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Monday, July 30, 2018

Adoption of disruptive technologies: lessons from history, Part I

I had the opportunity earlier this summer to visit a couple of museums focused on the early years of the automotive and aviation industries. It strikes me that there are some parallels with the new bioeconomy. In the spirit of the old saying that those who ignore history are doomed to repeat it, I offer some thoughts that might be relevant, based on a couple of case studies.

My first stop was at the Studebaker museum in South Bend, Indiana. If you know anything about Studebaker, you'll recall that production ended in South Bend in December 1963, and that the last car rolled off the assembly line in Hamilton, Ontario, in 1966.

The last Studebaker, produced March 17, 1966. This car is currently in the Studebaker museum.
The main reason was a failure to compete with the Big Three in the so-called pony car wars (the Mustang being the initial entrant and leader of the pony car class). Studebaker built solid, dependable and somewhat boring cars at a time when the American public wanted vavoom; the inability to build competitive vehicles was partly if not completely due to poor finances.

Innovative, but not a sales success: The Avanti. After Studebaker closed its doors, a consortium of Studebaker dealers purchased the Avanti name, spare parts and tooling, and continued hand-building cars in very small numbers. Since then, the company has had multiple owners, and has moved several times; the last car was made in Cancun, Mexico, in 2006. The then-current owner's arrest on fraud charges was certainly a contributing factor, but the niche automobile business is a very difficult one at the best of times, even without legal problems.
So why is a failed company like Studebaker a relevant case study for the bioeconomy? To answer we need to go back to the beginnings of the automobile, and look at the innovators. The big names include Henry Ford, Walter P. Chrysler, Louis Chevrolet, Gottlieb Daimler, Karl Benz and others. None had any background in the horse and buggy industry: Ford worked as an engineer with Edison Illuminating Company, who supported his early work; Chrysler and Benz worked for various railways; Chevrolet essentially worked exclusively for the automotive industry from a young age; Daimler and his colleague Maybach designed steam and gas engines from the 1870's. All founded new companies to develop and market their new inventions.

In contrast, two of the five Studebaker brothers, Clement and Henry Jr., set up shop in South Bend in 1852 to build horse-drawn carriages. The firm was incorporated in 1868. According to Wikipedia, half of the wagons used during the height of westward migration were Studebakers; they also supplied the Union forces with wagons during the US Civil War.

1857 (back) and 1919 (front) Studebaker buggies. The 1919 model is the last buggy built by Studebaker and went directly to the company's museum.

1910 Studebaker dump wagon, 1 ton capacity. Trap doors in the floor serve to empty the load. Presently in the Studebaker museum. 
By 1885 they were exporting carriages around the world, and annual revenue was $2 million, a huge amount at the time when the sturdy dump wagon shown in the figure sold for $202.78; many of the majestic homes built by the brothers and their partners are still to be seen in beautiful South Bend neighborhoods.

In 1895, a younger generation of sons and son-in-laws, led by Frederick S. Fish, began asking whether the company should look at this newfangled self-propelled device called the automobile. The discussion was apparently heated, and an engineer was assigned to this only in 1897 after the passing of one of the remaining brothers who felt that wagon sales were strong and the company should not lose its focus. The first automobile, made in 1902, was electric; the company made $4 million selling wagons that year. Gasoline-powered cars, built in partnership with other automobile firms, came along in 1904, and the last electric was built in 1911. Early teething problems were sorted out using cash from the wagon business, which continued to be strong, but this was a declining market; by 1918 sales of automobiles had reached 100,000 units while horse drawn unit sales had dropped to 75,000 from 467,000 in 1911. Studebaker finally sold the wagon business, to a firm in Kentucky, in 1920, replacing the wagons with a line of commercial vehicles.

1937 Studebaker Coupe Express pickup truck. Presently in the Studebaker museum.

1933 Studebaker President. Presently in the Studebaker museum.
The company survived the Depression, partly due to its reputation for solid and dependable vehicles. It is, if not the only one, certainly one of the rare cases of a firm successfully making the transition from horse-drawn carriages to the automobiles. While the firm was unable to navigate the rapid changes in the post-war automotive market, the decision to adopt a disruptive technology in 1897 led to almost 70 more years of commercial activity. This contrasts with most other players in the early automotive industry, who were overwhelmingly outsiders, often railway engineers already comfortable with the concept of a self-propelled vehicle.

What can we learn from this? A few things. First, you need a successful business with decent cash flow to support a move to a new field. The Canadian pulp and paper industry, by and large, is finding the existing business challenging, and free cash flow is in short supply. Second, partnerships can be a good way of distributing risk, although they need to be selected carefully; Studebaker's partnerships with existing automotive firms were at best unsuccessful, and at worst almost destroyed the new business due to poor product quality. So picking a technology provider, rightfully, requires a painful amount of due diligence for the technology provider, if not for the sponsoring company. In my former life as a research manager, this was a difficult lesson to learn. Third, vision starts from the top; the transition at Studebaker only started in earnest once board members opposed to the change passed away or moved on.

In Part II of this post, I'll look at the effect of patent wars on the adoption of new technologies. Spoiler alert: it wasn't pretty.

References: The Studebaker museum in South Bend, Indiana; Wikipedia;

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