Zap and the Electric Vehicle Industry

ZAP and the Electric Vehicle Industry

Executive Report

This report will be discussing several relevant aspects related to ZAP and to the electric vehicles industry. After a brief introduction, I will proceed to discuss in detail an analysis on the current situation at ZAP and in the industry.

I will be including here a SWOT analysis, a competition analysis based on Porter's five forces model and an extensive analysis of the external environment, quite important and with a certain impact in this case. After underlining several key issues, I will include several alternative options in terms of grand strategies and product strategies. Finally, in the end I will argument that the best solution for ZAP's business in the future is a penetration market strategy and an emphasis on the two most profitable products from its portfolio, the electric scooter and the electric bicycle.

Introduction

The history of the company goes back to 1994, when James McGreen and Gary Starr founded ZAP Power Systems in Sebastopol, California. The name of the company was an acronym for Zero Air Pollution and was, as such, an indication about the company's profile.

The company began producing and commercializing electrically powered bikes, initially through auto dealerships and then through catalogues. In 1997, ZAP joined with the scooter producer Motivity to cross-distribute products through ZAP Europe. Other agreements soon followed with companies from Japan, China and Switzerland.

The company became closely linked to the new Internet technology as it sold its stock to the public via the Internet, in 1997 and began a strong marketing and sales campaign through the Internet, changing its name to Zapworld.com. The company's portfolio of products became more and more diversified, as the company introduced its Zappy scooter in 1998.

The company's diversification strategy involved the acquisition of several EV companies, including EV Systems (February 2000) and Aquatic Propulsion Technology Inc. (May 2000). The joint venture with Nongbo Topp Industrial Company Ltd. Of China meant that Zapp entered through, manufacturing and distribution, the profitable and sizeable Chinese market.

The internal product development campaign, combined with new acquisitions in the market, meant a significant diversification of the product portfolio, so that the company could already boast ten different product categories, as well as different accessories for them. The revenues doubled in 2000 as compared to those in 1999.

III. Situation Analysis

III.1. SWOT Analysis

In terms of the company's strengths, there are several things worth mentioning. First of all, we need to refer to the company's well diversified portfolio of products and patents. Indeed, a generous acquisition campaign and a series of marketing agreements meant that ZAP had offerings in over 10 different product categories. In some areas, it had become a leading brand and products such as Zappy were recognized on the specific market segment.

In addition to these products, ZAP had a 14 patent portfolio, which meant that the company was well protected against the increasing competition in the market. This was, however, both a strength and a weakness. As Starr has recognized himself and as events that followed showed, patents represented a way to protect your interest, but it also meant that you had additional legal costs, implied by legal actions taken against patent infringers. As such, on one hand you had a strength, because you had a diversified portfolio of patents and a protected intellectual property, and, on the other, you had additional legal costs.

From the strength/weakness category is also the Internet policy that the company had adopted. In its beginnings, its presence over the Internet meant that it could benefit from the dot com era, from technological advantages such as public offering over the Internet and commercializing products through the Internet. However, the company also came close to crashing as the dot com bubble burst.

Another strong point worth mentioning is the extensive system of joint ventures that the company put into practice. The one with the Chinese company is perhaps the most significant example. A joint venture agreement with Nongbo Topp Industrial Company meant that ZAP could penetrate the enormous Chinese market, with royalties paid on each Zappy scooter sold.

Further more, the strategic agreements and alliances reached with different companies in the industry meant that the company benefited from its products being distributed (in some cases) and from distributing itself other products. This means that the ZAP brand has a better chance of getting spread around, with all the benefits deriving from this. At the same time, the company will be making additional profits from its distribution activities.

In terms of weaknesses, I would rather address the company's challenges, as the case study is keen on mentioning at the end and on which we have to focus and find answers for. The main challenge for ZAP is related to projecting and estimating demand in the market. This is extremely difficult to handle, in general. The specifics of the EV vehicle industry in particular make it a case apart.

Indeed, I would tend to agree with the team members that stated that sales forecasts needed to be obtained after careful calculations and studies, both on demographics and population preference, as well as on environmental variables. It seems quite clear that ZAP does not yet have a proper mechanism in place for such evaluations and that it has, until now, simply produced and sold, without an actual strategy connected sales to demand and to demand growth. In the future, this weakness/challenge needs to be corrected.

Another weakness that may be addresses is the fact that ZAP seems to have a rather limited number of best- selling products. Indeed, as we have previously seen, it has a diversified portfolio of products and patents, but, as we later learn, not all of these are actual success stories. Only in terms of scooters and electric bicycles can we actually state that the company is a possible market leader.

In terms of opportunities, we have to mention the fact that the market will surely grow over the next couple of years, as estimates and studies have shown. This, combined with the company's positioning in the market, means that there is lots of hope that the company will be performing well in the next years and that its sales will be constantly increasing.

In this sense, it is useful to note that the company's sales have doubled from 1999 to 2000, mostly as a result of the market's ascending trend, which we are inclined to believe will continue in the future. I will be referring to some of the elements of the external environment that lead us to this opinion further below.

Another opportunity refers to the new markets that ZAP has not penetrated yet or has begun to only previously. The partnership with the Chinese company seemed an excellent example in this case. Indeed, the Chinese market is a highly profitable one, mostly still unexploited, with a continuous population growth. Additionally, the EV vehicles, light and maneuverable, are an excellent choice as substitutes for the traditional Chinese bicycles.

As for threats, we have to mention here the increasing number of competitors in the EV market. Companies from Taiwan tend to produce at lower prices, because of low- cost workforce. As we have seen from the tables in the case study, these are quite numerous and increasingly profitable.

Further more, I tend to see as a threat the fact that large companies, such as Ford, are most likely to enter the market soon. Of course, we may state that these companies will generally concentrate their business on EV automobiles, however, their enormous financial potential and production capacities are a cause for concern.

Finally, the segmentation of the market may prove to be a threat rather than a gain. For companies such as ZAP, which have invested in a diversified portfolio of products and patents, it may be the case that they will not find all of their businesses profitable.

III.2. Industry Analysis

The industry analysis will comprise both an overview of general industry characteristics, such as competitors and competitors' size and an analysis of the external environment that has an impact on the industry's future trend and the driving forces in the industry (both discussed here below).

The EV industry has greatly evolved during the 90s and the ascending trend is most likely to continue. As the case study mentions, the industry itself is "very broad in scope" and includes things like military tanks, electric vehicles (including automobiles) or even golf carts. Estimations had shown that from $6 billion in 2000, the sales would most likely reach and exceed $26 billion in 2010, which would mean that the industry is likely to grow at a $2 billion per year rate.

The industry's growth is relying on several pillars. First of all, it is clear that the EV industry is a nonpolluting one. With the generous environmentalist trends and ideas, a nonpolluting industry is likely to develop at a faster pace than a polluting one. Further more, the urban challenges such as traffic congestions may mean that EV vehicles, lighter and easier to maneuver may provide a serious alternative in the future.

Increase in the industry's sales are also due to several other less than expected customers. The police and law enforcements agencies, for example, have recently turned to EV vehicles, because these are easier to maneuver in the busy cities. EV vehicles are also means for elderly citizens to get around and have a certain independence despite their physical weaknesses.

In my opinion, from what the case study has mentioned, the EV vehicle market seems to be rather segmented, both in terms of competitors and products. In terms of products, as I have previously mentioned, there is a quite large and differentiated category of EV vehicles, ranging from heavy industrial equipment to military equipment, such as tanks, from leisure vehicles (like electric bicycles and golf carts) to electric automobiles.

In terms of competitors, each of these submarket segments provides a high number of companies and manufacturers. Only for the electric bicycles we can mention at least 20 producers. Many of these are located in Taiwan or China, with the competitive price advantage deriving here from.

III.3. Competition Analysis - Porter's five forces model

Porter's five forces model refer to:

The degree of rivalry

The threat of entry

The threat of substitutes

Buyer power and Supplier power.

We will be referring to each in part in order to have a brief industry analysis from Porter's point-of-view.

The degree of rivalry

There are several elements that may determine the degree of rivalry in the industry. One of them refers to the number and size of the players in the market. We may agree, for example, that a reduced number of competitors will tend to decrease the degree of rivalry, because the companies will tend to recognize their interdependence. Similarly, if an industry has a large player and several smaller ones, the degree of rivalry will also tend to be smaller, because the larger player will tend to impose his way on the market. Where do we stand on the EV market?

In my opinion, we are rather in a situation where we have a high degree of rivalry. This may be motivated by several arguments. First of all, the EV market is formed of several components, including the electric bicycle market, the scooter market, the golf caddies market, etc. Each of these markets has a numerous number of small players, with small sales volumes. The markets are quite segmented: the electric bicycle market, for example, has no less than 23 manufacturers worth mentioning. Additionally, the EV market does not fulfill the second condition either. Indeed, there are no serious large players, as large car makers, such as Ford, are still in their early EV producing stages.

The Threat of Entry

The most important issue to be determined and analyzed here refers to the entry barriers that may discourage a company to enter the market. In my opinion, the cost of capital that a company entering the EV market will have is higher than the short-term profit it is likely to obtain. This is supposed to happen because the costs associated with starting such a business are quite high (of course, I am referring to the costs associated with building a profitable and sustainable business).

These costs are most likely to be high in terms of acquiring technology and creating the company's own research and development unit. Additionally, as I have already mentioned, the market is quite competitive, especially because of a large number of manufacturers and an increased degree of rivalry. Despite the fact that the new entry may find a profitable niche in which to operate, I would tend to assert that the entry barriers are quite difficult to overcome.

The Threat of Substitutes

The most obvious substitutes that we are likely to find are, of course, the fuel- driven vehicles or, in a more general classification, to the non- electric powered vehicles (here including normal bicycles, for example).

The substitutes I have mentioned are likely to be able to decrease the demand for EV vehicles in the future. The threat, in my opinion, does not necessarily come from the fuel powered vehicles. Indeed, as I have mentioned in the part on the external environment, the general trend, under pressure from environmentalists, is rather directed towards nonpolluting vehicles. However, nonpolluting, non- electric vehicles are possible substitutes threats. Normal bicycles, for example, are indeed a threat. People may still want to benefit from a healthy living and use normal bicycles for getting around.

Buyer Power

The buyer power has a definite influence on any industry. This may come either as "compelling competitors to reduce prices" or "to increase the level of service offered without recompense."

In my opinion, the buyers play a significant role in the EVB market. Quite differently from the pharmaceutical industry, for example, the cost of substitution, from the buyer's point-of-view, is quite reduced and the EV buyer may always find a reasonable priced substitute to turn to, including fuel powered vehicles. In the age of the Internet, the buyers are highly informed and are most likely to have adequate knowledge on the products' costs, on their reasonability, etc.

Supplier Power

In general, the suppliers' power is a mirror image of the buyer power. As such, in the EV market, we are inclined to believe that the supplier power is more reduced. Indeed, the only thing we should be analyzing here is the electricity supply. This is quite cheap and will most likely not be a factor of negotiation for the suppliers. The only way this balance of forces is likely to change in the future is if newer, more performing and more expensive batteries are developed.

III.4. Macro- Environmental Analysis

The case study provides valuable information in terms of the political, legal and economic environment that has a definite impact on ZAP's activity and position on the market. Additionally, we may have a brief discussion to include the three other components of the external environment, the socio- cultural, geographic or technological elements.

Political Environment

The political changes occurred in the last 20-25 years have certainly both increased confidence in environmentally friendly transportation and increased projected demand in this sector, at least over the next decade. For example, the 2000 Olympics in Sydney were an excellent place to promote this relatively recent idea of transportation that is healthy for the environment. Additionally, this trend is likely to be followed into the future, as governments worldwide are more and more inclined to promote environment protection policy. I should also add that the role of ecologist parties is increasing on the political scene. For example, in Germany, the Greens have scored close to 20% in state elections in the last twenty years and they are a credible political force, a party with which the two major political forces, the Social- Democrat Party and the Christian- Democrat Party, tend to form electoral and post- electoral alliances. So, this comes to show that we are likely to see, in the future, the promotion of environmental friendly policies.

It is obvious that this type of policies is going to increase demand for environmentally friendly vehicles. Not only will we see policies encouraging this kind of transportation, but, jut as efficiently, there are probably going to be policies reducing the polluting transportation as well.

Socio- Cultural Environment

From a socio- cultural point-of-view, the last decades have encountered a significant rise in groups of interests, non- governmental organizations and lobby groups that promote and sustain the idea of a clean environment. We may situate this increase in the interest for a healthy environment somewhere in the 60s, but the trend has been increasing in the last years. Pollution seems to be everyone's public enemy and, more and more, we tend to witness the renunciation of traditional forms of transport, energy, etc. In favor of cleaner and healthier ones.

This is also the case for transportation. Lobby groups and environmentally friendly organizations have not only had an impact on the political stage, influencing environmental protection policies, but have also created a wave of ecology promoters in the civil society. More and more, influenced by the groups I have mentioned here above, people begin to give up on traditional products in favor on those less polluting. In this particular case, the demand in the environmentally friendly transportation area is likely to increase due to these forces.

Legal Environment

The legal environment (which I could have discussed in the same place as the political environment, but it seemed more reasonable to do it separately) is quite significant in our discussion. The case study gave the example of the state of California, which has the highest antipollution standards in the United States. These standards meant that the automobile industry came under serious pressure in order to produce viable alternatives to polluting cars. They have not thoroughly succeeded in this sense, however, many large car producers have begun to enter the environmentally friendly vehicle market segment with productions of their own. Ford Motors was an example in this sense.

The second legal issue to be discussed here refers to a resolution by the California Air Resources Board in the early 1990s that required that 4% of all vehicles sold in the state by 2003 should fall in the zero emission vehicles category. Other states are mentioned to have adopted the same or similar regulations.

Finally, in terms of legal issues, there seems to be a positive trend of legislative packages encouraging the use of EVs, especially light EVs. Fore example, 2000 saw the passing of a legislative bill in California that allowed the usage of specific electric scooters on roadways.

All these legal matters I have mentioned here above point out to the fact that, while on one hand we see a definite increase in demand for environmentally friendly vehicles, on the other, we also see an exacerbated competition, with more and more companies entering to feel in the gaps and with the large car makers, like Ford, Toyota or Honda, most likely to be taking a part of the spoils as well.

Economic Environment

In terms of the economic environment, the most significant issue that we should discuss refers to the increasing oil prices. We know from all resources that oil is becoming a more and more scarce resource. Indeed, the oil resources are estimated to be dried up by 2050. We have already endured two oil shocks, in 1973 and 1979, which saw the price of oil gradually increase. Political instability in the Persian Gulf area, the richest in oil in the world, is not helping either. As we speak, the price of oil is coming close to $50 a barrel, which is enormous.

This has led people to search for new energy sources and electricity is one of the most favored. Indeed, as the case study points out, electricity has always been a cheap source of energy, which could prove the right solution in the period to come. Obviously, this will only encourage demand in the EVs market.

Technological Environment

Technology has taken a serious swirl forward in the last decades. What had seemed to be part of our imagination some years ago is a reality nowadays. The EV market will certainly be influenced and will benefit from the technological inventions that are likely to follow in the years to come. For example, the battery and electricity producers market will probably be seriously affected by the technological changes and this will certainly mean a profit for the EVs as well. Just imagine what a battery that can be charged in less than an hour would mean.