Auto Bailout

JB points out that much of the discussion about the auto bailout centers on promises by the car companies that they'll innovate to produce more fuel efficient cars. It's related to my earlier point that ExxonMobil might not be best able to make investments in renewable energy.

One interesting wrinkle in the auto business is that innovation in fuel efficiency complements existing auto technology. What does this jargon mean? The innovation we need is new, more fuel efficient engines. But those new engines then need to be paired with wheels and tires and doors and steering wheels and all the other stuff that's in cars.

This makes the innovation game tricky. Detroit is really good at internal combustion engines. This suggests that Detroit might not be that good at developing technologies that replace internal combustion engines.

But Detroit is also really good at doors and wheels. And this means that anyone who does develop an economically viable electric drive train will want to combine that innovation with Detroit's skill at wheels and doors and other car stuff. An electric-car entrepreneur would be (a bit) at the mercy of Detroit in terms of capturing the value of this innovation.

To put it back into jargon, an electric engine would substitute for Detroit's knowledge of internal combustion. This suggests that Detroit might not be good at developing electric engines. But an electric engine would complement Detroit's knowledge of wheels and doors. This suggest that Detroit might be good at developing electric engines.

So it's not clear to me whether our car innovations are going to come from Detroit, or from non-Detroit entrepreneurs like Tesla. There was an interesting 60 minutes piece on this a couple months ago.

My colleague Lyda Bigelow studies this sort of stuff, using historical data from the auto industry in the 1920s.