, if we take a five or ten-year view, if not a one or two-year view, where we could be in terms of moving from petroleum-driven miles to electric miles?

Andy Grove: The whole concept is as exciting and as desirable today as it was when the first few items appeared in the publicity and in the literature. If we want to convert to sources of energy that are renewable, all of them generate electric power. To convert that electric power into some intermediate source so you can drive the car with that intermediate source, you lose all the advantages.

So if you step away from the economics of the day and you accept that environmental conditions/considerations will drive us toward wind, nuclear, water, hydroelectric, solar, we have to be able to use that electricity. And we have to be able to use that electricity preferably in a fashion that requires or allows the flow of electricity from the place where it’s generated, the place where it’s used, to be reasonably even because electricity cannot be stored very cheaply. It can be stored, but then you have some big equivalent of batteries and you’ve got yet another extra expense.

The charging of these cars fortunately takes place when you are asleep, and the electricity flow would otherwise be low. So the existing infrastructure is capable of handling a very large portion of the automotive fleet with the flow of electricity from the solar and like cyclical generation to the cars during the time than otherwise the electric demand is low. This is a hidden economics that will probably come close to paying for the cost that the government has to do to advance, in advance, to run this cycle. So that is very exciting to me.

Rik Kirkland: Where do you see some of them — do you have any particular places where you see the innovation happening? Are there particular approaches to the type of car or the type of battery or also to rethinking, as some people are doing, the whole business model? People are talking about using more of a cell phone kind of system where the car is the least of it and the really key thing is the network, they believe, to charge these things, and have batteries available at stations, et cetera. Which part of that rich panoply of approaches do you find most promising when it comes to actually moving us to getting new cars on the road using electric power?

Andy Grove: The most significant thing that I see that is a very exciting concept is the partially electric car as compared to the fully electric car, in other words, an electric car with a range-extending engine that can be much smaller, much more efficient, that all that does, that replenish the electric power that you’ve used up in driving. The advantage of this as compared to the old electrical answer is that you don’t have to put in a charging infrastructure, which is expensive and starts yet another chicken-and-egg kind of scenario.

The Volt is perhaps the highest-profile, if the reports about it are correct, probably the best engineered implementation of this.

Rik Kirkland: This is the General Motors Volt, right?

Andy Grove: That’s correct. Toyota’s introduction of the Prius has put into mass production elements of the same capabilities. It has an electric motor, it has the conversion, but it is a gasoline car with electricity as a supporter of that. I think, sooner or later, Toyota will change the priority and it will rebalance – electric first and gasoline second – as compared to the current Prius, which is gasoline made more efficient by electricity. It’s a much simpler proposition than a manufacturer has to deal with if it starts without it.

So the two things that I see that are very appealing to me is both are partial electric/partial gasoline in different balance between the two, the GM Volt and the Toyota Prius.

When it comes to business model innovation, I think there’s going to be enough complexities in government incentives, gasoline taxation, the differences between the gasoline first and electric second and the other way around. I don’t think there’s going to be a capacity in the consumer world to deal with too many changes at the same time.

So whatever the merits of those are, I really wish them well. But I’m skeptical that people will have willingness to experiment in too many places, and, therefore, I think that is unlikely to be a big phenomenon in the U.S. market in the near term.

Rik Kirkland: So it sounds like your engineering training has convinced you that you’re probably better off keeping it as simple as possible.

Andy Grove: That is correct. And it is not as possible; it’s not that simple.

Rik Kirkland: Exactly. So let me close, Andy, by asking you to put on a, kind of, futurist hat, if you could, and just look out under two scenarios. A lot of people, including a number of us at McKinsey, think that the electrification of transport is really going to be a reality if you look out a decade. So look out a decade. Where are we roughly if we simply let the entrepreneurial spirit in innovation and market forces get us there? And where are if we do all that plus get a little push from the government?

Andy Grove: Five to ten percent of the U.S. fleet as compared to the thirty/forty percent of the U.S. fleet.

Rik Kirkland: Could you restate that, so that I understand? Which scenario are you attaching each to?

Andy Grove: If the free market forces are left to do their thing, the portion of the U.S. fleet of cars that is going to be partially or fully electric may, perhaps, be in the five to ten percent of the total range in ten years’ time. If government policies are implemented that are serious and steady so we don’t change our minds on it every alternate year, the penetration of the electric vehicles could be in the thirty-forty percent range. That’s a huge difference. At thirty or forty percent, you’ll have a profound effect on the energy economy in the U.S. At five to ten percent, it’s a hobby.

Rik Kirkland: Andy Grove, always a pleasure talking to you. Thank you so much.

Andy Grove: Likewise, Rik. Thank you for having me.

Transcript provided courtesy of eScribers

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