Chicago Booth Magazine: Summer 2012

The Elusive Course to Alternative Fuels

US motorists won't be abandoning the gas station for battery chargers anytime soon, industry experts agreed in a keynote panel that considered the future of transportation


60th Management Conference

By Rick Popely
Published: Summer 2012
Management Conference 2012

Matthew Gilson

Internal combustion engines and petroleum-based fuels will dominate transportation for decades to come for a compelling reason: the gas tank on a Toyota Prius weighs about 40 pounds, takes five minutes to fill, holds enough energy to travel 400 miles, and costs $400 to manufacture. The battery to power an electric car, on the other hand, weighs more than 800 pounds, requires several hours to recharge, travels 100 miles, and costs 25 times more to make.

This was the assessment of Toyota engineer Bill Reinert during the 60th Annual Management Conference keynote panel, a wide-ranging discussion that also covered the prospect of reducing greenhouse gas emissions, the influence of world economic growth on energy consumption, and the government's role in energy policy.

This year, 600 alumni, students, and business leaders gathered at the Hyatt Regency Chicago for the keynote presentation on May 11, while hundreds more viewers from 39 countries watched a live simulcast of the event. Breakout sessions at Gleacher Center continued the day's dialogue on business topics, which included an evaluation of US tax policy and an examination of the use of data in understanding consumer behavior.

Moderator Robert Topel, Isidore Brown and Gladys J. Brown Distinguished Service Professor in Urban and Labor Economics, prodded panelists Reinert - a member of the team that developed the Pruis - and Michael Wirth, executive vice president of downstream and chemicals for San Ramon, California-based Chevron Corp., to explore the prospects for Jetson-style flying cars and vehicles that drive themselves. Reinert and Wirth served with Topel on the National Petroleum Council, a task force that studied the future of transportation and fuels in the United States.

According to Reinert, earthbound vehicles are here to stay. 

"As long as there's a three-ton pickup with a drunk behind the wheel, there's going to be liability issues with an automated car," said Reinert, national manager of the advanced technology group for Toyota Motor Sales, USA, Inc., in Torrance, California.

Driverless cars aside, Reinert said he does not see customer demand for electric cars outside of urban areas.

"We're going to be using oil and gas for quite a while - decades out. I know a lot of people thought that batteries were going to work, but if you try to make a business case for a pure, battery-electric car, it's really, really tough," Reinert said.

To underscore the difficulty of bringing electric vehicles (EVs) to market, Reinert discussed plans for Toyota's RAV4, a battery-powered SUV that the automaker will sell initially in California and then offer in other states if demand warrants. The base price of the RAV4 EV is $49,800 - twice that of the Prius - and Toyota has set of sales goal of just 2,600 units over three years. Toyota sold nearly 61,00 gas-powered Prius hybrids in the United States in the first three months of 2012 alone.

Wirth said that petroleum fuels will dominate transportation for the foreseeable future, because they deliver more efficiency than any other alternative. deliver more efficiency than The energy density, portability, and shelf life of a gallon of gasoline “beats everything else by a long way,” Wirth explained. When it comes to fueling everyday transportation, it is a matter of thermodynamics and physics.

Vehicles have to provide utility and convenience for the owner - and be affordable - he added, and filling passenger or cargo space with a battery or a fuel tank for hydrogen or natural gas runs counter to that philosophy.

“The reality is, most people buy a vehicle for utilitarian reasons, and if they can’t get the stroller in the trunk, that car’s not very useful,” Wirth said. “I think the real challenge is recognizing that these technologies ultimately have to serve the customer.”

Though neither panelist saw a revolution in transportation technology on the horizon, they agreed that cost-competitive alternative vehicles and fuels will emerge over time. In the meantime, they said, government’s role should be to promote research that will lead to innovation, rather than to dictate what people should drive or use for fuel.

In California, for instance, a state mandate for zero-emission vehicles has pushed automakers to roll out several EV models. As many as 10 other states have similar emissions regulations and could adopt the same rules. In addition to designing EVs, manufacturers plan to meet these mandates with plug-in hybrids that run on battery power for short distances - so-called partial zero-emission vehicles - and with hydrogen-powered fuel-cell vehicles. 

Instead of setting the industry standard, government should identify targets and give industry the latitude to meet them, the panelists said. “Picking winners in technology, even if government were completely uninfluenced by interest groups, is damn hard,” Wirth said. Rather, government should provide ample and sustained funding through its national laboratories to support basic research into technologies that will help reduce fuel consumption and greenhouse gas emissions. These initiatives include developing alternative fuels, such as hydrogen; refining fuel manufacturing and distribution systems; and finding weight-saving materials for vehicles.

The problem, under the current system, is that funding for such research can be turned on and off annually, based on politics and on who is in charge in Washington. 

“It’s extraordinarily frustrating to work as collaborators with US science right now, because of the cycles of funding,” Reinert said, pointing to annual budget battles in Congress. “If we could fix that and lay out a five-year plan of 'this is what you’re going to get,’ we could do so much better.”

Topel asked about the likelihood of meeting an Obama administration goal of cutting in half greenhouse gas emissions from transportation by 2050. Both panelists agreed that the target is unrealistic.

Wirth predicted that global energy demand will grow by 40 percent over the next 20 years, a boom that will increase worldwide greenhouse gas emissions. Today, there are about 830 million vehicles in use globally, and the International Energy Agency predicts that the total will triple by 2050 as personal vehicle ownership soars in countries such as China and India.

“There are about two billion people on the planet that are the emerging middle class in some of the developing economies, and all they want is the lifestyle that you and I take for granted,” Wirth said. The increase in demand from developing nations will more than offset gains made by reducing greenhouse gases in the United States and other developed nations.

To prepare for a future with escalating worldwide energy demand, the United States requires a reliable, affordable, and diverse energy supply. Although there are dire predictions that the world soon will run out of oil, the development over the past 20 years of hydraulic fracturing, which makes it possible to drill deeper and horizontally, as well as vertically, has led to the discovery of oil reserves that previously were unreachable, Wirth said. That has been “the single biggest technology breakthrough” for the energy industry, and has increased the world’s recoverable oil reserves by 30 percent, enough to last 70 to 80 years, while simultaneously boosting oil and natural gas production in the United States.

“We are running out of oil, but peak oil is a long way out from a technical and economic standpoint,” he said. Though neither panelist identified an energy source that is likely to displace oil as the dominant player in transportation, both said that hydrogen, along with compressed and liquefied natural gas, could become more prominent sources of fuel. Wirth expressed doubt that renewable energy would be a major part of the mix any time soon. Renewables - solar, wind, biofuels, and geothermal, which represent 1 percent of the energy supply today - are expected to grow to about 3 percent in 20 years.

 As energy companies continue to search for new energy sources, the auto industry will focus on making internal combustion engines more efficient, Reinert said. 

The average car today is about 17 percent efficient, meaning that is how much of the energy from the gas tank gets to the wheels that drive the car. A Prius hybrid is about 34 percent efficient. Reinert predicted that a decade from now, engines will be two to two-and-a-half times more efficient than they are currently. In addition, weight reduction in vehicles, through materials and design changes, will improve fuel economy.

Fuel-cell vehicles, which convert hydrogen and air to electricity, and which emit little or no harmful emissions, also show promise, Reinert said. Toyota plans to offer a hydrogen-powered fuel-cell vehicle globally in 2015, and other manufacturers have similar plans.

Reinert currently drives a Toyota Highlander SUV that was converted to hydrogen fuel-cell power from a gasoline engine. The car is part of a demonstration fleet of about 100 vehicles. Reinert estimated he gets the equivalent of 60 miles per gallon from gasoline and predicted that hydrogen would cost about the same as paying $5 to $6 per gallon of gas. Although the cost of fuel-cell cars and the lack of fueling stations are obstacles, he predicted hydrogen cars could start to make an inroad by 2020.

Reducing dependence on petroleum-based fuels will be challenging, simply because the energy market is enormous: the world uses the equivalent of 300 million barrels of oil daily to satisfy its energy needs. It will take decades to develop viable alternatives.

“The system that we have today took over a century to evolve and trillions of dollars of investment,” Wirth said. “We will transition off of hydrocarbons. It’s inevitable. The question is when and how. It will happen gradually, and it will happen through sustained investment in research, development, and technology.” 

Watch video of the keynote panel and breakout sessions »

breakout session

Tax Code Needs an Overhaul

Experts agreed high corporate rates discourage investment

By Duncan Moore
Published: Summer 2012

The corporate tax system in the United States is such a disaster that tax attorneys routinely tell student entrepreneurs to start their businesses offshore. As a result, multinationals are investing outside the country’s borders, which suppresses economic growth at home.

“Do not develop your international capital in the US. Get free of these onerous tax policies,” said Merle Erickson, professor of accounting and moderator of the breakout session panel on corporate tax policy. “This is the advice we’re giving to our best business developers in this country."

With that as prologue, three corporate tax experts delved into the technical problems that the US tax code presents to large enterprises.

“We would take the tax system of any other country over the tax system we have,” said David Lewis, vice president for global taxes at Eli Lilly & Co. in Indianapolis. The nominal corporate tax rate of 35 percent is too high to be competitive with other advanced countries, he asserted. In addition, US tax law is too convoluted. It allows double taxation on foreign income, and it discourages spending on research and development, a vital issue for the pharmaceutical industry, he said.

The present tax system is the product of a compromise made between the Kennedy administration and Congress in 1962, said Rod Donnelly, a partner with Morgan Lewis, LLC, in Palo Alto, California. It was suboptimal from the start, he said, and has only gotten worse. US trading partners around the world have reduced and reformed their corporate income tax structures; Canada, for instance, makes it a deliberate policy to undercut US corporate tax rates, Donnelly said.

In 1981, the statutory US tax rate was roughly even with that of the rest of the countries in the Organisation for Economic Cooperation and Development (OECD). “Over time, we’ve become the last high-rate jurisdiction out there,” said Jeff Maydew, a partner at Baker & McKenzie, LLC in Chicago. The huge tax burden inhibits multinationals from repatriating foreign-earned income. To avoid the taxes, firms have preferred to let $1.2 trillion in offshore earnings pile up abroad, money that won’t be invested in the domestic economy. 

Lewis noted that the United States lags in subsidizing research and development through tax incentives, registering at 24 among 38 of its trading partners. The rest of the world seems to understand the importance of such government support. Other countries set lower rates and “allow capital to be deployed around the world as a business sees fit.” By doing so, “they incentivize innovation,” Lewis said. 

The United States instead has pursued inconsistent and dilatory policies, the panelists agreed, and they acknowledged that it is difficult to operate in such a climate of uncertainty. The tax credit for R&D has expired 14 times and been extended 13 times during its 30-year history, Donnelly noted. President Obama has proposed expanding the benefits of the credit and making it permanent. Lewis noted that the tax credit funds jobs, but Lilly is under competitive pressure to locate R&D functions in countries where the payoff is higher.

The panelists agreed that the country’s need for increased revenue can be met only if the tax code becomes fairer, more balanced, easier to administer, and less punitive toward cross-border economic activity.

But they were not optimistic that tax reform will happen quickly - or rationally. In Washington, the conversation focuses on revenue neutrality, said Lewis, who is part of a working group that talks regularly to members of Congress. 

Making matters worse are the enormous costs of compliance with the technical peculiarities of US law. Many international firms evince “a visceral dislike to touch the US tax system,” Maydew noted. Large multinationals have as many as 1,000 in-house tax experts, he added, and companies’ efforts to keep those positions staffed are “sucking in some of the most talented students” from the United States and abroad. “Should the best and brightest be coming to the US to help us solve this self-inflicted wound?” 

Unfortunately, the transformational leadership needed to pilot this issue through the political process is nowhere to be seen, Lewis observed. “Instead of rising to the occasion and having a thorough public debate around how we should change our policies, we’re erecting walls and barriers, trying to hang onto what we have, based on laws that were passed in the 1960s.” 



Understanding How Shoppers Behave 

Data doesn't explain what drives purchasing decisions, panelists say


By John Slania
Published: Summer 2012

Retailers and consumer goods marketers are blessed with buckets of data. They can discern what consumers are buying based on credit card usage, customer loyalty programs, and internet purchases.

But that data does not explain why consumers act the way they do. Some grocery shoppers shun prepared meals because they prefer to cook with fresh meats and vegetables. Others prefer store labels because they are less expensive than national brands. Still others hew to brands that tout healthy ingredients.

Lessons that can be learned to better understand consumer behavior were the focus of the breakout session on the use of syndicated consumer packaged goods and retail data. Moderator Erik Hurst,V. Duane Rath Professor of Economics and John E. Jeuck Faculty Fellow, asked the panelists to provide insight into how data is accumulated by marketers and how it is used to understand the way shoppers act. 

The true test, according to the panel of Booth alumni with expertise in retail and consumer marketing, is to analyze the data and draw the right conclusions. “There is no shortage of data,” said James Dodge, ’93, vice president and managing director at New York consumer research giant The Nielsen Company. “The challenge is clarity on the issues and outcomes.”

Dodge and his fellow panelists agreed that while retailers and consumer packaged goods manufacturers have become adept at collecting data on who is buying what, the information does not provide an immediate understanding of why a consumer makes a particular purchase.

“There is a difference between behavior and insight. The data is very important to identify the behavior, but I would encourage marketers to keep trying to peel the onion back and get to the deeper motivation,” said Howard Brandeisky, ’85, vice president of global marketing and innovation for John B. Sanfi lippo & Sons, Inc., a nut and snack producer based in Elgin, Illinois.

To gain deeper insight into consumers’ buying decisions, Brandeisky said he has accompanied shoppers to the grocery store to conduct “shop-along ethnographies.”

“You can see in real time how consumers are reacting to stimulus in the store. You can see what’s on their list, what’s not on the list. What they buy on impulse. There’s nothing quite like asking them as it happens,” Brandeisky said.

The lesson here is that while quantitative data is a valuable tool, it is still diffi cult to predict shopper behavior.

“Consumers don’t behave rationally in any type of retail setting. They are irrational by definition,” said Robert Mariano, ’87 (XP-56), chairman and CEO of Roundy’s, Inc., the Milwaukee-based parent company of the Roundy’s and Mariano’s grocery chains.

“In the old days, when I was a storekeeper, I knew every one of my customers,” Mariano continued. “Today, on a relative basis, we know very little. That’s why we use quantitative information -  to build a relationship so that we can be relevant.”

L. Dick Buell, ’78, former chairman and CEO of Catalina Marketing, Inc., based in St. Petersburg, Florida, said that research conducted by his firm on consumer loyalty uncovered a troubling fact: less than half of consumers who are considered to be highly loyal to a particular brand maintain that loyalty a year later.

“Loyalty is a defection dilemma. Loyalty sounds like the glass is half full. In truth, it’s a glass half empty,” Buell said. “Loyalty is something you think you can build and accumulate, but it can be fleeting.”

The key to knowing the customer, according to the panelists, is gathering both quantitative and qualitative data, and then finding bright minds to draw the correct interpretation based on both sets of information.

“The challenge is to turn all that data into insights and action,” Brandeisky said. “The data is almost a commodity there’s so much of it. The real value-add is turning that into something insightful, something useable.”

Hurst concluded that the information was valuable for both the professionals and the academics in the audience. “I think the panelists really provided a lot of insights into how data is accumulated and used to understand the way consumers act,” he said. “I think this is the direction we want to move as a school going forward, where we take this very detailed quantitative analysis and use it for a variety of academic pursuits.” 

Last Updated 9/27/12