How to develop an oil independent transportation system, the Shai Agassi way

by David Spark on February 24, 2009

If you were next in line to be the CEO of a multi-billion dollar company would you quit with no money just to pursue your passion?

That’s exactly what Shai Agassi did when he left SAP to become the founder and CEO of a Better Place (site), a company whose goal is to build a scalable transportation system that ends our need for oil dependence. It’s not the first story like this that’s been told, but it’s the first one that people around the world are listening to, responding, and financing. And more importantly, Israel and Denmark have made commitments to deploy Better Place’s network of electric battery exchanging stations nationwide.

It’s all part of Agassi’s market-based vision of an all electronic vehicle transportation network that’s more economical than gas burning vehicles. Agassi spoke this morning at the Jewish Community Federation’s Business Leadership Council (BLC) breakfast. He regaled the audience with stories of leaving SAP, of giving back to the past and the future, of getting support from Israeli President Shimon Peres, and how President Clinton unwittingly developed his company’s business model.

Paying a debt to the past and a debt to the future

Prior to starting Better Place, Shai Agassi was a top executive at SAP and next in line to be CEO. Anyone would be foolish to turn down such a fantastic job, so thought all his colleagues after he repeatedly sent in his resignation. But Agassi felt he had a debt to Israel and a debt to the future. He wanted to tackle bigger problems that could truly make the world a “better place.” And not to insult the work and the people at SAP, but Agassi realized that he wasn’t going to make the world a “better place” working at SAP.

Agassi began thinking about tackling big world issues when he attended an event in which everyone was asked, “How do you make the world a better place by 2020?” His colleagues approached the question as a conversation starter, but Agassi took it seriously. How could he make the world a better place? The biggest issues of the day were saving climate change and peace in the Middle East. Not easy tasks Agassi acknowledged.

But Agassi knew where his talents lie. He had the skill to tackle a huge problem by solving each piece and then reintegrating those pieces into a new solution. And the problem he wanted to tackle was, “How do you run an entire country without oil?” It was a problem he felt must be solved, not dictated, because, “If you solve that question with the science we have today and by market forces, not an edict, you could replicate it to every country around the world, and thus you would make it a better place,” Agassi said.

How to develop an oil independent transportation system, the Agassi way

While working at SAP and spending time with his kids, Agassi would spend late nights researching the market for oil and alternatives. Initially, he thought the solution would be with biofuels and ethanol. Then he switched his mind and thought the solution would be hydrogen. That was until he realized hydrogen was the worst way to send electrons to the engine-a problem that wasn’t going to get any better. Agassi then saw the potential of the electric car. But he realized that in its current form electric cars lacked convenience (range only 100 miles before recharge) and were very expensive (electric cars were usually a $10K premium). Plus, he needed to make sure running these cars cost less than gas powered vehicles.

Throughout all of Agassi’s research, he realized that this solution had to be driven by market interests. Past incarnations of oil alternative vehicles couldn’t move markets or cause entire countries to adopt. A market force is economic. You can’t base a business model on the public’s eagerness to lower greenhouse gas emissions.

Get some money and a manufacturer, and we’ll give you a country

President of Israel Shimon Peres got wind of Agassi’s venture and brought him in to talk with every minister in the government and every industrialist family. Within two weeks, Israel was sold, but they weren’t going to finance Agassi’s mission. Peres said, go find $200 million from a venture capitalist and a top car manufacturer that will make a million of these electric cars and we’ll give you a country to build out your network. At the time Agassi was still at SAP and he didn’t have the money or a car company. It was hard for him to even think about leaving his job to which Peres said, “It must be such an important job that you wouldn’t save your country or wouldn’t save your world.”

With no money or a car manufacturer, Agassi left SAP realizing he could pull it off because of his passion to make the world a better place and one huge asset, the support of Israeli President Peres.

No hybrids. They’re like mermaids.

With Israel as the first country on board, Agassi immediately sought out financing and a car manufacturer. He contemplated hybrids to which the Vice Chairman of Renault-Nissan disagreed: “Hybrids are like Mermaids. You want a fish, you get a woman. You want a woman, you get a fish.” Renault was convinced the solution had to be all electric and they became the first car manufacturer to come on board.

The initial biggest financier thanked Agassi for coming to him first. This financier already had tons of money in oil refineries and by giving him a head start over his competitors, it would give him some time to sell off his refineries.

To build greater incentives on the electric cars, both Israel and Denmark created huge taxation inequities between electric and gas-powered vehicles. Israel put a 72% tax on gasoline cars while non-gasoline cars were only taxed 10%. Simultaneously, Denmark put a whopping 180% tax on gasoline cars yet 0% tax for non-gasoline cars. That meant a base level electric car in Denmark would cost only $20K and a gas-powered one would cost $56k. Agassi joked, “It’s kind of an IQ test and if you fail it they want you to move to Germany.”

President Bill Clinton unwittingly develops Better Place’s business model

Last year, Agassi had a conversation with President Bill Clinton about what he was trying to do with his company. Impressed, Clinton gave Agassi a backhanded compliment, “Shai, you’re solving the right problem in the wrong time frame.” President Clinton went on to explain that the average Joe in America won’t go into a car dealership and accept that you need to pay an extra $10,000 for his car today because over 12 years it’ll pay itself off. In fact, only a small percentage of people buy new cars at dealerships. Instead, most people buy nine year old cars and then they run them into the ground. And when they’re done with that car they buy another nine year old car.

Interview with Shai Agassi
Interview with Shai Agassi

So Agassi asked the President the obvious question, “How do you make money?” Clinton threw the question right back at him with the response, “I don’t know, you’re the smart guy.”

(Check out my one-on-one interview with Shai Agassi where he talks about that conversation with President Clinton.)

Agassi was forced to be the smart guy and figure it out, and he did. But he still credits President Clinton for being the inspiration for his company’s business model.

Sell miles like minutes

The answer to Better Place’s success is all in our pockets, said Agassi. The business model for mobile phones and the compatible telecommunications network can be adapted to electric cars and Better Place’s transportation network. In both cases you pay for the service which is priced at a level that can subsidize the device. With Agassi’s auto service model, consumers purchase their miles for their electric cars like we buy minutes for our cell phones. But the trick for Agassi’s team is to be able to price the miles so that it costs the same or it’s cheaper than gasoline, while also being able to sell the car for free or close to free?

On the energy side, Better Place’s two main costs are the creation of clean electrons (all energy not made from fossil fuels is renewable) and the depreciation of the battery. He calculated the cost to that was eight cents a mile which translates to about $1.50 a gallon. Cheap here, but in Europe, Agassi said it’s incredible. After an explanation of the extreme pricing mechanisms for oil in Europe, Agassi said, “We’re not just cheaper than oil, we’re cheaper than free oil.”

All electric transportation network coming to the Bay Area soon

We’ll soon see a solution here in the Bay Area as Agassi admitted to meeting with San Francisco Mayor Gavin Newsom. When Newsom heard Agassi’s plan he immediately said, sign San Francisco up. To which Agassi had to explain that the city of San Francisco is far too small for Better Place’s transportation network. “I do entire countries,” said Agassi, “You’re not running a state.”

“Just you wait,” responded Newsom.

Realizing that “Governor” Newsom may be a way off, the Mayor called out to nearby mayors of cities such as Oakland and Palo Alto expressing his desire to make Agassi’s all electric transportation network a reality in the Bay Area. They’re all on board, said Agassi.

In closing, Agassi mentioned how honored he was to follow Richard N. Goldman the prize winner for the 2009 Business Leadership award. He then apologized to the audience, “Didn’t think you were going to get a car salesman for the gala.”

Leave a Comment

{ 1 trackback }

Previous post:

Next post: