Feb 27, 2018 | 38 min read

Podcast #1 transcription

Clean Disruption of Energy and Transportation by Tony Seba of RethinkX

Welcome everybody to the Momenta Edge podcast, we’re kicking off this episode with one of my favourite thinkers and writers, Tony Seba.  

This is Ed McGuire, I’m Insights Partner at Momenta, and Tony and I have known each other for a few years now, I first discovered his work when a mutual friend of ours had raved about his book, ‘Clean Disruption of Energy & Transportation’, which he published in 2014, and when I read it I was so moved by the compelling argument that he made, based on a lot of data and an enormous amount of background research, that I reached out to Tony and we ended up working together to help bring his message to a number of people in the investment community. Last year, Tony who’s the co-founder of ReThinkX  published another piece out of the ReThinkX think tank with his partner James Arbib, all about becoming transportation disruption. 

What we’ll do in the podcast is have Tony provide some background, some context around some of his work, and then we’ll dive right into it. So, Tony, thanks for joining us. 

Thank you, Ed, thanks for having me, and I’m going to second what you said that you were truly one of the first really big influentials who discovered Clean Disruption, and really understood the disruptive power of energy and transportation, and so on, so I thank you for that. It’s such a pleasure to be here. 

I guess before we dive into the thesis around Clean Disruption, just provide a bit of context of your background and how your experience has led you to focus on disruptive and expediential technologies. 

I have an undergraduate degree in computer science from MIT, I did my MBA at Stanford, and while I was at Stanford I started working for a then little company called Cisco Systems. I was an early employee and we were talking about essentially this internet thing being all over a billion hosts, and so on, and folks did not understand how large that was going to be, but we did. The reason we did was the costs of that technology were coming down exponentially, and linked to that the market was growing exponentially also. So, we saw the power of the internet and they made some predictions back then, this is in 1994 or so, that by 2010 there would be about a billion webhosts – internet hosts, and I was within a couple of years of that happening. 

Then I joined another start-up company called RSA Data Security, which ended up holding the encryption in essentially all servers and browsers, and all internet connected devices at the time. So, I’ve been in many disruptive companies, I started my own companies and so on. After that I decided to take a couple of years off and go and teach, do one of the things that I’d been wanting to do for a long time, and I thought I would take two-years off to teach, write a book, and 12-years later I had written three books and was still teaching. So, I found that side of the equation, the thinking part was something that I enjoyed, the synthesising of the world is something that I enjoy very much, and I made my work disruption. 

So, essentially coming from technology, and coming from the business angle I started thinking about disruption very early. I discovered that the disruption concepts at the time did not really explain everything, they did not explain the smartphone disruption for instance, they did not explain Uber ride hailing for instance, and so on. So, I discovered that it was incomplete, and I set out to build a new framework for disruption that incorporated all the other names that I had learnt about throughout my career. I came up with something that I called the Seba Technology Disruption Framework, which says that technology disruptions happen because of a combination, so a convergence of technology cost curves, business modelling innovation and product innovation, of which are enabled by this convergence of technologies. There are several ways to disrupt, traditionally we thought of it as disruption from below, but I also discovered that there was a disruption from above, and some other folks discovered big bang disruption and disruption from the edge and so on. I put this together and then I wrote Clean Disruption. Clean Disruption was a way for me to prove or disprove that this framework worked 

Essentially what I forecast as you know in Clean Disruption, was there were four technologies and one business model; solar, batteries, electric vehicles, autonomous vehicles, and ride hailing that were disruptive in their own way, but combined would disrupt all of energy and transportation, that the disruption would be over by about 2030. Essentially by 2030 it would be all batteries, all solar, all electric vehicles and self-driving, car sharing, and so on. This is four years ago, at the time it was pretty radical if you will, but what it did was reframe the energy and transportation industries, and reframe the whole narrative that making this transition to clean energy and transportation was going to be multi-decades, expensive, and so on, and turned it into, ‘Well, actually this is going to happen, this is going to happen pretty quickly, this is going to happen for purely economic reasons, it’s going to happen and we’re on the cusp of these disruptions. So, that’s of course how you and I met four years ago, the predictions that I made at the time which some thought were pretty insane, are essentially on the money. Some of them are a little conservative with what’s going on today! 

After that I decided to start a think tank called ReThinkX, because it turns out that my disruption framework does work, and it does work not just for energy and transportation, but also across the board. One of my hypotheses was that every single industry bar none, every single industry is going to be disrupted by this combination of technologies, and business modelling innovation and product innovation. The decade of the 2020’s is going to be the most disruptive decade in history, because everything will be disrupted and it’s all going to happen at the same time. What I found through Clean Disruption was that a lot of our leaders, whether its business leaders, or investors, or policymakers, were not ready, were not thinking in this way. So that’s why I started ReThinkX, which essentially is an independent think tank that analyses and forecasts the speed and scale of all disruptions. Our first report was called ‘Rethinking Transportation’, which came out last May, which in a way Clean Disruption took that out for transportation.  

We made the prediction that it was the convergence of autonomous electric and on demand transportation that would disrupt all of transportation, and the tipping point was going to be 2021. Essentially on the day that level 4 autonomous vehicles are approved and ready, which we assume will be 2021, the cost per mile of transportation will be 1/10th, 10 x cheaper than the cost of owning a car. This is going to disrupt two things, the concept of individual car ownership is going to go away because 10-x as always involved a disruption, meaning a 10-x difference in cost for a similar product service has always, every single time in history caused a disruption. Also, this is going to cause the disruption of the internal combustion engine industry, so people are going to stop buying cars altogether, and anybody’s going to stop buying gasoline and diesel cars, trucks, so-on and so-forth.  

Of course, there’s implications throughout the buying chain for the oil industry, and that is going to happen even quicker. We forecast that the demand for oil is going to peak around 2020 at about 100 million barrels per day, and it’s going to go down to about 70 million in 2030 based purely on the car market, this doesn’t include all forms of transportation.  

The price is going to collapse immediately, and that’s because in oil markets all you need is a 2 or 3-million-barrel over-supply for prices to collapse; and we learnt that in 2014-2015 when oil came down from 111 to 29. We see there is going to be 2 or 3 million barrel over supplied by about 2021, maybe 2022. So, prices are going to collapse to the equilibrium it’s going to be as soon as 2021/22, but there will be this equilibrium, so who knows what the bottom is going to be. But if you assume it’s going to go to equilibrium which is $25 a barrel, that means for investors out there and so-on that any oil which cannot compete at $25 will be stranded.  

What that means is that deep water oil will be stranded right away and forever, Shell Oil is going to be stranded, anything that cannot compete at $25, and SAMs of course is going to be stranded because it can’t compete at $25. That’s going to happen in the early 2020’s, 2021-2022. There’s going to be trillions of dollars of assets that may be stranded quickly, we’re talking about three or four years from now. This has implications along the value chain of course, because it’s not just oil but it’s also all the assets associated with it, it’s the pipelines, the refineries and so-on and so-forth. It’s going to be a pretty massive disruption of the oil industry which is going to be caused by the disruption of transportation. 

Tony, I want to back-up a little bit, and I do want to return to the specific work and the forecasts you’ve made, but historically the ability to forecast disruption, or anticipate disruption has alluded experts, and I think you’ve done quite a bit of work where you have highlighted in the past how disruption can come really quickly. Why is it that experts or forecasters in different industries, and we can pull a couple of examples from history pretty easily around photography and automobiles of the past, why is it that people have had such a difficult time, not so much anticipating that disruption will come, but anticipating the speed and magnitude of disruption? 

From a corporate perspective even when you anticipate that its coming, the classic example of Kodak; Kodak invented digital imagining, they knew it was coming, they knew how quickly it was coming, they had invested billions of dollars into developing digital camera systems and so-on, and yet they were disrupted by their own invention, not because they didn’t know it was coming, not because they didn’t know how quickly it was coming, but because culturally they were not able to pivot to a new business model. Disruptions bring in many cases new metrics, new business models, and it’s hard for these corporations to pivot into the new culture, business models, and metrix that come with disruption. 

From the experts and analysts perspective, it’s usually that they make linear predictions. Everything is linear, even now that we know a lot more about disruption you see a lot of these predictions, say from the Energy Information Agency, from the International Energy Agency, from Wall Street mainstream analysts, and they’re usually linear. They say, ‘Last year there were half a million electric vehicles sold. If you grow that by…’ pull a number out of a hat, ‘… 35 percent per year, then you’re going to get…’ whatever, 35 percent penetration by 2040. In reality disruption and technology adoption itself never is a linear progression, ever. Technology adoption happens in S-curves, once you hit the tipping point it accelerates, it accelerates, and it basically wipes out the market in months or in a few years. So, experts and mainstream analysts fail to see the S-curve, that it’s going to accelerate and wipe out the existing industry.  

A lot of that is that they work with excel spreadsheets that only do these lines, they don’t do the system dynamics. Technology adoption has feedback loops, positive and negatives, they have network effects, once your neighbour adopts something then you adopt it, and then that feeds on itself and so-on. Platforms for instance, operating systems, the more users you have, the more developers you get, so that’s a positive feedback loop. Of course, the incumbents get into a negative feedback loop, and that happens exponential. So mainstream analysts and experts fail to see that, to put that into their models, and failing to look at the S-curves essentially is a failure to anticipate disruptions.  

In 2014 when you released ‘Clean disruption of energy & transportation’, that was a really interesting time for your to be making those predictions, because you had based your work on the analysis of cost curves around solar, batteries, electric vehicles, Tesla was just starting to hit its stride, and as you’re making your predictions I think you got some pushback from people who were sceptical of your forecasts, but in the intervening years I think what’s happened is that your framework has been very much validated. Could you provide a bit of colour at least on how you had initially envisioned this combinatorial evolution, or this combinatorial disruption, particularly addressing on the energy side. At Momenta we hold energy very close to our hearts and understanding the changes. How has the industry evolved when you look back at your original predictions? And when you see some of the original pushback, or the original I guess objections to your predictions, how has that played out in the interim? 

Beautifully! What I did was both create a new framework, and when I made the predictions I also provided the formula, so I told my audiences and told the world, ‘This is how I’m doing the forecast, these are the cost curves’, so at the time I said, ‘The cost of lithium ion batteries is going down by about 16 percent per year, so if you take that over the next 3, 5, 7, 15 years, this is what you’re going to get, you’re going to get $100 per kilowatt hour by such a year, and $80 by such a year. Now, if you don’t believe it’s going to be 16 percent, if you believe it’s going to be 10 percent then you can bake that into your own model. So, I provided not just a forecast but a framework that people could put into their own models to test it, to test whether I was going to be right or not. It turned out that I have been right, in fact it has turned out that for instance for lithium ion batteries it has accelerated. 

A lot of pushback at the time four years ago was that 16 percent improvement in the cost of lithium ion batteries, that’s insane, that’s not going to happen. Well, they were right, it’s been 20 percent, so even faster than I had said at the time, that’s not surprising for me but essentially I provided both the forecast and the framework so that folks could put in their own numbers and test it, and many of my representations saying, ‘What you should do is come back to have some group to test it. Come back in six-months and see how my forecasts are doing, come back in 9 months, and in 12 months to see how I am doing. If I’m on the money, then there is something there’. It turns out that I have been right on the money. I predicted four years ago that by this time, February 2018, that the market would offer unsubsidised electric vehicles with 200 mile-plus range in the $35,000-$40,000 range, of course a lot of folks thought I was insane, and guess what? We have two already with many more announced for the rest of this year.  

So, again part of what I did is to provide both the framework in a way that folks could test it, in a scientific way. I seldom said, ‘Trust me’, and in fact I don’t say that, but I provided a way, a scientific method in which they could test the hypothesis, and maybe if they thought they had better information and they thought it would accelerate, then they could bring that into their own models. So that made a big difference, and as the years went by and my numbers for solar, for batteries, for PVs and so-on, have proven to be right then they’re paying more attention. Essentially that has changed the whole narrative about how quickly this disruption is going to happen, that this is not an energy transition, that this is a disruption both energy and transportation. That’s because I was totally open in terms of how I was coming up with these models. 

Yeah, I thought you were always very open about any questioning of your assumptions, you had built a very transparent framework and I thought that was what made the message really compelling, was that you certainly didn’t have to take it or leave it, people could test it on their own, and it has been pretty remarkable how a lot of these predictions have unfolded. 

I want to move a bit forward to the work that you’ve been doing around ReThinkX, because you took the disruption thesis, and then you took it another stage deeper by looking at autonomy, and this whole concept of transportation as a service. You and James were very kind to let me take a look at your underlying assumptions and the math behind your calculations. I have to say, I really tried to poke holes in it and you all had really thought through a lot of these implications. Could you talk a bit about where that work has led you in terms of your conclusions and the predictions, but also, I’d like to go a little bit downstream, because you thought about the implications for not just business from government, but also society going forward. This I think is what’s really the most interesting part, and the most interesting aspect of the work. 

Thanks for the feedback participating in that work. We took the disruption of transportation that I had been working on, and we took it a step further, actually deeper and broader. What we said was, ‘Okay, so it’s been three years, we have new numbers, new discoveries, and new things have been happening and accelerating, so let’s do a deeper dive into how this disruption of transportation is going to happen’. Essentially what we discovered in that process was their convergence, so a lot of companies had invested in autonomous technology. We had 40-plus companies, and Google, and Tesla, and any number of companies were way down the road, no pun intended, in autonomous technology. So, we made the assumption that the moment that autonomous technology was going to happen was 2021. That’s because again, at what many of the cost curves, for light or for super computing power, for GPU’s, we knew that a lot better last year than I knew it four or five years ago. 

When we did the convergence of autonomous ride hailing, so Uber, Lyft, and Didi and so on, had gained a huge market share by that time. I mean 20 percent of all the vehicle miles travelled in San Francisco are Uber and Lyft, these are companies that did not exist 10-years ago, and that’s at today’s prices. So, when we did the numbers on the convergence of these three things, essentially that’s how we came up with the number, the idea that by 2021 transportation as a service which essentially means on demand, autonomous and electric was going to be 1/10th of the cost of transportation of owning a car. 2021 is around the corner, that’s something that I hadn’t put that number in clean disruption. We had a lot more data to put that together and we discovered a lot more things about EVs themselves, EVs last 500,000 miles against 140,000, or 200 for internal combustion engine vehicles. So, when you put those numbers into our models, essentially what the computer models came up with was this deeper, faster disruption that would start 2021, essentially it would tip 2021, that’s already started. Essentially by 2030, 95 percent of all miles will be autonomous electric and on demand. 

It validated many of the things that I had previously said in clean disruption in what we added, as you mentioned, which is the reason that I started ReThinkX is not just to forecast disruption, I had proved that I can do that fairly accurately; it was, what are the implications for that whole supply chain and of course for society, and what other choices that society will need to make to take advantage of the upside, whilst also mitigating the downsides. So, when the concept of individual ownership of cars goes away, which essentially are model SAS, it’s going to go away because of purely economic reasons. That means dealerships are going to go away, mechanics are going to go away, also because electric vehicles only have 20 moving parts as opposed to gasoline vehicles which have 2000+ moving parts, so electric vehicles don’t need the kind of maintenance that internal combustion engine vehicles need, and so-on. 

We did the analysis down the value chain, we forecast that for instance by 2025 dealerships are going to disappear, mechanics are going to disappear by and large, gas stations are going to disappear, and that’s because of the disruption. So, we went deeper, in that we went back to the value chain, and what does this mean for society? What this means is, driver jobs because it’s all going to be autonomous, are going to go away, not all at once but it’s going to happen very quickly. So, we’re going to have 7 to 8 million folks who are going to be out of work in the United States within a fairly short number of years, so we need to mitigate that downside of the disruption. The upside is huge, its every American family is going to save about $6,000 a year by using transport as a service, as opposed to owning a car. $6,000 a year is huge, half of American families have less than $1,000 in savings, half. Half of American families are a month away from homelessness if you will. $6,000 a year savings forever pretty is huge opposed to consumer spending, $1 trillion boost at the macroeconomic level for the GDP in America, and that goes to our pockets, that’s not something that goes to Google or whoever corporate is going to win, that goes down to the American families pocket.  

Of course, there’s another $1 trillion dollars in addition, by we not driving, nurses can nurse, and doctors can doctor, and consultants can consult and so on, whilst we not drive; that’s an additional $1 trillion in GDP gain. So, there are two trillion at least in GDP gain for the United States, which is huge, but of course there’s a downside. So, the choices that as a society we need to make are pretty clear, we need to enable this disruption because it’s going to be a huge boost to American families, and we also need to mitigate the downside for the millions who are going to be jobless, because every disruption leaves folks without a job, and we need to provide education and financial support, healthcare support and so-on, whilst they make a transition to new jobs and new industries. 

We were looking down the value chain to what the implications for society would be, cities are going to be massively transformed. Now with the individual ownership model transportation, we use cars for a percent of the time. Imagine Uber electric and autonomous, they use them 40 percent of the time, that means about 80 or 90 percent of parking spaces are going to be unused, they’re going to be obsolete, and that in many cities is about 1/3rd of the landmass of many American cities. Fort Worth is 40 percent parking, 80 percent of that and then you get 1/3rd of Fort Worth is going to be empty. Los Angeles is 2/3rds parking on roads, so they’re going to have a lot of land available. So, from a social perspective we have a choice to make, what are we going to do with that third of the city that’s going to be empty? Are we going to have green parks, are we going to have businesses, are we going to have affordable housing?  

Those are the types of choices that we need to make, and that’s what ReThinkX is all about. It’s to analyse the disruption, what the implications are down the value chain, and also what the choice is that we need to make as a society to essentially take advantage of the upside and mitigate the downside. We’re doing this across industries by the way, transportation was the first one.  We’re currently doing energy, and that’s essentially clean disruption took that over. We’re doing agriculture, so food is going to be massively disrupted, this is not something that’s in the public conversation, food is going to be massively disrupted. Healthcare is going to be disrupted and so-on. This is going to be a self-disruption that are going to go on in parallel, and they’re going to be huge both quantitatively and qualitatively. I’ll tell you what I mean by that; energy is going to be 10 times cheaper, transportation is going to be 10 times cheaper, so that’s quantitatively. Qualitatively in the sense that most energy is going to be generated locally with solar, batteries, wind, and so-on, it’s not going to be generated out there somewhere by central generating stations, so essentially this is if you will a disruption from the edge. Communities are going to be more resilient because they’re going to be able to generate their own energy, they’re going to be able to store it, and are going to be able to use it in electric vehicles and so-on, that’s the qualitative part.  

The same thing is to happen with food where many of the disruptions are coming into food, the disruption of the cow, the disruption of agriculture itself and so-on. What that means is production, generation of a lot of the products and services which are generated out there somewhere now, are going to be locally generated, that’s the qualitative part. Things are going to be massively cheaper, they’re going to be by and large generated locally, that means the institutions we have now and the governance systems we have now, even the investment thesis that we have now are going to change dramatically, we’re going to need new forms of what I call a new operating system for humanity, because many of the metrics, the organisations, and the institutions we have now are not built for this new world that we’re going to have. This new world is happening now, basically we’re talking 2030, we’re not talking 2100, we’re talking 2030. 

So, that’s what we’re doing at ReThinkX, we’re going to put out reports and papers over the following year in all of these industries that I’ve mentioned. 

This comprehensive refactoring and reimagination of the future it is pretty profound, and I would agree with you that we haven’t ever seen this confluence of powerful transformative technologies that are hitting the expediential impact at the same time. You combine energy, transportation, robotics, AI, medicine, and even innovations like blockchain and decentralised organisations, it is pretty amazing. What you’ve talked about, cuts to a lot of the work that we’re doing at Momenta, which is really trying to envision a connective future, the concept of transportation as a service and the way cities are going to be rethinking their public spaces, and how we create these systems that are connected in the future, it’s going to transform as well the existing businesses, and in a sense it’s that shift from product to service, it’s a business model shift, it’s also a mindset shift. 

As you look forward what advice do you give to businesses and manufacturers, particularly auto-manufacturers, but also the energy companies that you’re talking to. I want to just choose those two because I know we could dive into this for weeks. But when you look at those two, what advice do you give them when you’re looking at the disruption ahead of them, and how they can apply the technologies most beneficially, to really navigate and affect a win-win transition to the extent that that’s possible? 

What I tell them is, ‘You have the advantage, you have the power’, no pun intended. Utilities now have a relationship with millions of customers, and when you look at the highest cost in installed solar for instance, the highest costs are not photovoltaics, photovoltaics is so cheap it’s nearly free, compared to the cost of customer acquisition, and compared to the cost of capital for instance. Utilities now have the relationship with the customer, they can take advantage of that to build the solar infrastructure. Today they also have a low cost of capital, that’s not going to last two or three years, in three years the world will be massively different; the tipping point for this disruption in both energy and transport is going to be 2020-2021, so we’re not that far away. So, they have the advantage right now. 

Auto companies know manufacturing very well, a lot of the disruptors have never built a factory before, and manufactured hardware before. So, the incumbents have advantages in terms of brand, in terms of access to capital, in terms of the ability to manufacture and so-on, so they can take advantage of that and be the disruptor, rather than be disruptive. That’s what I tell them, ‘Right now at this point in time you have the advantage. But you’re in an existential crisis also, meaning that this advantage is not going to last forever, it’s only going to last a year or two. If you don’t take advantage and become the disruptor then essentially, you’re out of business, the whole business model you’re in is going to go away, and it’s going to happen very quickly 

I give them the good news and the bad news, and if you’re willing to disrupt your business model and the way that you’ve done business for 100 years, instead of resisting which a lot of utilities and car companies and so-on are resisting, then you can be one of the winners, and it’s going to be a new business model, it’s going to be a new set of metrics, and so-on, but you can take advantage, because now you can anticipate the disruption. So, that’s the advice that I give them. 

I think that’s advice that’s operative for people in almost any industry, in particular that idea of innovation from the edge is certainly close to my heart. The empowerment of production and value creation really from the source and the ability to rethink industries, it really is an amazing time to be around. We all have an opportunity to shape all of this. 

We do. One thing I tell the utilities for instance to challenge their thinking a little bit is, imagine kilowatt hours are free, that the cost of energy is free, how would they make money if kilowatt hours were free? So, that’s your challenge, you need to think about new business models, because in the future energy is going down in cost so dramatically that you’re not going to be able to build huge businesses with just kilowatt hours. If they can get over the idea that kilowatt hours are going to be free, or close to free, then they’re in a good position to be survivors and disruptors. 

No doubt. As usual Tony, your insights are provocative and thoughtful, really invigorating too, because you leave people with a sense of optimism, but also a sense of realism as well, that the change is not going to be without some bumps along the road. It can be quite messy but looking to the other side, I think there are some amazing benefits that will include all of us. I was just wondering, I like to ask people for recommendations of a resource, or a recommendation you could provide for listeners that you like to share with people. 

First my pitch, go to ReThinkX.com all the stuff we produce is free, you can download Rethinking Transport Report, you can download everything for free, it’s even in Chinese now. Having said that, I want to recommend a book that is far from energy and transportation, but not from disruption, I’m reading a book called, ‘Paper’ by Mark Kurlansky. Kurlansky is a great writer and a great storyteller, he tells the history of paper in a beautiful way. Of course, I’m an author and I’m interested and so-on, but also one of the interesting things that I find is the connection between the invention of paper itself, and the printing press disruption, in Europe the, ‘Gutenberg Disruption’, and so-on, comes alive pretty well in this book, even though I don’t think it was his intent, it’s a great book no matter what. Paper is something we see every day, we touch every day, but we don’t think about very much, and it comes alive in this book. So, ‘Paper’ by Mark Kurlansky. 

That’s a terrific recommendation. It’s been great to have you on this podcast, I know for all the people that have tuned in and listened here to the end, I was going to give a plug for your report and you did that, but I would also recommend going back and picking up Tony’s original book on Clean Disruption, which is available, and we’ll post a link to it in the show notes. 

Tony, as always, it’s amazing to be able to see these predictions and these theses play out, I know you stick your neck out there, you put dates and real numbers behind your prediction and that takes a lot of guts, but it’s also backed up with a lot of work there. I think at least for the last couple of years you’ve been kind of laughing, and it’s really gratifying to see all this play out. If all of what you’ve talked about, or even a fraction of it plays out over the next few years, I think we’ve got some amazing times ahead. 

Thank you, it has been gratifying, thanks for your kind words. Always happy to be on your show, thank you for what you do. 

Thanks everybody, bye-bye.