Navigant Research Blog

Will EVs Destroy the Auto Dealership?

— October 31, 2012

Automakers Tesla Motors and CODA Automotive both operate company-owned showrooms, which are not being called “dealerships,” and which offer the ability to see, touch and feel vehicles, as well as order the vehicles.  Tesla vehicles are delivered to consumers’ homes.  Telsa claims this means these are not technically dealers, while CODA does have dealers in the traditional sense.  Similar to what we’ve seen before, traditional auto dealers are not buying Tesla’s distinction and legal battles are sure to follow.

This is a bit of déjà vu from the late 1990s, when car dealers felt threatened by companies trying to sell cars directly online.  This episode resulted in a strong response from auto dealers and legislated monopolies for dealers, under which particular dealers have exclusive rights to sell particular manufacturers’ vehicles in certain regions or cities.  This regulatory environment still exists today, including in Telsa’s home state of California.

Going back even further, to the early years of the automobile, vehicle manufacturers sold off their company owned dealers to avoid anti-trust suits from the government.  This has been the basis for complaints from auto dealers regarding any new perceived threat, whether Internet-based or manufacturer-based.  Let’s be clear on one thing: the current auto dealer business model is not going anywhere soon.  Auto dealers provide significant employment and political support in the United States, so it’s a near impossibility that the model will be demolished by a government or court ruling.  However, a consumer shift seems likely to have a bigger impact on the dealership model.  Tesla claims that it is not challenging the current dealer franchise laws so much as capitalizing on a unique marketing opportunity.  Whether that distinction matters seems likely to be answered by state courts, rather than public opinion.

A New Retail World

Dealers do provide key important services within the new vehicle purchase process.  They’re responsible for final inspections and detailing of vehicles for delivery and customer education and service during and immediately after sale.  As a manufacturer, Tesla is taking on a much bigger role and is likely to see strong support from consumers.  After all, what consumer wouldn’t want home delivery of vehicles, assuming inspections, education, and customer service are delivered with the car?  Whether Tesla can truly deliver these services with a vehicle will prove whether the Tesla business model has long-term merit.

Still, I wouldn’t be surprised if some states (particularly Texas) force changes to Tesla’s current store model.  At the same time, Tesla may be paving the way for a bold new world in automotive retailing.

Dealers are fighting what seems to be more of a consumer shift than simply a manufacturer skirting franchise laws.  The early adopters of EVs are young, wealthy, highly educated, tech savvy, and disinclined to put up with the haggling of the traditional auto-buying experience.  They want a more exclusive and customized experience than most dealers are delivering.  Dealers will have to recognize this (some already do), and I anticipate in another 15 to 20 years the dealer experience may shift toward something more similar to Costco’s model.  Costco works with a marketing firm and sells a manufacturers’ vehicle for a marketing fee or commission per vehicle sold, and the marketing firm then works with a dealer for ordering and delivery of the vehicle.  I don’t expect this shift will be smooth, but if the prognosticated long-term shift away from vehicle ownership holds true, dealers and individual state dealer laws are in for a shake-up whether they come along quietly or kicking and screaming.


A FVER Cure for Data Center Inefficiency

— October 31, 2012

An article in The New York Times on data center energy consumption has brought the debate over the hidden environmental costs of the digital society to a broader audience.  We have examined several of these issues in previous blogs and in our green data center report.

I think the article underplays the efforts the IT industry is making to encourage best practices on energy efficiency, notably through the work of organizations like The Green Grid. But it does highlight one particularly intractable problem: the unproductive consumption of energy by IT systems.  It’s a mark of shame for the industry that typically only 6% to 12% of the energy consumed by IT systems is used to do useful computational work.  This continues to be a problem despite campaigns to get data center managers to turn off idle servers and the availability of tools that can help monitor and manage the power use of IT.

One of the barriers to improvement has been the lack of an accepted metric that enables data centers to be compared in terms of their productive use of energy.  PUE (Power Usage Effectiveness) is now well established as a metric for data center energy efficiency, but it doesn’t capture data center productivity.  In fact, running your IT kit at full power even if it is not doing effective work will improve your PUE score (as IT would be a greater percentage of your energy consumption).

There are several current initiatives to produce a new metric that will account for the productive element of IT energy consumption, giving us a means of assessing which data centers are truly energy efficient.  The Green Grid has produced an initial model and work is also being done in the EU and in Japan, but it’s proving difficult to produce a metric that is both insightful and simple, which has been key to the uptake of PUE.  Now, though, a new metric developed by the BCS Data Centre Specialist Group may have cracked the problem.

Fixed vs. Productive Power

Called Data Centre Fixed to Variable Energy Ratio, or DC-FVER, it can be used to assess the amount of energy consumed for productive work compared to fixed energy consumption (that is, the energy consumed even when the servers are delivering little or no business value).  FVER allows each data center to define a useful work metric that is relevant to a company’s business, so it’s tailorable to different types of data center.  For example, a news website might measure productivity in terms of the number of webpages served per hour, while an online retailer may look at the number of transactions per second.  FVER is defined by the formula:

FVER = 1 + (Fixed Energy (kWh)) / Variable Energy (kWh))

As with PUE, the ideal FVER rating is 1, which would mean all energy is being consumed for productive work.  In reality, most data centers are expected to have scores closer to 10 on first assessment.

A simple example given by Victor Smith, Vice Chairman of the BCS, at the Green Data Centre Conference explains how it might work.  After choosing a useful work metric for a specific data center, the output and the energy consumption needs to be measured, say, every hour for a week.  At the time of minimal work, it’s possible to get a measure of the data center’s fixed energy consumption.  So if in the most productive hour 1.2 megawatt-hours (MWh) are consumed and in the least productive time 1 MWh, then variable consumption is 200 kWh, (the energy consumed for productive work).  In this case:

FVER =  1 +  (1000 kWh / 200 kWh) = 6

FVER will also allow direct comparison between data centers based on their productivity relative to energy consumption.  FVER is only one among a number of approaches to measuring data center productivity, and more complex metrics will also have their place, but it could help accurately assess the efficiency of data centers.


Your Tax Dollars at Work

— October 31, 2012

Shame on you for reading that title and expecting an attack on government agencies.  Far from it.  I encounter many civil servants in my research – mostly U.S. civil servants – and they uniformly impress me with their knowledge and diligence.

The Industrial Control Systems Joint Working Group (ICSJWG) conference, hosted by the U.S. Department of Homeland Security (DHS), was of course well-attended by civil servants.  This is my fourth ICSJWG and I return from each event freshly encouraged that intelligent people are working long hours and thinking deeply about threats to critical infrastructures – that the servants, well, serve.

The ICSJWG conferences are among my favorites.  DHS’ sponsorship means that I hear speakers at their events that I will hear nowhere else.  Likewise I meet attendees there that I meet nowhere else.  Keynote addresses are entertaining and informative – something that I never take for granted.   There is a convergence of industry and academia at these events that somehow works.  Best of all, registration is free.

One compelling example of commitment came from the U.S. Navy.  The Navy’s next generation destroyer, the USS Zumwalt, will carry 50% fewer crew than previous destroyers, achieved largely via increased automation.  A destroyer is essentially a self-contained town, so that automation includes many industrial control systems (ICS), most of them IP-enabled.  ICS increases productivity but also increases cyber attack points of vulnerability dramatically.  So in designing the ship’s cyber security, the Navy uses a triage approach to cyber threats in different scenarios.  One sobering scenario: during combat, the ability to complete a mission has greater priority than protection of human life.  Try to think of another ICS where protection of human life is not top priority.  That’s commitment.

I leave every ICS JWG conference reassured that the U.S. government is taking action, urgently, to protect critical infrastructures.  Yes, we need more and better regulations.  But the people I see at ICSJWG aren’t waiting around for a set of regulations.  They are taking action when action is needed:  now.  They are well-aware of today’s threats, from hacktivists or from hostile nation-states.   Hacktivists are by nature unpredictable, making defense a challenge.  And nation-states only have to be hostile part of the time to threaten our infrastructure.  Those two threats are at nearly opposite ends of the spectrum, yet DHS considers each equally.  Each can wreak havoc if left unchecked.

For all the utilities that are waiting for NERC CIP v5 before funding cyber security or hiring lawyers as compliance officers, here’s a tip:  the United States government is way ahead of you.  Watch and learn.  Then do!


U.S. Bucks the Tide on Carbon Taxes

— October 31, 2012

Concerns about rising carbon emissions on a global basis have prompted many nations to implement taxes on their carbon-emitting industries.  According to a Climate Commission report, in 2013 33 nations and 18 sub-national jurisdictions will have adopted some form of national carbon tax that covers around 850 million people, about 30% of the global economy and 20% of global emissions.

Although the European Commission proposed a carbon tax in 2010 to charge companies between $5 and $39 per metric ton of CO2, that legislation has not yet been agreed upon by its 27 member states.  However, many European countries have enacted their own carbon tax, including Denmark, Finland, Ireland, the Netherlands, Norway, Slovenia, Sweden, Switzerland, and the United Kingdom.

Finland was one of the first countries to introduce a carbon tax, in 1990 (with a 2010 price on carbon of $26 per metric ton of CO2).  Sweden and Norway enacted carbon taxes a year later, followed by Denmark in 2002.  Today, Norway, the 8th-largest oil exporter in the world, has one of the most aggressive carbon taxes in the world.  The Norwegian government has recently proposed to double its carbon tax on offshore oil companies to more than $71 per ton of CO2 and to almost $9 per ton of CO2 on its fishing industry.  In the United Kingdom many large companies pay a price for the carbon they emit through the EU’s emissions trading scheme.  Examples of carbon tax adopting nations in Asia Pacific are Australia, India, South Korea, Japan and China, which has run pilot emissions trading schemes in a number of provinces and cities to eventually implement a carbon tax on high energy-consuming companies.

What about the United States?  The United States has resisted a nationwide carbon tax policy. Indeed, the current U.S. Congress has made every effort to prevent any action to curb carbon emissions by the Environmental Protection Agency (EPA).  Most recently, on September 21, the U.S. House of Representatives voted in favor of Stop the War on Coal Act (H.R. 3409) to prevent greenhouse gas (GHG) reduction measures, including a ban on any action by the EPA to address climate change.  Given this political climate, a nationwide carbon tax is not very likely in the foreseeable future.  However, California has taken matters in its own hands by enacting its own carbon trading scheme, including a carbon tax, as part of its Global Warming Solutions Act, enacted in 2006.  To meet the state’s carbon emissions reduction goal of matching 1990 levels by 2020, California developed a cap-and-trade program that included a carbon tax on 300 companies, including several utilities, deemed to be the most serious polluters.  Today, California’s cap-and-trade program is linked to Québec’s cap-and-trad scheme, with the first auction scheduled for November 14, 2012.

To be sure, carbon taxes are not without serious challenges and criticisms.  Critics object that such taxes will inevitably be passed onto consumers, could result in industry and electricity production moving to other countries, and won’t significantly reduce carbon emissions.  Yet, countries around the world, convinced that emission trading schemes coupled with carbon taxes are the most cost-effective and efficient ways of reducing emissions, are taking steps to tackle climate change by pricing carbon.  At the same time, policymakers in these countries realize that taxes alone are not enough: broader environmental policies on a national level need to be in place to reduce carbon emissions.


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