Telephones, computers, electric vehicles, and other market failures

February 15th, 2013

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By W. L. Leow

In some circles in Washington, DC, the future of electric vehicles (EV) has become as hot a topic as sequestration or immigration reform. Some skeptical journalists and policymakers are rushing to declare the entire electric vehicle sector a mistake or failure at the first sign of difficulties. Their rhetoric is cogent, writing lucid, and numbers seem compelling. At first glance, the fact that Americans bought just 71,000 plug-in hybrids or all-electric vehicles in the past two years might make the EV look like a failure. The emergence of EVs, however, needs to be viewed from the framework of technology adoption and diffusion, rather than raw numbers or road trips, to tell the true story.

Today, EVs are the purview of innovators like Elon Musk and Larry Page. In the lifecycle of a new technology’s emergence, that’s where they should be. In this context, the EV is crying at the pains of birth and infancy, rather than convulsing at the death throes of oblivion, as some seem to suggest. Its future depends on continued innovation, the right policies that help EVs transitions to become the primary mode of transportation, and the quite likely rise of gas prices. As important, particularly for those making policy or opining on it here in Washington is an understanding of how consumers adopt technology and how it gets diffused into the marketplace.

Technology adoption and diffusion is hard to predict, and even the most brilliant minds fail at that. Ask Thomas Watson what was on his mind when he thought, “there is a world market for maybe five computers.” Or what were they thinking in Western Union when they dismissed “the telephone has too many shortcomings to be seriously considered as a means of communication.” and concluded that “The device is inherently of no value to” them back in 1876. Harry Morris Warner, of Warner Brothers fame, had his off-day too, like when he questioned “Who the hell wants to hear actors talk?” in 1927.

Technology adoption and diffusion takes time, and some innovations take much longer than others to be embraced by the population. It is difficult to put a timetable on this, and hastily writing off an innovation is foolhardy at best. Drafting a timetable for the adoption of EV is hard. It is helpful, however, to get a more realistic assessment of the future of EVs if we put their growth in the context of broader, established framework of how new technologies are adopted by consumers and gain widespread traction in their market.

In 1962, Professor Everett Rogers published his work “Diffusion of Innovations,” which introduced a theory on the adoption and diffusion of innovations among individuals and organizations. According to Rogers, there are five categories of consumers.  These five categories of consumers are Innovators, Early Adopters, Early Majority, Late Majority and Laggards.

The relationship between the five categories of consumers and the different phases of technological adoption and diffusion. The figure presents the five categories of consumers and their proportion on a Bell curve, and the market share achieved as each group of consumer adopts the innovation.

Innovators are usually the youngest, richest first adopters with a larger appetite for risk. They tend to be very social and have close contact to scientific sources and interact with other innovators. Though a small part of the population, at 2.5%, they lead the pack and pioneer the adoption of a new technology.

The Early Adopters are the second fastest to adopt an innovation. They have the highest degree of opinion leadership among the other adopter categories and are typically younger, enjoy higher social status, have more financial lucidity, and are better educated. Though similar to innovators, early adopters are more discerning in their adoption choices.

Members of the Early Majority adopt an innovation after a varying duration of time. They are much later to the game than the Innovators and Early Adopters. This cohort also has above average social status and comes into contact with early adopters, but they seldom hold positions of opinion leadership.

Consumers in the Late Majority category tend to adopt an innovation only after the average person has already done so. They approach an innovation with a high degree of skepticism, have below average social status and limited financial lucidity, don’t have contact with early adopters or innovators, and have very little opinion leadership.

Finally, laggards, as the name suggests, are typically the last to adopt an innovation and show little to no opinion leadership. These individuals typically have an aversion to change-agents and tend to be older. They are also more focused on “traditions,” and are more likely to have the lowest social status and financial fluidity. Laggards are usually in contact with only family and close friends.

So, where do EVs fit in this frame?

Cars like the Ford Focus Electric and C-Max Energi, Toyota’s Plug-in Prius, Chevy Volt, Nissan Leaf, Tesla Model S are still being adopted by the Innovators and, at most, are in the realm of Early Adopters. In the context of Roger’s theory, these are still early days for the EV. Joe the Plumber isn’t likely to shell out $30,000 to $100,000 for an EV. One suspects he is at best an Early Majority. But if gas hits $6 a gallon, Joe may be the first to place an order for an extended range EV from Via Motors so that he can stay competitive in the cut-throat plumbing business.

We also shouldn’t overlook the export potential of EVs. Some Chinese cities like Beijing have dangerously low air quality, making EVs that run off of electricity from the growing nuclear, hydro, and renewable generation fleets an attractive option. That’s likely part of the reason Chinese manufacturer Wanxiang Group quickly came knocking when American A123 batteries failed. If an American EV manufacturer did go under, which we don’t expect, it is likely that every northeast Asian automaker will be locked in a Royal-Rumblesque bidding war for it.

All of these are reasons why we’re willing to bet that in a future oped or term paper, the assessment that the EV industry is a mistake will be added to the list of example we cited of predictions on technology adoption and diffusion going wrong.

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W. L. Leow received his doctorate in engineering systems for his work on sustainable energy systems at the Massachusetts Institute of Technology Energy Initiative. He is currently exploring his interest in clean energy policy with Third Way.