This blog will cover some news items related to Sustainability: Corporate Social Responsibility, Stewardship, Environmental management, etc.


China’s green opportunity: China can and must achieve sustainable growth. Although the country has already charted an ambitious course to improve its energy efficiency and environment, a McKinsey study finds opportunities to do even more.

The McKinsey Quarterly
China's green opportunity
China can and must achieve sustainable growth. Although the country has already charted an ambitious course to improve its energy efficiency and environment, a McKinsey study finds opportunities to do even more.
May 2009 • Martin Joerss, Jonathan R. Woetzel, and Haimeng Zhang
China's rapid development over the past three decades has lifted hundreds of millions of people out of poverty and catapulted the country into the ranks of the world's largest economies. Over the next several decades, as China's economy continues to grow and the pace of urbanization accelerates, the country must not only ensure that it has sufficient and secure energy resources but also mitigate the impact such growth will have on the environment.
China must address these issues without compromising its growth or the living standards of its people. But the population's huge size and the scale of the economy have created a uniquely challenging problem. To deal with it, China's policy makers have developed an extensive body of regulations and policies to raise the energy efficiency of many sectors and thereby reduce growth's environmental consequences, including carbon emissions.
To help policy makers and business leaders identify and prioritize additional opportunities to raise energy efficiency in China and make its growth more sustainable, we undertook a study of technologies, measuring their impact on greenhouse gas emissions. We looked only at approaches that are technically feasible and likely to be commercially available no later than 2030.
Our findings indicate that by that year, the aggressive deployment of a range of new technologies—for instance, electric vehicles and new waste-management approaches—would allow China to reduce its demand for imported oil by an additional 30 to 40 percent over the energy efficiency goals already identified. The country also could stabilize coal demand at current levels. This approach would substantially improve China's already significant plans to improve energy security and reduce carbon emissions. However, these goals will require considerable capital investment. For the next two decades, China would need to spend €150 billion to €200 billion a year—on top of currently planned spending on energy efficiency—to realize the full potential of the technologies. What's more, several barriers stand in their way, including social costs (such as layoffs) and retraining. And the window of opportunity for capturing benefits is short: every building or power plant constructed without these technologies subtracts from the total energy efficiency gains they could deliver.
Adopting them will require nothing less than a "green revolution" in the generation of power, the fueling of vehicles, the management of waste, the design of buildings and cities, and the nurturing of forests and agriculture. Policy makers will have to make the decisions, but to do so they must understand the opportunities and trade-offs.
The rising challenge of sustainability
China is home to one-fifth of the world's population. In 2007, the country consumed about 2.7 billion tons1 of standard coal equivalent2 and emitted about 7.5 gigatons of greenhouse gases. Indeed, it has overtaken the United States as the world's top emitter. China's demand for energy—and the emissions and pollution associated with its use in industry, power generation, transport, and waste landfills—also contributes to other environmental ills. In northern China, desertification threatens arable land and grasslands. Water shortages are a growing problem across the country.
China emits a greater proportion of greenhouse gases from its industrial sector than most other nations, developed or developing. These high levels reflect the massive industrialization China is now undergoing. Emissions from the provision of electric power and heat to commercial and residential buildings are a consequence of China's rapid urban growth and rising living standards. The country's moderate level of transport-related emissions reflects the current low penetration of motor vehicles—about 4 vehicles per 100 people in 2008, compared with almost 60 vehicles in Japan and 80 in the United States.

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As China's GDP grows in tandem with urbanization, the country's emission profile will change. Long-term projections based on a consensus of leading Chinese economists suggest a 7 to 8 percent annual GDP growth rate.3 By 2030, two-thirds of China's roughly 1.5 billion people will live in urban areas (see sidebar, "Green mind-set"). To cope with that increase, China plans to build 50,000 new high-rise residential buildings and 170 new mass-transit rail and subway systems. (By comparison, Europe has only 70.) As the economy and the cities grow, so will household incomes. Carbon emissions will rise as a result of higher consumption, including additional cars.
Suppose China made no efforts beyond what it is now doing to improve energy efficiency and diversify its fuel supply, and there were no improvements in technology. We call these admittedly unrealistic assumptions the frozen-technology scenario. Annual emissions of greenhouse gases in China would rise to 22.9 gigatons by 2030, from 6.8 gigatons in 2005. In this scenario, demand for oil would increase fourfold by 2030, requiring imports of about one billion tons a year. Demand for coal would more than triple, requiring annual imports of 3.7 billion to 4.2 billion tons.
The frozen-technology scenario was developed to serve as a hypothetical baseline. Actual emissions will probably be far lower because China is improving its energy efficiency and reducing consumption of carbon-intensive sources of energy and emissions. For the past two decades, the country's carbon efficiency has gone up by 4.9 percent a year, largely through higher industrial productivity.4 The government has set a goal of reducing the country's energy intensity by 20 percent during the current five-year plan.5 The measures now envisioned include adopting stricter, high-efficiency building codes and higher fuel efficiency standards for vehicles, shuttering subscale capacity in energy-intensive sectors, and stepping up investments in renewable energy.
We estimate that China's current efforts and recently enacted policies could reduce the country's energy intensity by 17 percent during every five-year interval from 2005 to 2030. Under what we call the policy scenario, China would emit 14.5 gigatons of carbon emissions annually by 2030. The gains in energy efficiency would come largely in the industrial sector (through lower energy intensity and better waste recovery) and in the generation of power (through increased use of nuclear and renewable energy and improvements in coal-power efficiency). More energy-efficient new buildings and better fuel efficiency in car fleets would help as well. These improvements would also reduce the need for imported energy—by 30 percent for oil and 85 percent for coal.
To achieve these gains, the government will have to make a significant effort, rigorously enforcing policies and providing incentives for investments in energy efficiency across sectors.
A green revolution
China has set ambitious goals for improving its energy efficiency. Yet we found additional opportunities (Exhibit 1), including even greater use of technologies or policies that China has already committed itself to pursuing, such as building additional nuclear power plants and planting forests. Other opportunities involve current and emerging technologies, such as electric vehicles, new semiconductor-manufacturing equipment that's better at controlling fluorocarbon emissions, and the use of agricultural waste as a fuel for co-firing with coal (to reduce coal consumption) in cement kilns.

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We identified five major categories of energy efficiency and greenhouse gas–abatement opportunities that China could implement between now and 2030. If China pursued them successfully, it could reduce its dependence on imported oil by up to 30 percent more than the 30 percent reduction it currently hopes to achieve. The country could also stabilize coal demand at current levels, substantially reducing the proportion of electric power generated by using this fossil fuel, to 34 percent by 2030, down from 80 percent today. These efforts could enable China to hold its greenhouse gas emissions to roughly eight gigatons by 2030—roughly 10 percent higher than 2005 levels—without hindering growth.
This would amount to nothing less than a green revolution in China. Let's look in detail at each of the five categories of opportunities.
Green power
As manufacturers ramp up the production of equipment for solar and wind power, the cost of implementing these technologies will decline. By 2030, China could generate 8 percent of its energy through solar and 12 percent though wind (compared with nearly nothing in each category today), and the proportion of electricity generated by nuclear power could rise to 16 percent, from 2 percent; by hydropower to 19 percent, from 16 percent; and by natural gas to 8 percent, from 1 percent (Exhibit 2).

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China is the world's largest exporter of photovoltaic solar panels, and we think it will hold that position for some time. The cost of the equipment used in China's photovoltaic solar-power installations should fall almost 80 percent by 2030, given the country's (and the world's) projected photovoltaic capacity and this sector's historical learning rate (cost reductions gained through experience as production volumes rise). As the technology improves, solar-power generating costs will fall to €0.045 per kilowatt-hour in 2030, making it just 50 percent more costly than coal rather than five times, as it is today.
Similarly, China could have an installed nuclear capacity of 182 gigawatts by 2030, an increase of 74 gigawatts over the policy scenario's goal. China manufactures 70 percent of the equipment necessary for nuclear plants, and the cost for this equipment has been falling. If the country develops nuclear power to the fullest extent, by 2030 carbon emissions could fall by 470 million tons, at a cost of €3 per ton.
By 2030, carbon capture and storage could abate 730 megatons of greenhouse gas emissions from China's most important fuel source, coal, at a cost of over €60 a ton. This technology is very expensive, but more than 25 percent of China's coal-based power plants—both new and retrofitted—could be equipped with it by that year.
Green transport
Cars and trucks are a relatively minor source of greenhouse gas emissions in China, but that's about to change. By 2030, it could replace the United States as the nation with the most vehicles—over 330 million of them. Let's assume that internal-combustion engines have by then become as fuel efficient as possible at a reasonable price. Still, China will have to rely on imports for 75 percent of its oil.
Our policy scenario estimates for energy efficiency from the adoption of electrified vehicles are conservative. Suppose, however, that China began to adopt them widely starting in 2015 and ramped up the rate of adoption to 100 percent of new vehicles by 2020. Our analysis shows that demand for imported oil might fall 30 to 40 percent. China could emerge as a global leader in this industry by leveraging the country's low-cost labor supply, its fast-growing vehicle market, its success in rechargeable-battery technology, and its substantial investments (both made and committed) in R&D for electrified transport.
From 2016 through 2030, capital investments of over €70 billion a year would be needed for an extensive rollout of electrified vehicles and for the recharging infrastructure China will need to accommodate them.
Green industry
The steel, chemical, cement, coal mining, and waste-management sectors play a crucial role in China's economic development. All of them also use significant amounts of energy: they accounted for about one-third of total consumption and 44 percent of carbon emissions in 2005 and are also a major source of air and water pollution. China is shutting down or consolidating subscale, inefficient facilities in each of these sectors, has set energy-reduction targets for their largest enterprises, and is adopting global best practices in production. These and other government energy-saving efforts in the industrial sector could save 450 million tons of standard coal equivalent a year by 2030.
New quality standards for cement, introduced in 2008, set higher specifications for clinker (the primary material in it) and stricter definitions for clinker substitute. We expect such measures to cut the use of cement in concrete by 10 percent, cutting the cement industry's emissions proportionately. Similarly, China is setting standards to reduce the energy used in burning waste and in recovering and reusing coal-bed methane—standards that would reduce the emissions from those activities. Such policy scenario efforts would allow China to reduce emissions in these sectors to 4.8 gigatons by 2030.
China has ample opportunity to reduce each segment's emissions below those envisioned in the policy scenario: new technologies and process improvements could abate an additional 1.6 gigatons of greenhouse gas emissions. The cement industry, for instance, could use agricultural waste as an alternative fuel for co-firing with coal in kilns. In steel making, thin-strip direct casting (casting and rolling in a single step) could substantially reduce energy use and emissions.
The challenges of implementing new technologies include limited talent and funds for investment. The skilled technicians and engineers needed are scarce in China, and because its universities don't teach some of the required skills (such as systems engineering), these limitations will persist. In certain sectors, the opportunity cost of investment in energy efficiency is high; in others, the total returns seem too low. Executives also dislike the idea of shutting down plants to improve them or of accepting the losses associated with introducing novel technologies or processes. To pursue the additional efficiency and abatement opportunities, the government will have to address these hurdles.
Green buildings
China's rapid urbanization will continue for several decades. Apartment houses, office buildings, and commercial centers are proliferating to accommodate this massive migration and economic development. In the frozen-technology scenario, total emissions from energy consumption in the buildings sector will rise from 1.1 gigatons of greenhouse gases in 2005 to 5.1 gigatons by 2030. Policy scenario moves to address the growth of the sector's energy use and emissions could reduce them to 3.2 gigatons by 2030. We estimate that implementing the full range of practical technologies would cut emissions to 1.6 gigatons annually.
Total floor space (including residential and commercial) will more than double in China, from 42 billion square meters in 2005 to 91 billion in 2030. Rising income levels are pushing up energy use as households buy more appliances and air conditioners. To address these issues, the government is setting targets so that more heat for urban buildings comes from relatively energy-efficient sources, such as natural gas and combined heat and power plants, rather than coal and diesel. Over time, natural gas will replace coal (or coal gas) for cooking and for heating water in many areas. The government is also imposing strict new energy-efficiency rules for building codes, enforcing firm energy-efficiency ratings for appliances, and rolling out subsidies to encourage the shift to more efficient lighting.
Beyond these government-directed efforts, the opportunities include replacing low-efficiency community boiler systems in northern China with large network district-heating systems6 and retrofitting commercial buildings with automated systems and pumps to regulate heating, ventilation, and air conditioning more efficiently. China can also apply to new buildings the principles of "passive design": reducing the energy used for heating and cooling by designing insulation, ventilation, and the use of natural light and shade at the same time. Older buildings can be retrofitted with energy-saving materials such as insulation and replacement windows.
Such moves will exact a social cost. Higher energy-efficiency standards for heating controls and pumps could drive inefficient local players from the market. More expensive heating systems and market-driven fees for heating could make it unaffordable for lower-income Chinese unless they get subsidies. Enforcing higher building standards will drive up administrative costs. Many of the government's efforts so far haven't been very effective. Despite awareness programs and subsidies, the penetration of compact fluorescent lightbulbs (CFLs) has reached only about 10 percent a decade after the bulbs were introduced. The government hasn't banned incandescent bulbs from the market (as Australia, for instance, has) and faces an uphill battle to persuade consumers that more expensive but energy-efficient CFLs pay off in the long term.
Green ecosystem
Farms and forests are carbon sinks. Although China has halted most activities that led to deforestation, virgin forests now cover only 11 percent of the country's total land area. By our estimates, government forestation and reforestation programs will raise forest coverage to 20 percent of China's total land area by 2010. China is also trying to limit grazing on grasslands (90 percent of its 400 million hectares of grassland is degraded or at risk), to introduce sustainable agriculture, and to promote the use of methane from animal manure for heating and cooking in rural areas. (Some 23 million rural families heat their homes and cook with methane.) By 2030, these policies will reduce emissions by 0.29 gigatons annually.
Additional abatement opportunities along similar lines could provide 0.64 gigatons of possible abatements by 2030. These include increasing the forest cover to 25 percent rather than 20 percent, raising more animals in enclosures rather than letting them graze on grasslands, and promoting agricultural practices such as conservation tillage and the use of the latest fertilizers. These opportunities could also have knock-on effects: improved land-management practices, for example, control desertification and use water supplies more productively.

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To realize the full potential of the additional opportunities, China would need to start now; even waiting a few years would reduce the possibilities for raising energy efficiency and abating emissions. To capture the full abatement potential in the power-generation sector, for instance, China must start implementing by 2010 most of the measures we recommend. China builds new plants continually. Coal-fired ones brought on line next year, if not retrofitted with expensive carbon-capture technologies, will emit greenhouse gases for the next 30 to 40 years. A simple sensitivity analysis shows that postponing the implementation of cleaner power technologies for just five years would cut the abatement potential by up to 1.5 gigatons of greenhouse gases—over 50 percent of what's possible (Exhibit 3). A ten-year delay would reduce the abatement potential by 80 percent.
By starting now to embrace the technologies for a green revolution, China can create a future with greater energy security and lower energy emissions—without compromising economic growth and the living standards of its people. 
About the Authors
Martin Joerss is a principal in McKinsey's Beijing office; Jonathan Woetzel is a director in the Shanghai office, where Haimeng Zhang is an associate principal.
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1 Metric tons: 1 metric ton = 2,205 pounds.
2 One kilogram of standard coal equivalent = 7,000 kilocalories.
3 In this report, 7.8 percent is used as long-term GDP growth rate for China.
4 Carbon efficiency measures the amount of GDP produced per unit of greenhouse gas emissions.
5 Energy intensity, which measures the energy efficiency of a nation's economy, is calculated as units of energy per unit of GDP.
6 Coal plants that heat water and channel it to buildings.

The quiet sound of a breakthrough?

Thanks to Keiron for this one... That is indeed an interesting approach + suggestion from Lord Stern

Nicholas Stern recently suggested a break with British government policy ... with Copenhagen looming, is this the start of an agreement on the producers/consumers debate?

Monbiot's article:

Monbiot's interview (2 mins):

Age of Stupid panel discussion (1 hour):

Stern breaks the east-west deadlock on who's responsible for CO2China says it's unfair that the west 'outsources' emissions. Now that Lord Stern has said responsibility should be split between producers and consumers, other countries may follow suit
I think I heard the quiet tinkling sound of an unacknowledged breakthrough last week: a statement that could make the difference between success and failure at December's crucial climate talks in Copenhagen.

One of the issues that could sink the talks is the question of "outsourced emissions". This refers to greenhouse gases produced in one nation on behalf of another. The UK, for example, is comfortably meeting its commitments under the Kyoto protocol only because much of our manufacturing industry has moved to China. Under Kyoto rules, the pollution produced by Chinese factories making goods for the UK belongs to China. The protocol counts only the production, not the consumption, of greenhouse gases.

China says this is unfair. Around half the recent increase in its emissions arises from the manufacture of goods for western markets.
This pollution should, it says, belong to the consumer nations, not the producers. A successor to the Kyoto protocol which did not recognise this would punish China for our consumption.

The rich nations have been furiously resisting this idea. That's not surprising: a study by the Stockholm Environment Institute for the British government suggests that carbon dioxide emissions caused by the UK's consumption increased by 18% between 1992 and 2004, even as our production emissions fell. Had the Kyoto agreement measured consumption, not production, the UK would be missing its targets by a very long way.

I'm with China. Greenhouse gas emissions are rising because consumption is rising. Unless we address this, we cannot prevent climate breakdown. It doesn't matter where production takes place: the problem is that we are consuming too much.

During the panel discussion that followed a screening of the eco film Age of Stupid last week, I asked Lord Stern about this. His answer surprised and delighted me: it represents a dramatic departure from the policy of the government with which he has worked so closely. Here's what he said:

It is a point that the Chinese authorities make very clearly and strongly and I think that it's a very sound one. My own view is that we need a combination of the two things. If you move to a different kind of division of labour where another country, in this case China, starts to make things that we might have made, and therefore has that production process in the emissions occurring there, rather than their own country, then we're jointly responsible for that and both parties gain from the division of labour. That's what trade is all about and that's why trade can help development.

So my own view is that we probably need something like an average of the two, or a combination of the two. But the logical point China makes is that there is a definite responsibility with the consumer and not just with the producer is a sound one.

When Stern talks about these matters, governments listen. If he is prepared to pursue this proposal - that outsourced emissions should be shared between producers and consumers - there's a good chance that it could be adopted at Copenhagen. It is surely the most realistic way to break the deadlock.


What GM could learn from IBM: Open innovation is seen most clearly in firms like IBM... "The auto industry is different," he says. "It hasn't learned that no one company or industry has a monopoly on useful ideas." It is difficult to imagine the typical US driver paying more for hyperefficient fuel injectors when a fill-up costs less than a pizza

Beyond Detroit: On the Road to Recovery, Let the Little Guys Drive
By Charles C. Mann Email 05.22.09

The Detroit-knows-best model for automaking has broken down. A better way: Build an ecosystem of innovation that harnesses the best ideas and technologies, wherever they originate. 
Illustration: Bryan Christie Design

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Beyond Detroit: This Startup Could Double Your Mileage

The offices of Transonic Combustion are not going to win any design prizes. Located in Camarillo, California, the company occupies a line of anonymous rooms and padlocked garage workshops at the edge of town, where land is cheap and prying eyes are scarce. Alloy-frame bicycles lean against the walls of the computer-stuffed workspaces; wastebaskets overflow with empty Mountain Dew cans. So many nondisclosure agreements have spewed from the printers on the tables that they must be capable of producing them without human intervention.
It looks, in other words, like any other high tech startup trying to make its mark in software, electronics, biotech, or energy. But Transonic isn't working in any of those fields. Instead, it is part of a surprising wavelet of innovation in an industry largely dismissed by venture capital: automobiles. The company makes a special breed of fuel injectors, which use advanced technology to force precisely timed, high-pressure bursts of gas-air mixture into engines to increase their power and efficiency. Tests are not complete yet, but Transonic believes that its products could help drivers get as much as 100 miles per gallon out of otherwise standard internal combustion engines. "If you double gas mileage, that ultimately cuts consumption by about half," Transonic president Brian Ahlborn says. "We're in business to make money, but we're aware of what that kind of dramatic drop could imply." He hopes that in the next few years Transonic fuel injectors will be in millions of vehicles, saving millions of gallons of gas a year.
Not long ago, Ahlborn's dream would have seemed quixotic. Detroit's Big Three automakers have for decades been notoriously hostile to outside innovation; Flash of Genius and Tucker, films that decry the industry's insularity, are both based on true stories. No small US company has grown into a big carmaker in the past 50 years—one of the reasons that the automobile itself hasn't changed more fundamentally during that time. "It's as if the computer industry were still dominated by Wang and Data General and DEC, and they were still selling minicomputers," says Henry Chesbrough, executive director at UC Berkeley's Center for Open Innovation.
Nonetheless, the automotive startup world is sputtering to life. Venture capitalists invested roughly $300 million in young car-related companies last year, up from $8 million in 2003. Dozens of startups are dipping a toe in the water, many in the high tech corridors near Boston and in Southern California (see this story's "Next Year's Module" sidebar). Some, like Transonic, focus on nitty-gritty hacks of machines that exist today. Others are assembling fanciful all-electric sports cars that may cost as much as a small house. But all of them are trying to jump-start the industry with new ideas, vigor, and technology.
Detroit desperately needs them. US automakers' share of the domestic market has plummeted nearly 30 percentage points since the early 1980s. The federal government has unceremoniously ousted the head of General Motors. By the time you read this, two of the Big Three may be in bankruptcy, a bleak capstone to years of collapsing stock prices, shrinking margins, and cascading layoffs. Some analysts believe not one of the major US carmakers will exist a decade from now. And while there are plenty of historical explanations for Detroit's sorry state—vicious labor relations, uncontrolled health care costs, neglected quality control—the most fundamental problem is also the hardest to overcome: The most innovative cars are no longer made in America.
If a domestic auto industry is to survive, it will have to incorporate and encourage breakthroughs from outsiders like Transonic. Automakers will need to transition from a vertical, proprietary, hierarchical model to an open, modular, collaborative one, becoming central nodes in an entrepreneurial ecosystem. In other words, the industry will need to undergo much the same wrenching transformation that the US computer business did some three decades ago, when the minicomputer gave way to the personal computer. Whereas minicomputers were restricted to using mainly software and hardware from their makers, PCs used interchangeable elements that could be designed, manufactured, and installed by third parties. Opening the gates to outsiders unleashed a flood of innovation that gave rise to firms like Microsoft, Dell, and Oracle. It destroyed many of the old computer giants—but guaranteed a generation of American leadership in a critical sector of the world economy. It is late in the day, but the same could still happen in the car industry; it just has to harness our national entrepreneurial spirit to develop the next wave of auto breakthroughs.
Transforming US auto manufacturing would be an enormous task. It would require the cooperation of the federal government to help create the conditions under which innovators can thrive—primarily by removing the energy and health care obstacles that now stand in their way. But now is the time to do it. The specter of global economic collapse has forced politicians, labor, and industry to abandon some of their most entrenched and dysfunctional ideas. Eventually, a reconfigured car industry could leapfrog Europe and Japan the way Toyota began to outpace Detroit 30 years ago. Indeed, such a radical reconfiguration may be the only way this vital industry can survive on these shores. "They're going to have to swing for the fences," says Steven Klepper, an economist at Carnegie Mellon University who studies industry innovation. "The only way I can see for them to win the game is to change it entirely."
I should declare a personal interest here. My father worked as a Big Three executive for much of my childhood, most of that time at Ford. He left to run his own marina, but he always remained loyal to Detroit. He never bought a foreign car. I didn't buy one until after his death, and even then I felt like I was thumbing my nose at his memory. I would like to return to a US product. More than that, I would like millions of Americans—people who don't share my sentimental ties—to come back to vehicles from US companies.

Manufacturing, Retooled

The Detroit-knows-best model for automaking has broken down. A better way: Build an ecosystem of innovation that harnesses the best ideas and technologies, wherever they originate.

Today: Top-Down System
The Big Three either manufacture parts in-house or dictate their design and production to a small group of suppliers.

Tomorrow: Cycle of Innovation
Suppliers work independently to create components; automakers select the

Illustration: Bryan Christie Design

My father spent his days at the "Rouge," in Dearborn, outside Detroit. Once the biggest factory complex in the world, it had its own electricity plant, its own steel mill, even its own docks on the River Rouge that were big enough to handle deep-water vessels. Raw materials were unloaded on those docks, shuttled around the plant on 100 miles of internal railroad, and turned into finished vehicles, entirely inside the high factory walls. The Rouge made every major component for every model it produced except the tires—the company even tried to make the tires for a while, buying an Amazonian rubber plantation twice the size of Delaware in the 1920s.
The Rouge was an embodiment of the vertical integration that has defined the US car industry since the days of Henry Ford. Initially, the complex was Ford's attempt to solve a manufacturing problem; in the days before networked communication, coordinating precisely with small suppliers was impossible, which meant he couldn't ensure that all the parts for his cars would be ready at the right time and in the proper condition. Ford's answer: total control. By trusting as little as possible to outside entities, he was able to guarantee that his factories got what they needed when they needed it.
But by the 1970s, this system's deficiencies—bureaucracy, groupthink, and inflexibility—were obvious. Toyota-style production, with its dramatically smaller parts inventories and workers who functioned in teams, was much more efficient. Japanese companies also enjoyed better relationships with labor, more-dedicated employees, and centralized purchasing that allowed them to take advantage of economies of scale. It took a long time—far too long—for the Big Three to adapt, but they finally did. Detroit began adopting lean production methods in the late 1980s, and by 2007 it had repaired its labor relations enough to win important benefit concessions. General Motors also centralized its fragmented organization to benefit from massive economies of scale. (The rest of Detroit is still several years behind GM in this regard, according to David Cole, chair of the Center for Automotive Research in Ann Arbor.)
The costs of these shifts were huge and painful—the once-proud Rouge was nearly shut down altogether—but almost everyone inside and outside of Detroit believes they were worth the hurt. When the transition is complete, lean production, labor concessions, and globalization will have shaved nearly $5,000 off the cost of every new vehicle from Detroit. Many consumers may still regard US carmakers as high-cost, low-quality manufacturers, but in truth they have largely caught up with—and in some cases surpassed—their Japanese competitors.
But even this extraordinary effort may well not be enough. Consider the 2010 Fusion hybrid, Ford's next-generation gas-electric, launched in March. Driven by a nickel-metal hydride battery that is smaller, lighter, and more powerful than the one in the previous model, the car has a novel electronic dashboard that uses visual cues to train drivers to maximize mileage. The Environmental Protection Agency rates the car at 41 mpg for city driving, though many reviewers report getting 50 mpg or more. Ford did focus far too long on its highly profitable pickup trucks and SUVs, and it was blindsided by the public interest in hybrids, which soared with the US arrival of the Toyota Prius in 2000. But now it has crashed through a top-of-the-line, technologically advanced product in record time. Sleekly styled and innovative, the Fusion "proves what I've been writing and saying for years,"proclaimed Washington Post auto writer Warren Brown. "Detroit makes good cars."
Alas, so does the competition. One month after the Fusion came on the market, Honda launched a new version of the Insight, a five-passenger hybrid with almost the same fuel efficiency as a Fusion—and a base price of $19,800, about a quarter less than the Ford's $27,270 price tag. One month after that, Toyota introduced its third-generation Prius, rated by the EPA at 50 mpg—now the most fuel-efficient vehicle in the US market. A similar fate may well await GM's forthcoming plug-in electric car, the truly innovative Chevrolet Volt, which unlike typical hybrids uses its gas engine only to charge and extend the range of its heavy-duty battery, drastically cutting fuel consumption. The problem is that "the rest of the Volt is just an ordinary family sedan, for which they are charging more than $40,000," says Michael Cusumano, a professor at MIT's Sloan School of Management. "If they sell more than a few thousand, I'll be surprised." Meanwhile, according to current timetables, by the time the Volt goes on sale in late 2010, Toyota will have already released its own plug-in version of the fashionable Prius.
By seeking to match the likes of Toyota, Detroit has been trying to come from behind in a game where its adversaries set the rules. To Klepper, the Carnegie Mellon economist, the Big Three today resemble the American television-receiver industry in the 1970s and 1980s, pioneered by US corporations that, after decades of domination, were suddenly confronted by foreign innovation. Companies like RCA and Zenith were slow to incorporate new technologies until it was too late; all exited or sold out to foreign firms. "Every time American companies catch up to the competition," Klepper says, "the competition already has moved on and instituted new things. In that situation, it's extremely difficult to get ahead."
The only escape from this conundrum is to pursue what Harvard Business School professor Clayton Christensen has called disruptive innovation—the kind of change that alters the trajectory of an industry. As Christensen argued in his 1997 book, The Innovator's Dilemma, successful companies in mature industries rarely embrace disruptive innovation because, by definition, it threatens their business models. Loath to revamp factories at high cost to make products that will compete with their own goods, companies drag their feet; perversely, financial markets often reward them for their shortsightedness. Good as they are, the European and Japanese automakers are established companies. At this point, they are as unlikely to pursue disruptive innovation as Detroit has been. That gives the US auto industry an opening. To take that opportunity, it will have to behave differently—it will have to step far outside the walls of the Rouge.

Next Year's Module

In a new, modular car industry, the Big Three could plug into the legion of nimble component companies that are eager to develop and manufacture the next wave of automative breakthroughs. Here are five promising firms and the products that might help US carmakers regain the mantle of innovation.—C.C.M.
[1] A123Systems 
Watertown, Massachusetts

Nanophosphate lithium-ion batteries that are optimized for electric vehicles. Chrysler and Norwegian electric-car maker Think both plan to use A123's products in future models.
[2] Fallbrook Technologies 
San Diego, California

Continuously variable transmission components, which could let cars accelerate without shifting gears. Currently being developed to help alternators and AC units run more efficiently.
[3] GEO2 Technologies 
Woburn, Massachusetts

Spongelike, rigid ceramic for diesel vehicle filters. Increased airflow reduces back pressure, boosting fuel efficiency and power. Could be used to give smaller gas engines more pep.
[4] ISE 
Poway, California

Heavy-duty gas/diesel-electric hybrid drive systems for buses, trucks, tractors, even trams—a market almost completely ignored by major automakers.
[5] Transonic Combustion 
Camarillo, California

Advanced fuel-injection system that brings fuel and air to a "supercritical" state increasing its explosive power and decreasing pollutants. Can be used on gas, diesel, and ethanol engines.

Illustration: Bryan Christie Design

Most modern automobiles have a long, serpentine belt that winds intricately through the engine compartment. Driven by the engine, it powers the accessory system: the alternator, water pump, AC compressor, and a handful of other components. During city driving, the engine turns slowly, which spins the belt slowly, which in turn pumps the compressor slowly. Running at low efficiency, the air conditioner must be enormously powerful to keep the car cool—so powerful that car and truck air conditioners account for about 5 percent of annual US motor fuel consumption. Similar problems plague alternators, which provide little charge to the battery during the start and stop of most driving.
Fallbrook Technologies, a San Diego startup, has raised $50 million to solve this problem. It hopes to squeeze more power from the serpentine belt by building simple, cheap transmission components that will power the accessory system more efficiently. Unlike standard transmissions, which move from gear to gear in distinct steps, transmissions using Fallbrook's technology move along a smooth continuum, allowing it to function more effectively at low speeds and to drive accessories at a constant velocity, no matter how fast the engine is turning. Typically, automobile transmission systems have hundreds of parts, many of which must be manufactured to high precision. Fallbrook's has fewer than 50, of which the most critical is a set of stainless-steel ball bearings—"the cheapest precision-machined product in the world," says Fallbrook CEO William Klehm, a former Ford executive. Preliminary tests on military vehicles show that Fallbrook's tech can make alternators produce 75 percent more power at idling speed. Although the transmissions would have the most impact on tomorrow's electric cars, Klehm says they can be used almost immediately to benefit gas engines, too.
When Klehm was working for Ford, a small outfit like Fallbrook would have had little chance of engaging the industry. "There was a big NIH problem," he says. "If something was 'not invented here,' we didn't want it." Detroit has long worked with outside suppliers, but the relationship has typically been one-way and often hostile; car companies specify exactly what services they need and how much they'll pay for them. Since the 1990s, the Big Three have forced suppliers' prices down so much that many are edging toward bankruptcy. At the same time, the industry has tried to loosen up, outsourcing production to independent firms. However, these efforts have done little to change the underlying dynamic, in which the automakers exert an enormous amount of control over a handful of giant suppliers. None of the big manufacturers have regularly allowed Silicon Valley-style innovators like Transonic and Fallbrook into the core of their products.
Even inside the companies themselves, the industry draws on a narrow well of innovation. Detroit does work with the University of Michigan, an excellent school. But the Big Three pull in few employees from other top colleges. "Our students have basically not been joining GM, Ford, or Chrysler for 20 years," MIT's Cusumano says. "They go to companies like Intel, Cisco, and Hewlett-Packard." One consequence, he says, is that when young engineers and designers launch their own firms, the last sector they think of is the auto industry. "It's seen as a place that isn't interested in new ways of doing things."
In its insularity, the auto industry is increasingly an outlier. A growing number of firms have adopted what UC Berkeley's Chesbrough dubbed "open innovation"—accelerating change by letting ideas flow much more freely in and out of companies. Rather than depending primarily on their own engineers, he says, auto companies should leverage the insights of others, outsourcing much or most R&D to an ecosystem of small, agile entities outside the factory walls. Unsurprisingly, open innovation is seen most clearly in firms like IBM, Alcatel-Lucent, and Millennium Pharmaceuticals, but Chesbrough argues that it has been picked up with success by companies in fields ranging from chemicals and packaged goods to lubricants and home-improvement gadgets. "The auto industry is different," he says. "It hasn't learned that no one company or industry has a monopoly on useful ideas."
Nobody can say which companies will come up with the inventions that revive the auto industry—Transonic, Fallbrook, any of the other startups, or some company yet to be created. A few years ago,a 1978 photo of Microsoft's founders—a disheveled bunch of geeks—made the email rounds under the subject line "Would you have invested?" No single company could have foreseen or designed the modern computer industry, just as the Big Three cannot predict the eventual shape of the US auto industry. But they can build the ecosystem that allows it to develop.
How does a traditionally top-down manufacturer become an open-ended promoter of innovation? Clues can be found in "Managing in an Age of Modularity," a classic 1997 Harvard Business Reviewpaper by economists Carliss Baldwin and Kim Clark. They studied how personal-computer manufacturers divided their products into subsystems, establishing standards that allow parts to be readily swapped out and replaced. By giving outside innovators the freedom to tinker with individual modules—hardware, operating systems, software, peripherals—PC makers spurred the development of far more sophisticated devices and allowed customers to individualize and customize their purchases. In other words, modularity encouraged multiple innovations from multiple sources and made them easy to incorporate.

Traditionally, the Big Three design most of their car components in-house. These Jeep doors are ready for the assembly line in Chrysler's Jefferson North Assembly Plant in Detroit. 
Photo: Floto + Warner

The analogy between cars and computers can't be taken too far. Because automobile design and manufacturing flaws can kill people, the industry is properly governed by strict regulations—and subject to continual product-liability litigation. As a result, automakers will never be able to release a set of standards, then snap together a working automobile out of whatever components entrepreneurs happen to come up with. But they can use this model to rethink how they approach innovation and manufacturing.
Indeed, a precursor already exists. In 2000, GM inaugurated a new complex in southern Brazil. Rather than following the still-dominant Rouge model, the Gravataí factory consisted of 17 separate plants, 16 of which were occupied by suppliers, including Delphi, Goodyear, and Lear. Unlike elsewhere in the auto world, the Gravataí suppliers didn't just carry out GM's blueprints but took an active role in designing their subunits: fuel lines, rear axle, exhaust and cooling systems. Suppliers delivered preassembled modules to GM workers, who plugged in the pieces to make cars much more quickly than plants in the rest of the world.
Despite its achievements, the Gravataí model has largely been ignored. It should have been extended. Instead of limiting the number of suppliers, companies could encourage startups to join the supplier network, working to meet industry specifications while bringing their own ideas and innovations to the table. As in Gravataí, the car company would act largely as a coordinator and assembler, piecing together interchangeable units to create a complete vehicle.
The growing dependence of cars on computers will accelerate this process. The typical 2009 car includes about 200 electronic sensors and some 40 networks, monitoring everything from temperature to tire pressure. Outside firms are already largely responsible for the electronic equipment that reduces emissions by controlling the mixture of fuel and air combusted by the engine; they also largely developed electronic stability control, the network of actuators and controllers in the suspension that helps prevent skids. One can readily imagine garage entrepreneurs in Silicon Valley—or platoons of data-crunchers at Google—building software-driven devices that make cars run more cleanly, efficiently, and safely. Scott McCormick, president of the Connected Vehicle Trade Association, foresees a future in which networked cars constantly communicate with one another and the road, helping drivers avoid traffic jams and accidents. Plenty of tech companies would be happy to take part in accomplishing that vision.
By outsourcing most R&D, car companies would be able to reap the rewards of innovation for a fraction of the cost and risk. The growing sophistication of design and simulation software makes it easier for startups to create prototypes and test new products virtually, before undergoing those expensive processes in the real world. Not every idea will succeed, but the costs of failure will be reduced and borne by smaller firms that can collapse with less impact on the larger economy. Ultimately, modular construction will lead to cars that can be custom-built to the specifications of their future owners, somewhat as Dell allows purchasers to click on hyperlinks to add or subtract computer features. Custom-rebuilt, too—it will be easy to install upgraded modules, in much the way that computer owners replace old video cards.
Of course, there are dangers for the automakers. When US computer giants adopted more-open, modular designs in the 1980s, they set off an explosion of technological advances. But they also reduced their own relevance. Famously, IBM was overwhelmed by the entrepreneurs and developers it had enabled; to save itself from bankruptcy, the company successfully shifted its focus from physical products to software and services. Wang and DEC no longer exist as stand-alone companies. More globally, the balance of power in the industry has moved away from manufacturers and toward the module designers—the chipmakers and software jockeys whose innovations move the industry forward.
American carmakers could follow a similar course. By shifting away from vertical integration, they will inherently play a smaller role in the overall industry. As system architects, they would lay down the framework in which independent developers work, communicating and enforcing those standards with would-be suppliers. They would also be the marketers and sales force—nobody knows how to advertise like Detroit.
This will not come easy. But in seeking a model for outsourcing in a heavily regulated industry, automakers might look to pharmaceutical companies, which also operate under severe regulatory, legal, and safety constraints. Manufacturing is simpler for drug companies, but the process of testing new products with clinical trials is nightmarishly complex and costly. Yet this has not prevented drug firms from relying on outsiders; they routinely buy startups and test out their technology. Many or most of the acquisitions prove unusable, but the successes pay for failures. Managing and using outside innovation is difficult, but it has helped keep the US drug industry alive in a climate of unforgiving competition.
It is an open question whether the Big Three will be able to participate in the new auto industry. But they can't expect to maintain their positions as gatekeepers. They are too weak, and there is simply too much activity, too much interest, and too much money in play. Although that may be bad news for the companies, it may not be bad for their customers and—in the long run—their employees and the nation itself, which will eventually benefit from a revitalized industry. What is good for the country may no longer be good for General Motors.
The biggest obstacle faced by Transonic Combustion is just down the street from its offices: a gas station. When I pulled in for a fill-up, the average price per gallon was about $1.90—so low that Americans were again buying gas-guzzling SUVs and pickup trucks. It is difficult to imagine the typical US driver paying more for Transonic's hyperefficient fuel injectors when a fill-up costs less than a pizza. Nor will there be much enthusiasm for cleaner, safer vehicles in a nation that has few penalties for carbon emissions and where performance standards have remained effectively unchanged for decades.
In other words, the US automotive industry will not introduce innovative cars unless there is a market to support them. And sustaining that market is next to impossible when oil prices can double or drop by half within six months, argues Bernard Swiecki, an analyst at the Center for Automotive Research. That's why he and other economists argue that higher gas taxes are necessary. As the events of last summer prove, the best way to get Americans to buy more-efficient vehicles is to sell gas at $4 a gallon. A tax that sets a floor for fuel prices would be politically unpopular, but its bitter taste could be offset by cuts in the payroll tax—and by making it part of the broader energy package.
Even with all of these initiatives, a good outcome for the US auto industry is far from guaranteed. Detroit is in an extraordinarily difficult position. But a long shot is better than none at all. Asked if he could think of any industry that had recovered from the position in which Detroit now finds itself, David Cole, chair of the Center for Automotive Research, answered—unhappily, to my ear—with a simple "no." Then he said, "That doesn't mean it can't happen, though. There's room for bold action. I just hope they're allowed to take it."
Contributing editor Charles C. Mann (charlesmann.orgwrote about spam blogs in issue 14.09.


Limits to growth: 30 years later

... it appears they were mostly right. Let's hope not all the way to their conclusion. Thanks to Pete for the link