This week a committee of NAATBatt International members, acting at the request of Congressman Mike Honda (CA-17), reviewed a bill that Congressman Honda intends to introduce in Congress. The bill proposes new investment tax credits for certain residential and commercial energy storage systems. Next week in this newsletter, I will talk a little more about the bill and NAATBatt’s reaction to it. But this week I want to focus on a more fundamental issue: why government needs to support at all private, for-profit companies that are launching new technology products in the market.
Justifying government financial support for basic research and development is, or should be, easy. As a general rule, the free market does poorly in basic research and development investment. Failure rates in basic research are high. Even successful projects take years to develop into viable commercial products. Private investors, bound to consider the time value of money, have no incentive to deploy capital in basic research. That is why most of the major new technologies of the last century, from air travel, to space flight, the internet and a host of pharmaceutical products, owe their origin to government-funded research, not private investment. Government agencies such as DARPA, ARPA-E and NIH continue this important practice of public investment in basic research.
The United States compares relatively well to other countries in funding basic research. A recent paper published by the National Science Foundation indicates that the United States spent about $74 billion in support of basic research in 2011. The next closest was Japan, at $18 billion, and then France, at $13 billion. China came in at $9.9 billion.
So why is it that in areas such as advanced battery and energy storage technologies, where so much of the basic science comes out of U.S. research institutions, the companies dominating these industries seem to be located outside the United States?
The answer may be that while the U.S. leads in R&D investment, it probably trails badly in “Valley of Death” investment. The Valley of Death problem of technology companies is described by Geoffrey Moore in his book Crossing the Chasm: Marketing and Selling Disruptive Products to Mainstream Customers. Moore explains that while new technology products may find early success with customers who are innovators and early adopters, they face their greatest challenge in trying to sell to mainstream customers, who unlike innovators and early adopters, are motivated entirely by pragmatic, economic concerns.
The move from early initial deployment to mainstream commercialization–this Chasm or Valley of Death–destroys large numbers of new companies and new products. The risks for companies at that stage are huge and investment returns in them are notoriously low. In a sense, the challenge of Valley of Death investing is very similar to the challenge of R&D investing. Neither types of investment are particularly attractive to private investors. Accordingly, those kinds of investments must come in large part from somewhere else.
The tax credits for energy storage project proposed by Congressman Honda are, in effect, Valley of Death investments. The credits will advantage an important new technology, a technology that has proven efficacy and existing commercial products, but few mainstream customers. The challenge in storage today is not a deficiency in its technology. Rather it is the fact that the mainstream customers who must buy storage are highly pragmatic and economically focused. They will not buy storage products unless and until others buy them first and are successful. This makes for a long and difficult sales cycle–a chasm that must be bridged by some sort of financing or guaranteed market. Tax credits are one such bridge.
In reviewing the NSF’s work on relative national R&D investment, it occurs to me that the NSF might do well to survey investments in Valley of Death technologies by different countries. I suspect the NSF would find that many countries do much better in supporting Valley of Death technologies, such as advanced batteries and energy storage through subsidies and guaranteed markets, than does the United States. If one is looking for an explanation for why so many technologies developed in the United States end up being manufactured abroad, a significant Valley of Death investment gap might do much to explain the phenomenon.