If there’s a poster child for Israel’s entrepreneurial spirit, start-up Better Place is one strong candidate. Since launching the company in 2007, Shai Agassi — a 41-year-old Israeli entrepreneur and former executive of software giant SAP — has been shaking up the auto industry with his vision for mass adoption of zero-emission vehicles powered by electricity from renewable sources. Starting off with $200 million of seed money, Better Place has since been setting up networks of service stations for electric cars, helping to wean drivers from their environmentally unfriendly gas guzzlers. John Paul MacDuffie, a professor of management at Wharton and co-director of the International Motor Vehicle Program, joined Knowledge@Wharton to interview Agassi from the company’s headquarters in California about what it takes to develop an oil-independent future.
An edited transcript of the conversation appears below:
Knowledge@Wharton: You’ve often said that your inspiration for launching Better Place came to you at the World Economic Forum in Davos during discussion about ways to reduce the world’s dependence on oil. But the story of how Israel’s president, Shimon Peres, helped you turn that idea into a business is not as well known. Could you tell us about that?
Shai Agassi: I was [at] the Young Global Leaders Forum. I was challenged to think of a problem and then try and solve it. I started with thinking of how … you run a country without oil. I then prepared a white paper and presented it to a number of governments, [and lastly] I presented it to Shimon Peres. Peres was the only leader who jumped [at] the challenge in the sense of saying, “If it’s something that you’re serious about, let’s go figure out a way to do it.” He dragged me by the hand to every government office in Israel and a number of large industrial companies.
At the outcome of this journey that he led me through, we [set several] conditions, which were: If you find the money — $200 million — and if you find a car company that would agree to build a mass production line of electric vehicles according to the model that we described — the switchable battery car — then Israel would be the experimental site to deploy and run the model. And he, true to form, helped me find Renault and convince [chairman and CEO] Carlos Ghosn in a meeting that it was the right thing to do, and then worked diligently in Israel to get it done. I offered to do it as a government agency and he challenged me to quit my job and do it as a company, which is what Better Place ended up becoming.
Knowledge@Wharton: How difficult was it to get the support of all the other constituents in government and industry, including the other auto companies? What kind of issues came up that you had to address?
Agassi: It wasn’t easy. [People] had a hard time accepting it because there was a risk of betting on something that would not end up being successful. And there was almost no incentive for politicians to make decisions that are big and robust and breakthrough and disruptive. Most of their decisions are continuous developments of things that were agreed to by previous generations. There’s always somebody else to blame.
We were lucky enough to have at the time Prime Minister [Ehud] Olmert, who basically said, “If you find the money, I’ll fight Israel.” What most people don’t realize is that he has probably one of the most key individuals who is directly responsible to him — in this case the director general of the prime minister’s office — to work through the entire bureaucracy of the government. All branches of government touch on our project and he needed that one person to unify the entire government.
Knowledge@Wharton: You have been speaking to other governments as well about reducing oil dependence. What is your pitch to them and how does your experience with other countries compare with your experience in Israel?
Agassi: You have to remember that nobody had done it [before] so it was really hard to convince somebody to be the first one. It’s a lot easier to say, “We’ll take the Israeli model and repeat it,” than it is to be Israel in this case. And in most cases when I talk to governments, the common answer I got was that it’s very good that the young generation is thinking about these big problems. And that was it. Nobody was willing to be crazy enough to follow through this model with us regardless of what we asked. And most of the time, we didn’t ask for any money. We didn’t ask for any budget. We basically said, “Just work with us and we’ll get it done.” But it was the fear of being caught or being observed as crazy by the media, which put politicians in the position that they wouldn’t move.
Knowledge@Wharton: You were quoted recently — I think it was at a Wired magazine forum — saying that China is going to be a very important market for electric vehicles. Can you tell us a little bit about what you have been doing in China to make your case for your network [of electric-car recharging stations]?
Agassi: China is now the largest car country in the world. It’s the largest producer of cars as well as the largest consumer of cars. It [grew] by almost 20% in the last year. The Chinese have no incentive to protect their existing car industry because they were always looking to leapfrog the global car industry. And they’ve learned that it’s impossible for them to do it with the internal combustion engine because they won’t get to the level of quality that the Germans or Americans have gotten to after a hundred years. But suddenly in this new world of electric vehicles, they have the ability to not only leapfrog, but also lead forever in this market. Now, from a historic perspective, you have to remember that the U.S. has built its entire middle class on the car industry. Not only did people become middle class by buying [cars], but also a lot of the people became middle class by working in the car industry or its derivatives.
China is observing that same model to create its own middle class in a country that will most likely end up with the same kind of transportation layer of the West …. That means China will need to add somewhere around 400 million to 500 million cars in the next decade or two. And so you start to understand that there is a huge industrial effort [which will mean] that China can take over the backbone of the world’s manufacturing. And by doing so, [China will] actually pick the market. If they go electric, everybody has to go electric.
Knowledge@Wharton: Another interesting case is India. India already has an electric car, the Reva. And [in July], another new car company called Bavina said that it’s going to make electric cars in southern India. Since India imports 40% of its oil, it would seem to be a strong candidate to join your network. What efforts have you made there?
Agassi: India is interesting in the sense that it’s not a question of the electric car. It’s a question of the electric infrastructure for the car. In India, decisions for infrastructure are taken in a very different way than the Chinese model, which is basically centralized, top-down and very rapid execution from the moment a decision has been taken. When we look at India, we see great opportunity, but we’re not sure [about the] speed of execution, whereas the Chinese are already in execution mode, not analysis mode.
Knowledge@Wharton: Would you care to comment on Japan and your efforts there?
Agassi: You’re seeing sort of three couples around the world — China and Japan; the U.S. and the rest of the Americas — Canada and South America; and France and Germany. On each of the continents, you see one party moving really fast — [for example] China in the case of Asia — and one party reluctantly following its OEMs. In the case of Japan, it was [stuck] behind the Prius [hybrid] model that Toyota has led. It’s hard to defend the hybrid and we’re now seeing Japan racing to catch up with electric vehicles, [while] China is moving on. And you’re seeing the same thing in America.
But the starkest example is what’s happening in Europe, where France led the conversion to electric due to the development of nuclear power in the past and Renault’s position on electric. Germany was held behind by the OEMs, [and] mostly by Daimler and VW. Now that Daimler has bought into [California-based electric car maker] Tesla, and VW announced a partnership with China’s BYD, you’re starting to see the German government moving to catch up [with] the French regulation and position on electric vehicles.
Knowledge@Wharton: You were able to convince Carlos Ghosn that Renault and Nissan should join in the endeavor. How did that come about and how have the other car companies reacted?
Agassi: President Peres and I met with Ghosn in Davos in 2007. I don’t think we convinced Ghosn. He already had the vision that the future of Renault-Nissan is electric. A lot of people tell the story as if I convinced him. Ghosn was more convinced than I was that this was the future, so he deserves the credit. He was an exception in [believing] that hybrids just don’t make sense long term — its dual-drive train, its cost structure is counter-intuitive to everything that was done in the industry. So he took it to the extreme and said, “If we go more electric, let’s go all electric.”
The problem was that a lot of other CEOs were trying to defend their legacy instead of building for the future. And they did not understand how fast this shift would happen. But we’re explaining it to them …. The main problem we had was trying to explain to some of the car CEOs, the car industry leaders, that an opportunity is lurking in 2011, 2012 as the “house was burning” and they didn’t see how they were [even] going to get through the next quarter or the one after. It was not conducive to getting business done. Now that hopefully a lot of them are getting out of this situation … it’s easier to convince them that they’ve got to build for something in the future.
John Paul MacDuffie: To pick up on that, I am curious to hear your story for the Americas in terms of who is fast and who is slow, just to complete the world survey.
Agassi: One of the things that happened in America was that while we were changing the guard in the White House, Congress and the Senate were relentless in their push for the right incentive plan. So what you’re seeing is that in the U.S., we put a lot of money both into the manufacturing and the consumption sides of the equation. We put [Department of Energy] money to [facilitate the] change toward electrification with $25 billion of the budget, about $7,500 toward every electric vehicle at the federal level. Some states are doing more. We’re seeing a lot of programs in the current proposed energy bill at the House and the Senate, including financing for mass production, buying batteries [and so on] …. So there’s a whole collection of bills that have been put through the House and the Senate which are coming into fruition and creating a fantastic [opportunity] for electrification.
…. I’m starting to see it from the manufacturers in Canada, and in particular in Ontario, where Premier [Dalton] McGuinty is leading this effort. [Similarly] in Brazil and some of the other South American countries, their understanding is that if they don’t catch up with electrification, they will be left with the old industry, while the U.S. uses its money — hundreds of billions of dollars — to shift and rebuild the car industry before it’s too late.
MacDuffie: Of course, there are several new entrants in the electric car space in the U.S., like Tesla and Bright Automotive. Have you been in contact with them? Which do you think have promising manufacturing and business models that might coordinate well with your thoughts and your network?
Agassi: It’s important to understand that we’re solving a very different problem than these guys, as much as I have a ton of admiration for [Tesla chairman and CEO Elon Musk] and the role that the company has played in galvanizing the public’s perception that a great electric car can be produced. And [Tesla’s] Roadster has been a fantastic demonstration of what technology means in the world of electric cars.
We are trying to solve a different problem, which is: How do you run an entire country without gasoline? To do that, you really need to get a plan that scales at very high volume and low cost. And so while most of these guys have targeted high-end, $80,000 to $120,000 cars, we’re targeting cars that are below $20,000. We’re targeting the car that will be in that $10,000 to $15,000 range, but still give you everything you would get from a middle of the road Chevy Malibu, instead of trying to go to the highest high-end car possible.
If you look at volume, at producers that can produce at the very least … 100,000 of these kinds of cars per plant, there are very few players like that in the U.S. All three of them [Tesla, Bright, and Fisker] are well known as U.S. domestic makers….
Now the reason I’m saying 100,000 a plant at the very least is that we need something that is replicable, which can then go from 100,000 to a million to 10 million over a period of about 18 months to 36 months, because we have a very short period of time to solve this problem. If you don’t get very quickly to a million and then to 10 million, we will not be able to solve the problem of how to live without oil.
MacDuffie: That was one of the things about scaling that I wanted to ask you, so thank you. It seems that one of the ideas that has captured the public imagination most is the battery-swapping stations. Do you think that drivers will be comfortable with leasing their batteries versus owning them? In the early period of the hybrids, there was worry about whether these batteries will have longevity and so maybe leasing looked like a nice way to deal with that concern. But it seems like those concerns are not as strong today. Do you have any sense yet of what the consumer reaction to that idea will be?
Agassi: That was one of the key misunderstandings about our model. We do not lease the battery. We as the operator, Better Place, remain forever the owner of the battery. The consumer does not lease the battery. What the consumer buys is kiloliters. We don’t sell kilowatt hours and we don’t lease batteries. We’re not a financing organization. We’re an organization that provides a service, which is unlimited driving at a price on a per mile basis. And we buy kilowatt hours and buy batteries to provide that kind of service through infrastructure, which we put around an entire region. From all the surveys that we’ve done with consumers who have seen our switch stations, more than 80% said they would rather own a car without owning the battery or they don’t really care about who owns the battery.
MacDuffie: From the perspective of the different vehicles from different manufacturers that would potentially use one of these swapping stations, what’s your sense of the likelihood of the OEMs agreeing to standardization [so that] there’s one battery type? …. If a charging station had to stock multiple types of batteries for different manufacturers, the logistics of managing those inventories gets more complicated to avoid running out [of the batteries] or having surpluses at a particular location. ….
Agassi: For one, we do not assume standardization. We assume that there will be multiple types and sizes of batteries. And we believe that the early movers will most likely decide to go with batteries that are unique to them. As a result, when we start in a region, we will need to decide which cars we service, and continue to service those cars for longevity. The design of the switch station has been one [that deals] with multiple car types and multiple battery types.
At the same time, you have to remember that once the infrastructure is in place, car makers have an incentive to use the batteries that were used by somebody else [given that the volume is already high] in that region. Otherwise they’re the ones who are going to need to take care of stocking the extra batteries if volume [is low]. It’s the same model that you want with retailers. If you’re starting your first shops, then you need to court the original makers to give you some goods to sell; otherwise, the store is empty. But once your store is serving people, it’s your shelf space that becomes more valuable than the actual goods from the makers.
MacDuffie: So it’s really a pull over time toward standardization when the scale is there and the customers are there?
Agassi: Let me put it this way and you’ll get it very easily. We see that model today with gasoline. In the early days of gasoline, if you didn’t have oil, you couldn’t open up a gas station. The minute you got oil, you went out and you installed gas stations. And then you sold the oil at whatever refining level you had across all these gas stations. Once the gas stations are in the right locations and people like them … they use these stations. If somebody says, “I have a new fuel” — let’s say a zero-carbon, very cheap, no-emission, no-pollution fuel — they’re more at the mercy of the gas stations than the other way around. They need the gas stations to stock [the new fuel] before people buy the cars that use that fuel.
MacDuffie: I like that analogy. So let me ask a question that’s more about battery technology. Do you think it will be stable enough for whatever kind of model — whether it’s for recharging or battery swapping — in the infrastructure you envision? What’s the risk of it becoming obsolete by a big change in battery technology or some other change that would make the infrastructure problematic?
Agassi: One of the things I believe is that huge breakthroughs in science don’t happen as miracles. What we’ll see in mass production in five to 10 years’ time has to be in the lab right now ….
[In] very few cases can we get from 200 kilowatt hours per kilogram to 300 kilowatt hours per kilogram. That’s a 150% to 200% improvement over what we have today, which means we probably are going to see [a similar improvement] in about five to seven years’ time if that’s what is in the lab. That means we’re going to see a battery that will do roughly 250 miles to 300 miles on good days at the same size and for the same cost as what we have today.
The interesting element is if you get to that kind of battery, would you put that battery in your car? [What if] you — seven years from now — have a swapping infrastructure across the region [and can] only buy half that battery at half the price and have a price advantage that is more distinguished and gives you a better business model? The answer is most people would rather pay half as much per mile and have a 120-mile battery than those who would buy a 250-mile battery and pay twice as much per mile driven.
MacDuffie: So the emergence of that kind of greater range doesn’t necessarily invalidate the plan for the infrastructure [and] current battery technology?
Agassi: Remember the early cell phones — the bricks — that had a big battery attached?When that battery technology improved, we didn’t keep the same talking time and the big brick. We reduced the size of the phone and put a half a battery in there. Okay? And we kept on doing the same thing again, again and again. It’s not that we couldn’t keep [the old phone]. Imagine today if we took a brick like the original Motorola phone and put a battery inside. You’d be able to talk forever. But who would buy that phone?
MacDuffie: Let me ask what is a kind of geography question. So far, you’ve had a lot of enthusiasm from Israel, but also from other places that are relatively concentrated geographies, like Denmark and Hawaii. Is there any sense that that’s the most logical starting place for this model in terms of getting critical mass quickly and [needing] fewer long trips in a proximate geography, hence less need for spacing the recharger or battery-swapping stations to support long trips?
Agassi: Are you saying that it’s unfair that we picked the best places to start?
MacDuffie: No, I’m just wondering if you see a natural fit for … relatively smaller geographies as a place to prove this, or if you plan to prove it in large geographies at the same time?
Agassi: I just want to remind you that our third location is Australia. So we went big as well. The rationale in picking Israel and Denmark is obvious. It’s a single-cell model, if you want to think of a cell-phone metaphor. Israel is almost like a one-and-a-half cell, if you think of a cell as a radius of about 100 miles from the middle point of the country. And Denmark is not different than that. With the same kind of 100-mile radius from Copenhagen, you reach most of the country. You need half a cell to cover the rest of the country.
The issue is that we can only see multi-cell organisms. If you think of the West coast of the United States, it’s basically four cells and a long freeway connecting them. Think of L.A./San Diego as one-and-a-half cells. San Francisco is a full cell. And then Portland is a half cell and Seattle is a one cell. What you see is that you’ve got four cells and a 1,500-mile highway connecting them. That’s one of the models we’ll be looking at proving. So we’re always in the position that once you’ve done it in one country, it’s very easy to replicate in other countries regardless of size.
MacDuffie: Could you say a bit more about Australia because it is a [location] with vast expanses of very low density. How are you thinking of tackling a country like that?
Agassi: We don’t need to tackle all of Australia. That’s the beauty of it…. We don’t need to do 100% of the cars on day one. Australia has three very big cells: Melbourne, Sydney and Brisbane. All you need to do is cover each one of those cells that are very dense urban centers. If you think about them, there are extremely profitable cell-phone models in each one of those.
So the same thing [applies] to us. We have very dense coverage in those [cities] and then one freeway that connects them that runs, I think, about 1,000 miles. And that highway gets a switch station every 25 miles, which effectively gives you comfort that you won’t get stuck when driving from any of these cells to any of the other cells.
You don’t drive 1,000 miles every day. But when you do, you’re within coverage. And so you really get an environment where you’ve got three major, highly profitable centers and a very good connection across all of them.
MacDuffie: You’ve used the cell phone — product, business model, industry, evolution — [as an] example several times. Did that enter into your thinking early on as sort of a stimulus to your vision?
Agassi: It did. It’s actually more exiting minds right now than entering. One of the mistakes that we made is we thought of ourselves too much as being a cell-phone company. We’re more like an energy company or a modern oil company in the sense that we sell the same product, we sell miles to drivers…. We’re more [like] a company [in] infrastructure, which buys its assets and through that, sells a service — effectively a comfort of driving miles only with sustainable ways both for the economy and [the environment].
MacDuffie: One more general question about the different parts that Better Place is involved with. As I understand it, a lot of the automotive value chain would change under your vision, including design, production, distribution and the way that energy is consumed. How far along are you in figuring out the incentives for each part of the chain to [encourage them to] participate in the model?
Agassi: For car makers, it’s pretty obvious. They have a ton of capacity. They’re looking at a non-sustainable business model as it is today. We’re proposing to them a much better business model — a highly profitable car that drives for a long period of time with very low warranty costs, and some incentives to work with us and provide us with cars.
We’re providing an incentive for the gas-station owners to … leverage their space by [installing] switch stations inside. We’re providing great incentives for the utilities in the sense that we’re buying excess capacity [from them], in particular in renewable excess capacity. We’re selling them standby power whenever they need it so they’ve got a great customer who is intermittent and is willing to share its storage, which is a very big pain for them right now. For governments, we provide a way to [rectify] trade balance issues in terms of not importing any more oil.
….Finally, the consumer gets a cheaper car with more convenience, with the ability to drive indefinitely, without noise, without pollution, without killing their future and their kids’ future. Overall it’s one of the biggest value generators, mostly because we’re taking out the implicit and the explicit cost of oil.
Knowledge@Wharton: What message would you like to give high school students about the cars and car industry of the future? And how can they get involved with Better Place?
Agassi: First thing they have to remember is that their first car will be electric. The young generation today understands that … we don’t have enough oil in the ground and we don’t have enough of an atmosphere to sustain them until they die if we don’t switch early. And the earlier we switch … the easier it is going to be to recover from what we — our generation and the generations of the past — have done to this planet, and the abuse that we’ve [inflicted on] natural resources …. And so the first thing to remember is your future is electric.
The second thing is that this is one of the most exciting times in this industry. We will have a billion electric cars on the road sometime around 2025 because we will have a billion people [driving] and there’s no way they can be [driving] gasoline cars. Between now and 2025, a billion new cars need to be added and there will not be any industry that will be more exciting than this one. If you think of an industry that will make a billion of something, [with an average price of] $20,000, you’re looking at a $20 trillion industry rising up from nothing today within the span of 10 to 15 years.
Those are the kinds of [things] that made Silicon Valley a great place to work and made biotechnology a great place to work and made the Internet such a fun place to be part of in 1995. If they’re looking for something that will be the next big industry, there’s no doubt in my mind that the electric car is the next big thing and that $20 trillion is just the core of this industry. There’ll be batteries and services, innovation and new product technology. Everything will be reinvented and they’ve got to think of a way to get into this industry while they can.
Knowledge@Wharton: Is there a way students can get involved with Better Place?
Agassi: We have probably about 15,000 to 20,000 unsolicited resumes. There’s always a way to get our attention if they want to and they work hard. I’m sure that down the road when they’re done at Wharton, we’ll look at their resumes.