TRANSFORMATION – ENABLERS AND CONSEQUENCES

Hugo Spowers was invited to address the 2018 annual conference of the European Investment Bank on 28th November

Good afternoon. I am Hugo Spowers, from Riversimple and I used to be an engineer designing racing cars but for the last 18 years I have been developing hydrogen fuel cell vehicle technology and, more importantly, the strategies and business models necessary for bringing them to market in a truly sustainable manner.

The key barriers are not technical but to do with people, politics and business inertia. I, or we, have been doing this independently because it is such a step change that it is much easier to do from a clean sheet of paper than trying to shoehorn hydrogen technology into a vehicle architecture, a manufacturing model, a distribution model and a culture that has been shaped by combustion engines.

And this step change goes beyond cars. We’re going through an industrial revolution and it is only possible because of the power of digital.

Technology deployment is mainly driven by those who stand to make money from it and nobody ever made money from NOT doing something. For instance, we are resigned to the inevitability of autonomous vehicles but nobody is really asking how they should be deployed appropriately – to maximise the benefit to society rather than short term profit – despite numerous potential negative unintended consequences. Technology is never bad in itself – it’s how we deploy it and we don’t have a great track record. In 1973, the Chief Economist of the UK’s National Coal Board – EF Schumacher – made a cautionary observation that “A society’s leisure time is inversely proportional to the amount of labour saving technology it employs.” We need a wisdom filter for the application of technology.

And transformation is not just about technology; the scale of transformation we are facing is utterly dependent on new systems and business models and these will have impacts as profound as the new technologies themselves. Business models, like living systems, are shaped by the constraints within which they operate. The business models of yesteryear treat natural capital as infinite, an understandable assumption when we were but a pinprick on the side of the planet, but the key drivers of today – climate change, energy security and peak resource issues – were simply not on the radar when these models evolved. We HAVE to take a bold, long view – because less unsustainable is still not sustainable – and it is much easier to design new business models to suit these conditions than to try to tweak business models that were designed to do something fundamentally different.

Because of these constraints, we are moving from a linear economy dominated by the sale of product, that directly rewards the maximisation of resource consumption, to a circular economy that rewards resource conservation. Or at least I hope we are, because I don’t see how we can ever have a sustainable industrial society based on rewarding industry for the opposite of what we are trying to achieve.

I am going to explain our model, the circular value network that we are building at Riversimple.

This is our first low volume production model, to be provided to customers under a sale of service contract that covers all costs, including insurance and fuel.

In the car is a fuel cell from a fuel cell manufacturer; in the fuel cell are Membrane Electrode Assemblies, or MEAs;

and on the membranes is platinum.

In our model, all these components stay on these respective balance sheets whilst the customer has the car.

The customer pays Riversimple a monthly direct debit with a fixed monthly base rate and a mileage rate – it is the only transaction involved in having the ‘usership’ of a car. We don’t buy the fuel cell – we pay for installed kilowatt hours of electricity. We are in discussion with two fuel cell manufacturers and it’s a complex transaction with multiple elements, such as a monthly inventory charge, a charge for the hours of running time as this degrades the fuel cell, and a payment for the efficiency with which our hydrogen is converted into electricity.

In turn, the fuel cell manufacturer doesn’t buy the MEA but pays on a similar contractual basis, as the membrane is where the degradation happens; in discussion with one supplier about this, their technical director immediately suggested that they would increase the platinum loading because that improves efficiency and they know they will get it all back – an example of how profoundly the business model affects the product design.

And in this model, they would not even buy the platinum, but lease it from a mining company, and at least one mining company has expressed interest in this model. There are obvious environmental and social benefits if a mining company can decouple its revenue from new raw material inputs.

The fuel cell is only a fraction of the whole. To enable these various levels of selling service, there are multiple payment calculations for each component in each car. Just last week, I was in Copenhagen working on a project funded by the EU’s Climate-KIC programme with Denmark Technical University and a tyre company on the micro contractual elements of paying for tyres by the mile and the impact that has on the design of the tyre and its environmental performance.

For a large fleet of cars, this is a mind-boggling number of calculations and it’s ONLY possible through the power of blockchain to automate trust and deliver a frictionless solution to enable a truly circular economy.

The two key features that maximise the competitive advantage of this model are a) that the asset is retained on the same balance sheet from a clean sheet of paper to End of Life and b) that all operating costs are internalised. And there are many benefits, but I will just pick out 4.

First is the alignment of interests

–           It puts everyone on the same side of the fence, including customers – if a supplier sells a component, their financial driver is the highest acceptable price and the shortest acceptable life whereas in this model, all parties have a shared interest in the cheapest way of providing a mobility service to customers for the life of the car.

–           This creates an ecosystem of cooperation and is a much stronger foundation for a collaborative working relationship.

Second is the driver towards quality

–           If selling a product, another major interest is the lowest possible cost, a structural driver towards low quality and shorter life – think no further than modern fridges.

–           When selling the service of a component or a car, a higher quality, longer lasting component, at a marginally higher cost will generate revenue for a much longer time, so it is more profitable at the same price to the customer – a structural tendency towards high quality.

Third, it makes efficiency profitable

–           It costs more to make a more efficient car but, if you sell cars, customers will never pay a premium, so it just reduces margin.

–           However, if selling the service of the car, we the manufacturer pay for the fuel for the life of the car which justifies investing in efficiency – because we reap the benefit.

Finally, it lowers the economic barriers to bringing new Low Carbon technology to market

–           In this model, being competitive is not dependent on the build cost of the car, but the lifetime cost.

–           The paradox is that by internalising all associated costs, we benefit from lower operating costs, end of life value recovery and much longer revenue streams, all of which offset the higher build cost and eliminate the entry barriers faced by new, low carbon but low volume technologies.

The transformation that I am describing here is a system level change but our culture, our businesses and our institutions are not attuned to system level change. Culturally, we regard it as prudent to change one thing at a time.

When any radically new idea is proposed, all the conversation goes straight to the reason why it can’t be done – and these reasons are generally true, but they assume that the context remains the same. The old idea co-evolved with a network of relationships and it is these connections that are the reasons why ‘It won’t work’!

If instead, we are prepared to start afresh and co-develop a new pattern of relationships, all those reasons disappear and the new idea can suddenly look much more attractive – starting again from a clean sheet of paper lowers both risks and barriers.

When there is a step change in external conditions, a new solution always emerges from a surprising quarter – not an evolution of the old solution – dinosaurs were not replaced by better dinosaurs. Climate change and peak resources, in a world with growth both in population and affluence, are presenting us with just such a step change in external conditions. Incremental solutions cannot solve these problems – You can’t cross a chasm in 2 leaps.

We all KNOW that we need radical solutions -the word on everybody’s lips, the thing everybody is seeking is Innovation – but from the perspective of one proposing such radical solutions, the resistance is overwhelming.

Our cultural leaning towards incrementalism, being prudent, obviously extends to our businesses, to investment and to our institutions, so they are not well suited to recognising innovation or fostering system level change. If we think in terms of a Bell curve, the really interesting innovations are at the edges of the Bell curve.

Understandably, for reasons of accountability and transparency, independent assessment is required for allocation of support but these independent experts are drawn from the incumbent industry. There is no conspiracy in what then happens; the experts tend to be very capable and to understand their industry and its constraints very clearly. However, from within their industry, their own constraints are seen as absolute and they simply cannot take off those blinkers and see the possibilities that exist if their constraints are lifted. The result is that the bulk of support goes towards incremental solutions.

Which brings me back to productivity and harnessing technology innovation. We need to challenge the bias towards incrementalism if we are to match the agility of China and other Asian countries. The devil may be in the detail, but God is in the system and we need to embrace new patterns of relationship.

Thank you.
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