Insight October 19, 2009, 9:53AM EST

Electric Cars: A Wide-Open Race

Warren Buffett has invested in China's BYD, but columnists Anil Gupta and Haiyan Wang caution against putting too much faith in its early-mover advantage

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The electric car is likely to emerge as one of the most transformational products of the current era, as important, perhaps, as the personal computer and the Internet. Given the effect of the auto industry on the rest of the economy, mass commercialization of the electric car will fundamentally transform not just that industry but others such as petroleum, electricity generation and distribution, steel, nonferrous materials, and chemicals. By reducing the world's dependence on crude oil, the electric car will reshape the structure of global trade. Importantly too, because electric cars have zero emissions, they also could dramatically reset the debate on global warming.

It's no wonder, then, that observers and analysts are caught up in frenzied discussions about who will win the great green-car race. What makes the contest particularly interesting is the fact that an all-electric car will be the first major new product in which, right from the start, the contestants include companies from not just the developed but also the developing economies. PCs, mobile telecommunications, and Internet services were invented and launched in the West. It was only later that Asian companies such as Lenovo, Bharti Airtel, and Alibaba jumped into these markets.

But this time, Asian companies are among the leaders in the electric-car race. The Chinese company BYD, for instance, is determined to roll out its all-electric E3 and E6 models this year and has announced plans to bring the E6 to the U.S. in 2010. Japan's Mitsubishi Motors has already launched its electric car, the i MiEV. The boss of another Japanese automaker, Nissan's (NSANY) Carlos Ghosn, is, through Nissan's alliance with Renault, the boldest promoter of electric cars. Tata Motors (TAMO) in India has announced that it will introduce its all-electric Indica Vista EV in Norway this year.

In predicting the future of this emerging industry, it is critically important to guard against two fallacious assumptions. No. 1: Leadership in battery technology will be the primary determinant of who emerges as the leading electric-car maker of tomorrow. No. 1: Being the first company to launch an electric car will bestow a strategically important first-mover advantage on the pioneer.

A Car Is More Than A Stack of Batteries

BYD's ambitions to beat Toyota and become the world's largest car company by 2025 appear to rest on the core premise that leadership in battery technology will automatically or easily translate into leadership in the car business. If so, this is a very precarious assumption. In fact, we deem it all too likely that Warren Buffett, who has made a big investment in BYD, may actually be betting on BYD's future as a leading battery supplier than as a leading car company. Consider a few examples:

Intel (INTC) dominates the world of microprocessors, the brains of PCs. Yet Intel is not a player in the PC industry. If Intel had chosen to play in both markets—microprocessors and PCs—it would probably have lost in both, since the core capabilities required to win are different across the two businesses. Also, as a PC company, Intel would have found it difficult to sell microprocessors to other PC companies, its direct competitors.