Diffusion of New Technologies

Abstract

Diffusion of new technology usually takes 10–40 years to achieve the big majority in a market. The first example studied, hybrid corn in Iowa, was S shaped. Since then all schoolbooks examples are S shaped. But reality is different. We often have a dip in sales after a first take-off that kills many small companies.

Diffusion is the process by which an innovation is communicated through certain channels over time and among the members of a social system.

Rogers, 2003

The Economist: Fuel economy

Difference engine: Going along for the ride

© The Economist Newspaper Limited, London (Feb 3rd 2012)

IMAGINE you are stopped in the street by a clipboard-toting pollster, who asks whether health insurance should automatically cover all necessary procedures and medication, with no restrictions or co-payments? Nine out of ten people (if not all) would instantly answer yes. But had the respondents been warned beforehand that they would have to stump up an extra $10,000 for such coverage, the answer could easily have been a resounding no.

Sad to report, this kind of selective polling—in which only the benefits are mentioned so as achieve a desired result—is cropping up increasingly in the support of various agendas. Substitute motor manufacturers for health insurers and fuel efficiency for medical treatment in the thought experiment above, and you have the kind of “grassroots justification” that the Environmental Protection Agency (EPA) and the National Highway Traffic Safety Administration (NHTSA) are using to push through a doubling in the Corporate Average Fuel Economy (CAFE) figure motor manufacturers must achieve or face stiff penalties. The new proposal requires the fleet-average for new vehicles sold in America to rise incrementally from today’s 27mpg (8.7 litres/100km) to 54.5 miles per gallon by 2025.

The most effective endorsement for the new CAFE proposal comes from a national survey carried out last October by Consumer Reports (a highly respected non-profit organisation based in New York) which claimed that 93% of the 1,008 people interviewed by telephone wanted higher fuel economy and would pay extra for it. The survey results were released the day before the government announced its new CAFE proposal. Ever since, the poll has been considered hard evidence that the new CAFE proposal is widely supported by the American people.

Like all polls, when people are asked personal questions, they do not necessarily tell the whole truth. Indeed, most respondents provide the kind of answers they consider socially acceptable. In some cases (how often do you brush your teeth?) the response is inflated; in others (how much do you drink?) it is deflated. It is a well-known phenomenon, called “social desirability response bias”, which has been studied by sociologists and market researchers for decades and requires questionnaires to be structured in highly specific ways to minimise inbuilt biases.

“So, when consumers say fuel economy is extremely important, they are not lying,” says Jeremy Anwyl, vice-chairman of Edmunds.com, the most popular source of independent car-buying advice used by American motorists. “The survey has just not allowed (or required) them to point out that other attributes are even more important.”

Deciding what new car to purchase is a complicated undertaking, requiring all sorts of rational and emotional compromises. There are emotional factors to take into account, such as brand image, luxury, sportiness and appearance. Then there are physical features like comfort, number of seats, cargo space, body type and towing capacity. For most people, price and fuel economy represent costs.

In testifying before Congress last year, Mr Anwyl explained that “consumers are happy to pay less, or save fuel, but not if it means giving up features they deem important.” A market simulation model that Edmunds has developed over the years indicates that fuel efficiency accounts on average for about 6% of the reason why consumers purchase a particular vehicle. Fuel efficiency only becomes important when petrol prices suddenly start climbing, but then declines in significance when pump prices stabilise or start to fall.

Here, then, is the conundrum: if the vast majority of motorists in America claim to want higher fuel economy and are prepared to pay for it, why are they not doing so? There is no shortage of cars already on the market capable of 40mpg or more. The Toyota Prius gets 50mpg on the EPA’s combined cycle, while electric vehicles like the Chevrolet Volt and the Nissan Leaf deliver the equivalent of 60mpg and 99mpg respectively.

Yet few people are buying them. Despite large tax incentives for buyers, Volt and Leaf sales have fallen well short of even their manufacturers’ modest expectations. Altogether, hybrid and electric vehicles account for only 2% of America’s new car market. The government may mandate manufacturers to produce fuel-efficient vehicles, but it cannot mandate motorists to buy them.

The problem is their higher purchase price. Take the Toyota Camry, which is available in directly comparable hybrid and conventional forms. The hybrid version costs typically $3,400 (or 15%) more than the standard car, but achieves 13mpg (or 46%) better fuel economy. Even so, there have been few takers for the petrol sipper. Last year, Toyota sold over 313,000 ordinary versions of the Camry compared with fewer than 15,000 hybrid versions, notes Mr Anwyl.

The official line is that owners recover the premium on a hybrid or electric vehicle through lower running costs—with payback times of anything from four to seven years, depending on fuel prices. Unfortunately, American motorists tend to trade their new vehicles in after 3–4 years, and so do not collect anything like the full payback. Besides, the Edmunds model of consumer-buying habits (with 18m visitors a month, the website collects more data on such transactions than even the manufacturers) shows that consumers demand a payback period of 12 months or less.

What, then, to make of the new CAFE proposal? Achieving a fleet-average of 54.5mpg is doable, say motor manufacturers, but it will not be cheap. The NHTSA puts the cost of the extra technology (eight-speed transmissions, direct-fuel injection, turbo-charging, hybrid drives, larger batteries, electric power steering, low-rolling-resistance tyres, better aerodynamics, heat-reflecting paint and solar panels) needed to achieve the target at a modest $2,000 per vehicle, with a lifetime saving on fuel costs of $6,600 (provided fuel prices do not decline).

At the other extreme, the National Automobile Dealers Association reckons all the additional technology needed to achieve the 2025 goal will add $5,000 to the price of a new vehicle. Take somewhere in between—say, the $3,400 premium that Camry hybrid owners pay—and any lifetime savings through lower running costs look even more difficult to recoup.

Much, of course, depends on what fuel prices do over the ensuing years. And that includes the price of coal and natural gas as well as oil. Remember, most of the new electric vehicles and plug-in hybrids that carmakers will have to build to meet the new CAFE requirements will be recharged overnight using electricity from power stations that mostly burn dirty coal or (if people are lucky) cleaner natural gas or uranium oxide.

The good news is that the bonanza in domestic discoveries of natural gas should help keep the lid on fossil-fuel prices for years to come. And if fuel prices come down in real terms, that will hurt sales of fuel-efficient vehicles.

Indeed, the way the NHTSA and the EPA have skewed the relief manufacturers get on vehicles of different sizes will pretty well ensure that American motorists will, once again, opt for trucks and SUVs rather than Prius-like vehicles. The deal done to buy off the industry’s opposition to the new CAFE requirements granted manufacturers special credits for certain fuel-saving technologies. Meanwhile, pick-up trucks and larger SUVs were given what effectively amounts to a free pass.

The degree to which a vehicle has to comply with the NHTSA’s fuel-efficiency and the EPA’s carbon-emission requirements depends on the vehicle’s “footprint” on the road. The larger the area (measured by multiplying the vehicle’s track by its wheel-base), the greater the relief.

This was the fix that got Detroit’s “big three”—which still rely on trucks and SUVs for the bulk of their profits—on board. No wonder Volkswagen and Mercedes-Benz have complained bitterly about the deal, while General Motors, Ford and Chrysler have now come out in support of the new CAFE proposal. An added sweetener for American manufacturers and trade unions was to exclude credits for the extremely frugal diesel engines that European carmakers have spent billions perfecting.

All told, then, will motorists across the country be getting 50mpg or more by 2025? Hardly. For a start, there is a world of difference between the testing methods used by the NHTSA for CAFE purposes and the EPA for determining a vehicle’s fuel-economy figures for the window sticker that new vehicles must display in dealers’ showrooms. Because of the difference, consumers will be paying for technology needed to achieve a CAFE average of 54.5mpg, but will be buying vehicles that achieve a real-world average of around 36mpg.

That assumes the CAFE target will still be in place by then. Because there is a limit to the number of years ahead for which the NHTSA can set fuel-economy standards, the new CAFE target will have to be reviewed by all parties in 2019. By then, much could have changed—in terms of energy price and availability, as well as engineering. Though a long shot, a breakthrough in storage technology would alter everything.

And by then there will, of course, be a new Administration in the White House with, quite possibly, an entirely different agenda concerning energy and the environment. As much as anything, insiders reckon the possibility of being let off the hook by a new Administration was the clincher that persuaded the motor industry to go along for the ride.