Japanese_Government_Eviromenatal_Policies_in_Automotive_Industry

Government Policies and Environmental Innovations in the Development of Alternatives to Conventional Vehicles Major Assignment Abstract The primary aim of this essay is to understand the impact of government policy on innovation in the development of alternatives to conventional vehicles. The focus of this essay is on battery-powered electric vehicles (BPEVs), hybrid electric vehicles (HEVs), and fuel cell electric vehicles (FCEVs). These alternatives present an interesting case of innovative technical choices in government policy. The whole chain of government support, including the context in which these policies have been implemented since the early 1970s, is described. Governments have adopted comprehensive strategies and drafted long-term strategic plans including R&D, demonstration and market support. These strategies have enabled governments to influence the direction of technical development within domestic and international automotive industries with relatively limited government funding. In the development process discussed here, market support has been equally important for the development process as the R&D efforts. The history of electric vehicle innovation in Japan is referred to heavily as it illustrates the conventional wisdom the ‘picking winners’ in government policy is not easy. My conclusion is that government should, if possible, focus on technologies that fulfill several policy aims and which can be used in several different applications. This increases the chance of a technology surviving the long journey from idea to competitive product. Government Policies and Environmental Innovations in the Development of Alternatives to Conventional Vehicles The aim of this essay is to discuss the effect that government policy has played in the development of alternatives to conventional vehicles. Recent suggestions for continued government policy are discussed, as the development of alternative vehicles is still an ongoing process. Firms in innovative industries are engaged in activities rich in technological opportunity. For that reason they are expected to generate a sustained flow of products and processes, some of which may represent major rather than incremental advances (Aghion 2008). Environmental considerations are bringing pressure on manufactures to produce vehicle designs that are radically different from the current, conventional powertrain consisting of an internal combustion engine combined with a mechanical drivetrain (IECV) (Jaegul 2004). The alternatives that have been discussed by car manufactures and governments with increasing intensity during the past 30 years are battery-powered electric vehicles (BPEVs), hybrid electric vehicles (HEVs) and fuel cell electric vehicles (FCEVs) together with more conventional alternatives based on internal combustion engines such as compressed natural gas vehicles (CNGVs). This essay focuses on alternatives with an electric drivetrain, i.e. BPEVs, HEVs and FCEVs. These alternatives have the potential for substantially reduced tail-pipe emissions and greater energy efficiency then improved conventional ICEVs (Weiss 2001). The traditional technical design, the IECV, has been refined and improved over 100 years, and together with a global industry characterized by fierce competition restricting the possibility of taking the risks involved in developing an alternative design, could well be defined as a case of market lock in (Cowan 1996). This has motivated governments all over the industrialised world to support the development of less polluting and more efficient vehicles (Lemoine 2008). However, Japan was the first country in which a vehicle with an alternative powertrain (the HEV) became available on the passenger car market (Ahmann 2004). This essay provides some analysis on how government policy not only affected the pace of innovation but how it can also affect the evolution of market structure. The specific barriers, development needs and estimated time before becoming completive differ between the various vehicles studied. The alternative powertrains addressed in this essay all depend on the successful development of the electric drivetrain and its links between the development of high-powered batteries and high-energy batteries during the early stage of development (Jaegul 2004). As Japanese auto manufactures have lead the way in bringing to market alternate powertrains (Lemoine 2008), this essay will study the Japanese Government’s role in fostering innovation and will analyze the whole chain of government policy since the early 1970’s, the technical choices that have been made, and in what context all this has been implemented. Due to the success of ‘Big Science’ in the 1940’s, where scientific progress relied on large scale progress (e.g. The development of the atomic bomb), technical innovation was long seen as a linear supply push process, in which scientific discoveries automatically led to useful applications that satisfied market needs (Capshaw 1992). In the linear model the role of government is limited to funding of basic R&D and sometimes applied R&D in the public interest (Freeman, 1995). The sequential linear model in government policy and innovation replaced the linear model in the 1970’s (Soete 1995). This process of technical change is here seen as separate and sequential development phases (e.g. R&D, field tests, demonstration, market introduction, and diffusion) (Blazejczak 1999).Government involvement is not limited to R&D but could be called for in all phases and could include financial support for gaining experience (learning effects) and increasing scale of production, distribution of information, building of industrial networks, and creating standards (Blazejczak 1999). Based on the current understandings on what successfully drives and guides the process of technical change, the role of government policy has shifted from pure supply push, such as government funded R&D, and become more focused on the demand side and the utilization of scientific discoveries in society (Freeman 1995). A key feature of modern technological change theories is the influence of socio-technical (interaction between people and technology) paths guiding the direction in which technology develops (Hill 2008). These paths act as effective barriers for alternate technologies, e.g. Lock in effects (Cowan 1996). Another observation is that technical change in inherently uncertain, both with regard to technical progress and to adoption (Grubler, 1998). With the inherent uncertainty involved in development, the sequential linear model can be replaced by a more complex model where interaction and learning processes are at the core of technological change (Lundvall 1992). A government policy where the key features of technical change such as uncertainty, learning, path dependence and accumulation of knowledge were developed (Kemp 1998). This model differs from the sequential linear model in that support is needed in all development phases at the same time and not in a sequential order (Cunningham 2009). This suggests that governments should act as strategic niche market organizers modulating the market by implementing taxes, legislation and ‘niche market management’ schemes (Kemp 1998). This would create feedback to the R&D process and guide the research (Hill 2008). The overall concept, which is based on voluntary agreements and soft compliance, is to modulate technical change in a desired direction (Kemp 1998). The actual strategies of governments has always been a combination of the three models above; however, the emphasis on which of the models of innovation that have been supported by governments has changed over time in response to the development of knowledge (Cunningham 2009). The choice of technology in the linear model is made on a very basic level when determining which fields of science to support (Kemp 1998). The rest of the development from demonstration to useful innovation and diffusion is expected to be market guided with no need for government intervention (Freeman, 1995). Barriers for introducing new technology, such as a lack of infrastructure, lack of information and high initial costs are not typically acknowledged (Freeman, 1995). The sequential linear model acknowledges that there are barriers such as lack of information, split incentives and lock in effects for new technologies that motivate government support from all phases including support for dispersion (Kemp 1998). However, the sequential linear model includes some very strategic technology choices to decide which technologies should have continued support which is especially important in the demonstration and early deployment phase (Kemp 1998). In theory, perfect foresight in both technical development and future market demands would be required to make the right choice (Cunningham 2009). The interactive model of technical change and government policy in not very well defined when it comes to technological choice (Jaegul 2004). Governments cannot support experiments with all possible technologies, but have to make some sort of priority at one time or another (Jaegul 2004). The interactive model acknowledges path dependency as a natural development for technology and aims at steering this path in a desired direction. The selected technologies are assumed to constitute a natural path agreed upon between active companies, government and other stakeholders (Cunningham 2009). This choice is thus assumed to evolve from experience gained from government initiated experiments. Through stakeholder involvement, policy makers are well informed about the specific needs for successful innovation in their area, including issues such as regulation, standard setting, the role of public demand and to balance new technology development with the requirement from customers and users (Cunningham 2009). The role of the government is to act as a trustee ensuring that public interest is considered in the development process (Cunningham 2009). In this process the established and dominating companies will have a pivotal role and these companies seldom make radical changes (Ashford 2002). Ashford advocates more regulatory approaches based on standards set by environmental considerations. This makes it easier for outsiders to enter the market with more radical innovations. In order to promote innovation, developed policies should be forward looking and set ahead of time, in a ‘technology forcing’ approach. Setting standards instead of ‘picking winners’ is typically described as technology neutral, but relying on standards can in effect, entail a technology choice (Cunningham 2009). This not only increases R&D efforts by increasing the number of participants, but more importantly the competition between the participants increases the rate of innovation (Encaoua 2002). The technology forcing approach is generally believed to be a more efficient way to bring about technological innovation (Cunningham 2009). Unlike a technology based standard, which relies on existing technologies to bring about pollutant reductions, technology forcing standards essentially require innovation to meet the standards be setting performance levels that are beyond known existing technical capabilities of the manufactures, thus forcing technological innovation (Jaegul 2004). Government support for developing vehicles with alternative powertrains started in Japan in the early 1970’s (Iguchi 1992). Responsibility for drafting and implementing policies for regulating vehicle emissions and promoting new environmental friendly vehicle technology on a national scale was lead by the Ministry of International Trade and Industry (MITI) (Iguchi 1992). BPEV’s where chosen by the MITI as the most interesting option for the future as they had the potential to mitigate both local emissions and oil dependence (JEVA 2002). The MITI established a basic market expansion plan for BPEV’s in 1976 (Iguchi 1992). This plan was a comprehensive commercialization plan coordinating government agencies, companies and municipalities in their efforts to expand BPEV development (Iguchi 1992). Barriers were identified and the relevant organizations, institutions and agencies were called upon to make efforts to remove these barriers through technical development, amending laws and taxes, creating new standards and building a fuel infrastructure (Iguchi 1992). The first market expansion was initially intended to cover 10 years, but after a few years it became apparent the plan was no longer appropriate (Ahmann 2004). Oil markets stabilized and the progress in technical development was slower than first anticipated so the plan was revised in 1983 (Iguchi 1993). At the end of the 1980’s, global environmental and energy issues became an important topic in Japan. This factor along with the newly adopted ZEV mandate in California, increased interest in BPEV’s again as a long-term sustainable option (JEVA, 2002). As a consequence a third, more aggressive market expansion plan for BPEV’s was issued in 1991 (JEVA, 2002). In 1997 the MITI altered the 3rd expansion plan to include not only BPEV’s, but also HEV’s, CNGV’s, methanol-fuelled vehicles and FCEV’s (JEVA, 2002). This was the first time the development of HEV’s was included by the government. The inclusion of HEV’s was decided due to new CO2 reduction targets for 2008-2012 under the Kyoto protocol (Patchell 1999). These new market expansion plans presented comprehensive requirements for the development and commercialization of the targeted technologies (Ahmann 2004). These market expansion plans should also be seen in the context of the visions of the MITI for Japanese industry, including strategic goals for future competitiveness, as well as energy and technology independence (JEVA 2002). The plans included all relevant groups identified by MITI including industry, universities, local governments and government agencies. The aim of these plans was to induce a common vision among groups and, with a minimum of formal pressure, coordinate industry and government policy (Ahmann 2004). The efforts of the relevant groups were coordinated and the MITI supervised the process. Little formal pressure existed and the plans rested on a vision in which all groups, including the Government, were expected to play their part (Wantanabe 2000). The above plans required targeted government policy efforts in several different areas (Patchell 1999). The policies can be categorized as R&D on vehicle and components, support for infrastructure for future fuel supply and as market support (including subsidies, leasing programs and standardization issues. The initial R&D project resulted in prototype BPEV with a range of 455km in 1976 (JEVA, 1998). The following leasing and purchasing incentive programs resulted in the introduction of 655 BPEVs between 1977 & 1996. The outcome was mostly small size BPEVs and niche market BPEVs, such as commercial vans (Patchell 1999). A comprehensive evaluation of the whole leasing and purchasing incentive program was conducted in 1996 by the Japanese Electric Vehicle Association (JEVA). The program did not succeed in increasing the diffusion of BPEVs outside the program, but the effort sustained the automobile manufactures interest in the field on electric drivetrains which led to substantial feedback into the R&D process (JEVA, 2002). The reason for lack of market success was largely attributed to inadequate performance but also a lack of interest, as the original policy drivers, reduction of oil dependence and tail pipe emissions, seemed less urgent in the mid 1980s (Iguchi, 1992). The Californian zero electric vehicle (ZEV) mandate in 1990 and growing concern for global environmental and energy issues led to a renewed interest in BPEVs at the beginning of the 1990s where the Japanese government wanted to take a leading role in transforming society towards sustainability (Tsotomu, 1997). Toyota, Nissan and Honda were all affected by the Californian ZEV mandate and entered the BPEV development race more seriously than before and began investing heavily in BPEV technology (Mauro, 2000). New technologies for electric drvietrain components with substantially better performance, including cost, were needed in order to market a BPEV in California (Mauro 2000). Batteries needed to have higher specific energy; longer lifetime and lower cost then the batteries available (Patchell 1999). The MITI identified the battery as the crucial part in need of government support for the successful introduction of BPEVs onto the market (Terada 2001). The lithium battery project started in 1992, presented in 2001 a BPEV battery that met most of the criteria (Terada 2001). Car manufactures made the strategic choice to develop batteries in collaboration with battery manufactures thus keeping their options open as the future was and still is highly uncertain (Patchell 1999). HEVs are now established as a commercial option to IECVs (Ahmann 2004). However it is still too soon to tell whether hybrid configurations, either with an IC-engine or fuel cells, will become the dominant design or only continue as a fuel-efficient option (Lemoine 2008). Governments regard fuel cell development for vehicle use as a strategic issue for long term environmental sustainability (Lemoine 2008). Today, most automotive manufactures regard the fuel cell system as strategic and proprietary issue and development is pursued in house or together with other private companies (Mauro, 2000). An important finding from previous efforts to establish BPEV charging stations is the need for early standardization (NEL 2000). Standardization in also seen as strategically important for Japan; not letting other countries to set the standards, but influencing coming world standards in a Japanese way (Morita, 2002) For the future development of hydrogen fuel cell vehicles, the MITI has identified three areas in which government support is needed in equal measures: R&D on methods for providing hydrogen, standardization, and fuels and infrastructure (Ahmann 2004). The choice of future fuel is regarded as a very important and strategic issue, both by the Japanese government and by industry. The MITI wants a non-fossil, preferably indigenous, fuel development path, while industry wants an inexpensive and commercially viable path (Ahmann 2004). Both government and industry currently regard hydrogen as the ultimate energy carrier (Lemoine 2008). The Japanese Government was early in identifying innovation as a way to mitigate the environmental and energy problems associated with transport (Mauro, 2000). Apart from stricter tail-pipe regulations targeting short-term effects, they identified electric vehicles as a long-term target for vehicle development (Mauro, 2000). The view held on technical change and Government policy by MITI was a sequential linear view advocating government support in all development phases, including early diffusing throughout the market (Daito, 2002). Here, the MITI identified technical winners and guided technical development towards the target set off by offering R&D support, demonstration programs and market promotion programs (JEVA 2002). The long-term program had a 3-phase structure starting with basic R&D, via demonstration and feasibility studies to standardization issues and early market development. Supporting the necessary infrastructure is also regarded as a possible task for government (Hill 2008). The MITI orchestrated the development of the BPEV industry in Japan in the early phases, offering both R&D support and an initial niche market, together with a long-term target (Patchell, 1999). The first market expansion plan of BPEVs was the starting point for a coordinated effort to introduce a common vision among market groups for a future BPEV market (Mauro, 2000). Industrial cooperation was always seen as an important part of government support for new technologies (Nel 2000). The choice of technology was guided by the overall energy policy of Japan. Ridding the country of its dependence of foreign oil was at the top of the list and this partly explains the initial resistance of the MITI towards petrol fuelled HEVs as an alternative (Ahmann 2004). Moving away from fuels based on petroleum feedstock had been the main issue. Electricity and Hydrogen are two fuels that offer great flexibility in terms of primary energy source. However the perceived development potential for BPEVs was, in hindsight, too optimistic and associated with a high risk of failure (Nel 2000). Today, government policies have evolved and become directed more towards supporting technical options that would otherwise not be explored by companies i.e. infrastructure and soft issues such as standards. Less focus in now placed on core technology development (Cunningham 2009). This is partly explained by the readiness of the alternative powertrain market and the strong commitment from automotive manufactures to continue this development. The core technologies are now developed in house and seen as proprietary by manufactures (Lemoine 2008). The role played by the Japanese Government in the HEV development process resembles much more an interactive model, then the sequential linear model forwarded by the MITI. However the Japanese Government never offered the HEV targeted support, but the HEV was able to benefit from the technical development and experiences gained from the sustained governmental support, which was primarily aimed at BPEVs (Ahmann 2004). The actual outcome of the Governments policy has thus been a relatively flexible policy enabling a number of alternatives to challenge the dominating ICEV technology and where government policy increased the technical diversity by offering both R&D support and support for building initial markets to non conventional vehicles (Ahmann 2004). This has resulted in a system where the sustained efforts created feedback to the R&D process from early market experience and the possibility of accumulating and maintaining knowledge, even when consumer interest and support was low (Nel 2000). It is not possible to determine in detail how much government support really helped the development process of the HEV, but the Japanese approach offers greater flexibility that better corresponds to the inherent uncertainty of technical change compare to, for example, regulation and technology forcing mandates (Watanabe 2002). The long sustained effort that included R&D, support for infrastructure and market support led to a knowledge base and accumulated experience in the field of electric traction that has contributed to the fast growing sales of HEVs (Lemoine 2008). The basic technologies now utilized in HEVs were first developed for BPEVs as companies were able to utilize the knowledge accumulated in BPEV development. Market support for HEVs expanded, not created, the initial market thus securing and increasing market confidence in a critical phase (Weiss 2001). The Japanese Government was quick to respond and extend the support programs to include HEVs as the framework for a subsidy system was already at hand (JEVA 2002). The winner in the sustained BPEV effort seems to have been the electric drivetrain that was developed and adapted to vehicular use as a response to policy created niche market applications (Jaegul 2004). In this respect, the BPEV effort has contributed to the unintentional success of the HEV. The introduction of HEVs onto the car market can be seen as a combination of company strategy and the Government providing a good environment for development (Cunningham 2009). The development of alternative powertrains confirms that trial and error is important in gaining experience and supplying the R&D process with important feedback (Ahmann 2004). Another important feature is the build up of market knowledge. The relatively quick response of Japanese companies to the Californian ZEV mandate can be seen as an indication that industry was relatively well prepared (Mauro 2000). It is also worth noting that the development of HEVs demonstrates that established and dominating companies can make radical changes in their core technologies (Aghion 2008). Government has succeeded in drastically reducing tail pipe emissions from single vehicles and substantially increasing the fuel economy (Mauro 2000). However, attempts to shift away from oil as the primary feedstock have thus far failed. The electric drivetrain technology developed has instead been utilized in petrol based HEV configuration. The numerous alternate energy carriers tested previously, electricity, CNG and methanol, have not succeeded in attaining significant market share (Ahmann 2004). HEV technology does not, however, exclude future shifts towards FCEVs or BPEVs using hydrogen, electricity of bio fuels. Rather, present HEV technology should be considered a stepping-stone towards FCEVs or BPEVs (Jaegul 2004). To conclude, the Japanese Government has actively tried to induce technical change within the automobile manufacturing industry. Within the framework of the vision of the MITI a common understanding was developed and the direction of development was negotiated. The role of the government was that of a conductor in the development process supplying both R&D support and artificially created niche markets, and easing the way for targeted technologies by means of legislation and standards. This strategy has enabled the Japanese Government to influence the direction of technical development within the vehicle industry with relatively limited government funding. The development of alternative powertrains and the role played by Government indicates that market support, including industry and market expertise; early in R&D process is important. In this process, market support has been equally important for the development process as the R&D efforts. The history of BPEVs demonstrates that picking winners in government policy is not easy. The focus of the MITI on BPEVs was however not a failure even though the targets were not met. The technology base developed for BPEVs was later successfully utilized in the introduction of HEVs. The conclusion drawn from this is that the government should focus on technologies that fulfill several policy aims and can be used in several different applications. Flexibility in terms of technical choice is necessary in policy. This increases the chances of a technology surviving the long journey from idea to competitive technology. This example of alternative power sources for vehicles also demonstrates that established and dominating companies do not necessarily resist radical changes in their core designs. 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