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Andrew Grove, founder of Intel, writes about Detroit’s woes in today’s WSJ. An excerpt:

The government’s investment in General Motors might be directly helpful if the auto industry only had the recession to contend with. But that is not the case. The industry faces the confluence of a world-wide recession, rising fuel prices, environmental demands, globalization of manufacturing, and, most importantly, technological change involving the very nature of the automobile.

Electric cars have become viable and will likely only become more capable in the future. Components critical to their performance — batteries and electronic control systems — are on a rapidly rising technology curve. These technologies are new and therefore capable of improving quickly with incremental investments. By contrast, technologies that have been around a long time, such as the internal combustion engine and the fuel and drive systems built around it, have enjoyed the benefits of decades of development and have limited potential for further improvement.

The result is that there are several factors aligning to bring about a change in the structure of the automobile industry. Electric cars may match the needs of our time better and become more desirable than cars relying on the internal combustion engine. The car industry today is as vertical as the computer industry was before the PC. However, the simplicity of the electric car combined with the standardization of certain components may cause the automobile industry to shift to a horizontal structure. The Internet is already emerging as a key marketing medium for automobiles and is easily adaptable to a horizontal structure.

If such a shift occurs, the success of a producer will depend on how well it takes advantage of the new structure — whether it can use the mass-producibility and falling cost of batteries and other components better than its competitors.

The U.S. government is investing in the automobile industry with the intention of preventing jobs from being lost. This may improve GM’s ability to operate within today’s structure. But there is no comparably large investment being made to develop the capabilities that could serve the company in a new era of electric cars.

China appears to be making a different bet. It’s not clear precisely how the Chinese government influences industrial strategy. But China is putting a great deal of effort into developing and manufacturing batteries. Essentially, it is betting that it can take the lead in creating the foundation technology of what will likely be the new structure of the auto industry.

Which is the better investment strategy? It is too early to say. In the short term, the U.S. strategy will likely save jobs. The long term is much more problematic. We do not yet know when and if the automobile industry will shift into a horizontal structure. The stakes, however, are very high. The strategic bets being placed by each country may determine which one will end up as the world’s leader in automotive technology and manufacturing.



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