Wednesday, October 18, 2017

It Will Take More Than Tesla - News Roundup - Part 3

The last few weeks have seen a veritable torrent of news on the Electric Vehicle (EV - throughout these pieces, when I use EV I mean a solely battery powered vehicle, not a hybrid) front.  It's felt as if there was someone new shouting loudly about their vision, plan, idea or policy every day.  Entire countries have announced policies to sweep away both petrol and diesel cars in a matter of years.  Cities have claimed they have even more aggressive plans than their parent countries.  Companies are announcing research projects that may lead to results years in the future, or possibly never.    The supply and demand side has never yet been as active.

Let's start with where we began, that It Will Take More Than Tesla ...


... it seems that production glitches are affecting Tesla's ability to ship the new Model 3 - the one that has around 500,000 pre-orders (where customers have put down a refundable deposit).  Tesla's total production to date (beginning with the original Roadster) is around 250,000 and their current quarterly production, across all current models, is just 25,000.  The plan has been to ramp that to 500,000 total cars in 2018, or 125,000/quarter.  We know Elon Musk is capable of realising great visions - we only have to look at what Space X is doing to see that - but we can also see that scaling car production by a factor of 5 in a matter of weeks, much of that for an entirely new model, is going to be difficult and probably impossible given the dependencies on third party suppliers, the gigafactory, automation and workers (this in a month when Tesla reportedly carried out a huge appraisal process and let go several hundred employees - though they look to have added some 10,000 new employees in the last couple of years, so releasing a few isn't terribly significant)..  There could be a lot of disappointed Model 3 deposit payers next year.  Jean-Louis Gassée has an interesting take on the problems, comparing them with the silky smooth Honda production lines he witnessed years before.

The Race To Be First, Bigger and Bolder

Globally, 95% of electric cars are sold in only 10 countries: China, the U.S., Japan, Canada, Norway, the U.K., France, Germany, the Netherlands and Sweden.  These, and other countries, are racing to increase sales of EVs through announcing ever more ambitious policies:
Oxford, England: Starting in 2020, six streets in Oxford’s city center will be free of smaller gas-guzzling vehicles, including buses and taxis. By 2035, the ban will have expanded to all fossil-fuel powered vehicles and will encompass the entire city centre. Oxford has a particular need to make this happen soon - it is one of 11 British cities revealed last year to exceed the safe limits for toxic particles, according to the World Health Organisation.  This suggests a faster move than the UK's overall plan to ban sale of such vehicles from 2040. 
Scotland: The Scottish Government has set a deadline eight years ahead of the rest of the UK so wants to outlaw the sale of new petrol and diesel engines by 2032.
Paris, France:  banning all petrol- and diesel-fuelled cars by 2030, 10 years ahead of France’s 2040 overall target for achieving the same thing.  Paris is already practicing as it grapples with similar problems to those in Oxford - it already has car-free days, car-free zones and fines for drivers using cars more than 20 years old. On 1 October 2017, the most recent car-free day, nitrogen dioxide levels dropped 25 per cent and noise levels dropped by an average of 20 per cent.   Paris is also rolling out their equivalent of Electric Zipcars using a Boris Bike style model, see the photo below.

Norway: All new passenger cars and vans sold from 2025 should be zero-emission vehicles. The country is considered a leader in this area. About 40% of all cars sold in the country last year were electric or hybrid vehicles. 
Germany: proposing to ban sales of internal combustion engine vehicles from 2030 ... there is no word from Volkswagen on this policy as yet.  Seemingly as many as 600,000 jobs could be at risk.  
Netherlands: putting together a proposal for a ban from 2030 which will need to go through their equivalent of Parliament for ratification. 
India:  planning to ban petrol and diesel cars by 2030.  The interesting thing about India, and China, is that car ownership is just beginning to explode - making EVs a viable choice soon will mean that existing pollution problems do not, at least, get any worse as a result of increased car ownership (plainly there are power generation issues still)
China: considering, but not committing yet, when to ban petrol and diesel cars.   It already accounts for some 40% of EVs sold.
Other cities, including Madrid, Athens and Mexico City are also announcing plans to ban diesel cars from their centres.

The Supply Side

In an effort to capture what, based on the demand side policies, could be a rapidly booming market, existing carmakers and new entrants alike are falling over themselves to announce their plans.  

In the UK, they face a new car market that has declined for six straight months with diesels falling faster than petrol (as reported by the Department of No Shit Sherlock), though to put that in context, year to date car sales are only 3.9% lower than the same period last year (comparing September 2016 to this September makes for worse viewing - the fall was over 9%).  Diesel sales, though, are down 13.7%.   September is, of course, new plate month in the UK so typically sees higher sales - hence it's interesting to see combustion decline again.  On the other hand, there are all kinds of seasonable adjustments that can be made to these figures to present them in a better light - discounting, for instance, for April's change in Vehicle Excise Duty rates.  

September saw just over 22,000 EVs sold - roughly 5% of the market and up 41% on the prior year.  Overall market share, globally, for EVs is thought to be around 3% but it's clearly growing.

Perhaps it's better to look at a longer term forecast to see what things might look like.  Here's a recent graph published by the National Grid, covering UK volumes only:

This, naturally, given all of the policies noted above, says that the fall in petrol and diesel vehicles is only going to accelerate.  Today the question is "why should I buy an electric car?", but in as little as three years, as the market is flooded with new models from the big name manufacturers and a fair number of new entrants, it will quickly flip to "why shouldn't I?"  The implications for leasing, financing and PCP deals are interesting - what if there's no second hand car market (at all) for petrol and diesel cars?  What if there's a market, but the valuations baked in to today's contracts are wrong by 25% or 50%?

From A Very Low Base

The starting numbers, though, don't make for pretty reading:

- EVs amounted to only 0.5 percent of US car sales in 2016, or around 150,000
- Chinese consumers bought about 289,000 EVs and hybrids in 2016
- EU consumers bought around 215,000

To put those numbers into perspective, there were 92 million internal combustion engine vehicles sold in the same year.

On The Supply Side

Some of the supply side stories are:

Jaguar Land Rover - By 2020, the entire range of Jaguar cars and Land Rover sport utility vehicles will be available in fully electric, plug-in hybrid and an unclear combination called a mild hybrid, with a fully electric SUV (the I-Pace) launching in 2018.  Note that JLR will continue to offer petrol and diesel versions too - it's going to make the forecourt a very crowded place, not to mention increasing the number of demonstration cars that will need to be provided (and then sold at a discount).  Some of you will already have seen the fully electric E type prototype that was recently shown.  Jaguar's CEO, Dr Ralf Speth, is blaming delays on rolling out electric cars to government's failure to deliver the necessary charging infrastructure - last I checked, government didn't own, or subsidise, petrol stations.  My estimate is that more than 90% of charging will likely be done at home, work or a "destination" (such as a car park, supermarket, retail park etc) and 60% of homes have access to off street parking - I see a role for government to facilitate a market for on street charging (e.g. for terraced homes) but not to pay for it and run it.

Volvo Car Group (now owed by Geely, a Chinese company) -  Only hybrid or battery versions of its new models will be available as of 2019.  With China making up 40% of current EV sales and Geely playing a  part in that, it makes sense to bring that expertise to the Volvo brand. Separately, Volvo announced that they will move their Polestar brand (no, me either) to all electric vehicles, available by subscription (and in very low volumes initially - c500 for the first car, the Polestar 1) to compete with Tesla.

Volkswagen - In a head long and entirely predictable rush away from diesel vehicles, VW said that it would bring 30+ EVs to market by 2025 and aim to sell 2-3 million sold by then, roughly 25 percent of its total sales. Recently the company upped the ante again, vowing to create electric versions of all 300 of its models. A question, if I may ... does 300 models make any sense at all in an EV world? 

BMW - by 2025, they plan to have a dozen EVs and a further dozen hybrids on the market.

Dyson - Yes, that Dyson, he of vacuums, fans, hairdryers and other marvels of engineering, announced that he would be investing £1bn in new battery technology (presumably based on Sakti3, the company he bought a couple of years ago) and a further £1bn in a car design that he plans to have on the road by 2020.   For comparison, Telsa have invested roughly the same amount (a little over $2.7bn in their case) in just the last year.  I admire Mr Dyson greatly - he sees an opportunity and is unafraid to invest (and it's his own / family money of course), but it's an interesting call - Dyson's revenues today are around £2.5bn and they're profitable (Telsa after 14+ years is not yet profitable); putting sufficient investment into the car business may require an IPO or fundraising from outside investors.

Easyjet - Whilst we're talking about strategies and bold calls, Easyjet announced a plan to work with a US company, Wright Electric, to develop a short-haul electric plane.  An EP I guess; LPs will come later.  As far as I can tell, Easykey are providing advice and counsel rather than hard cash.

The Other Shoe Dropped

Meanwhile, Royal Dutch Shell (FT link - will require registration if you are not a subscriber) suggests all this talk of banning petrol and diesel vehicles could mean that potential gains from more fuel efficient vehicles are lost, banking on a much slower switch to EVs than others believe is possible.  26% of global oil demand is from passenger cars so any reduction in that is going to hurt Shell right in the bank account.  That said, recently Shell announced the acquisition of NewMotion EV - a Dutch provider of charging points (for homes, offices and public sites).  Is this right hand / left hand, or sensible hedging to cover all bases?

Alongside Shell, Exxon, in a recently published study, is forecasting that, even by 2040, EVs will only amount to a tiny part of the total vehicle base:


I added the black lines in to make it easier to read across - I take it as a forecast that hybrids will number c300m in 2040 and EVs will be only perhaps 100m.  We can say, perhaps, that Exxon is sceptical that the policies listed above, along with manufacturer plans, will make much of a dent in the use of petrol and diesel vehicles globally.  Separately, BP recently said that they see 100m EVs on the road by 2035 - again, only a small percentage of the more than 1.5bn vehicles on the road by then.  If there were 100m EVs on the road, the world would need something like 2m barrels of oil per day fewer than today - all other things being equal.

The Penalties

Car makers may sometimes be altruistic, but it's more likely here that they see both a market opportunity and a way out of some considerable penalties that come up from the turn of the decade.   Fines for failing to hit legally mandated CO2 targets from 2021 could reach £1bn for some manufacturers.    I've seen figures suggesting that 7 of the top 10 car markets - think VW, BMW, Fiat - are going to miss the numbers.  Diesel cars were a big part of meeting the targets - they emit less CO2 (whilst filling the air with far more noxious particles as now all know); with sales of those falling and likely to fall faster, things are looking tricky (diesel's total market share in Europe even 3 years ago was 52%, it's not 45% and falling).

Summing Up

This feels like the early days of the gold rush or the Internet boom.  Everyone is rushing to announce a policy or strategy that is bigger, bolder, sooner and more outlandish than everyone else.  There seems little in the way of substance behind those policies or strategies.  Governments can change their mind, blame others for slow progress, throw up their hands in despair when it doesn't work.  Suppliers can blame lack of infrastructure, poor demand, shortage of supplies such as lithium or cobalt.  Some of the policies and strategies will, though, come off.  Some will crash and burn completely, others will develop, grow and shine.  In the gold rush, it paid to sell shovels.  In the Dotcom boom, it paid to buy Amazon and wait a while, perhaps buying some more every year as it fell.  It's hard to see the winners and losers in the wider EV market (software, hardware, infrastructure etc), but it's looking like a fascinating place.

Little was said in any of these grand announcements about self-driving cars - some manufacturers believe they are many years (even decades) away, some believe that they are coming soon, but perhaps they have nothing to announce that is tangible and don't want the focus to be on what they don't have.  Countries and cities will also need to carefully think about when self-driving cars may become a reality - why focus on rolling out a local charging infrastructure if cars will be able to move to a nearby charging point, charge and head home autonomously?  The implications of self-driving cars are even more profound than those for EVs - no more driving schools, no more driving licences, the resurgence of out of town eating because there will be no such thing as drink/driving, lower accidents, smoother traffic flows with more predictable travel times and so much more.

My next couple of pieces will look at the big questions that the transition to EVs (and then to autonomous vehicles) will raise and maybe even propose some ways ahead, if not answers.




Friday, October 13, 2017

G-Cloud - A Whole Lot of "G", Not Much "Cloud"

It's been nearly two years since I last looked at G-Cloud expenditure - when the total spend crossed £1bn at the end of 2015.  Well, as of July 2017, spend reached a little under £2.5bn, so I figured it was time to look again.  I am, as always, indebted to Dan Harrison for his data analysis - his Tableau work is second to none and it, really, should be taken up by GDS and used as their default reporting tool (obviously they should hire Dan to do this for them).

As an aside, the raw data has been persistently poor and is not improving.  Date formats are mixed up, fields are missing, the recent change to combine lots means that there are some mixed up numbers and, interestingly, the project field has been removed - I'd looked at this before and queried whether many projects were actually cloud related (along with the fact that something like 20% of projects were listed as "null" - I can understand that it's embarrassing having empty data, but removing the field doesn't make the data qualitatively better, it just makes me think something is being hidden).

Recall this, from June 2014, for instance:
Scanning through the sales by line item, there are far too many descriptions that say simply "project manager", "tester", "IT project manager" etc.  There are even line items (not in Lot 4) that say "expenses - 4gb memory stick" - a whole new meaning to the phrase "cloud storage" perhaps.
Here's the graph of spend over the 5 1/2 years that G-Cloud has been around:


The main conclusions I reach are much the same as before:

- 77% of spend continues to be in "Cloud Support" (previously known as "Specialist Services").  It's actually a little higher than that - now that PaaS and SaaS have been merged (to create a category of "Cloud Software", Lot 4 has become Lot 3 but both categories are reported in the data.  It's early days for Cloud Software - it would be good if GDS cleaned up the data so that historic lots reflected current lots.

- 2017 spend looks like it will be slightly higher than 2016, but not by much.  If the idea was to move work from "People As a Service", i.e. Cloud Support, to other frameworks, it's not obvious that it's happened in a meaningful way, but it may be damping spend a little.

- IaaS spend, now known as Cloud Hosting, has reached £205m. I seem to remember from the early days of the Crown Hosting Service business case that there were estimates that government spent some £400m annually on addressable hosting charges (i.e. systems that could be moved to the cloud).  At the moment Cloud Hosting is a reasonably flat £6m/month, or £70m/year. It's very possible that there's a 1:10 saving in cloud versus legacy, but everything in me says that much of this cloud hosting is new spend, not reduced spend following migration to the cloud.  That's good in that it avoids a much higher old-style asset rich infrastructure, but I don't think it shows much of a true migration to the cloud.

28% of spend by the top 5 customers.  

In the past I've looked at the top spending customers and top earning suppliers, specifically in Lot 4 (now a combination of Lot 4 and the new Lot 3).  There are a couple of changes here:

- Back then, for customers ... Home Office, MoJ, DVLA, DSA and HMRC were the highest spending departments with around £150m between them.  Today ... Home Office, MoJ, HMRC, Cabinet Office and DSA (DVLA dropped to 7th place) have spent nearly £800m (total spend across all lots by the top 5 customers is only £100m higher at £925m which shows the true dominance of support services at the top end).  £925m out of £2.5bn in just 5 customers.  £1.25bn (51%) is from the top 10 customers.

- And for suppliers, Mastek, Deloitte, Cap Gemini, ValTech and Methods were the top 5 with a combined revenue (again in Lot 4) of £67m.  Today it's Equal Experts, Deloitte, Cap Gemini, BJSS and PA Consulting with revenue of £335m (total spend across all lots for the top 5 suppliers is £348m - that makes sense given few of the top suppliers are active across multiple lots - maybe Cap Gemini is the odd one out, getting some revenue for hosting or SaaS).  It takes the top 10 suppliers to make for 25% of the spend.  I don't think that was the intention of G-Cloud - that it would be dominated by a small number of suppliers, though, at the same time, some of those companies - UKCloud (£64m) for instance - are still small companies and, without G-Cloud, might not exist or have reached such revenues if they did exist.

A couple of years ago I offered the observation that
"once a customer starts spending money with G-Cloud, they are more likely to continue than not.  And one a supplier starts seeing revenue, they are more likely to continue to see it than not."
That seems to be exactly the case, here's a picture showing the departments who have contracts that have run for more than 24 months (and up to 50 months - nearly as long as G-Cloud has been around):


If anything, this is busier than might be expected given the preponderance of Lot 4 - it might be reasonable to expect that support services would be short term and focused on a specific project, such as migrating locally hosted email to Office 365 or to Gmail, or setting up the capability to manage cloud infrastructure.  What we see, instead, is many long term resource contracts.

What should we really conclude?  And what can we do?

In 2012, with G-Cloud not even a year old, I asked whether it could ever be more than a hobby for government.   I wondered about some interim targets (at the time the plan was for a "cloud first" approach with "50% of spend in the cloud" - that should all have happened by now).  There is absence of strategy or overall plan for further cloud realisation - with GDS neutered and spend controls licking their wounds from the NAO's criticism that they spent far more time than they should have done looking at projects spending less than £1m, it's not clear who will grasp the mantle of driving the change away from long term contracts towards shorter, more cash intensive (as opposed to capital driven) contracts (be they with big or small suppliers).  Perhaps it's time for Chris Chant and Denise Mcdonagh to come back?
  • Should there be spend control review of "Cloud Support" contracts to determine what they're aiming to achieve and then assess whether there really has been a reduction in costs, a migration to the cloud, a change in the contracting model for the service?  If we were to do a show of hands across departmental CIOs now and ask how many were running their email in the cloud (the true cloud, not one they've made up and badged as cloud that morning), what would the response be?  If we were to make it harder and ask about directory services (such as Active Directory), what would the answer be?  If we were to look at historic Lot 4 and test how much had been spent in pursuit of such migrations, what would the answer be?  
  • What incentives could we put in place to encourage departments to make the move to cloud?  Departments have control over their budgets, of course, and lots of other things to spend the money on, but could we create a true central capability (key people drawn from departments and suppliers with a brief to build a cloud transition plan) that was architecture agnostic and delivery focused that would support departments in the transition - and that would be accountable (and quite literally held to account) for delivering on the promise of cloud transition?  If that was in place, could departments focus on their legacy systems and how to move those to more flexible platforms, in readiness for future cloud moves (or future enhancements to cope with Brexit)?
  • What more could we do to encourage UK based cloud companies (as opposed to overseas companies with UK bases) to excel?  Plainly they have to compete in a global market - and I were a UK hosting company, I would be watching Amazon very closely and wondering whether I will have a business in a few months - but that doesn't mean to say we don't want to encourage a local capability across all lots?  What would they need to know to encourage them to invest in the services that will be needed in the future? How could that information be made available so that a level playing field was maintained?  Do we want to encourage such a capability in the UK, or should we publish the overall plans and transition maps and let the chips fall where they may?
  • Are there changes that need to be made to the procurement model so that every supplier can see what every department is looking for rather than the somewhat peculiar approach now where suppliers may not even know a department is looking to make a purchase?  What would that add to the timeline?  Would it result in better competition?  Would customers benefit as well as suppliers?  Could we try it and see - you know that whole alpha, beta, A/B testing thing?
GDS have long since been quiet on grand, or indeed any, plans for transition to the cloud (and on many other things too).   Instead of a cloud first strategy, it looks like we have contracts being extended and delays to existing projects. IR35 likely resulted in some unexpected cost saves as the headcount of contractors and interims reduced almost overnight, but that also meant that projects were suddenly understaffed and further delayed.

Energy and Vision

We need a re-injection of energy and vision in the government IT world.  Not one where the centre dictates and micro-controls every action departments want to take, resulting in lengthy process, avoidance of spend that might be scrutinised and cancellation/delays to projects that could make a difference ... but one where the centre actively facilitates and helps drive the changes that departments want to make, measuring them for logical consistency against an overall architectural plan and transition map rather than getting theological about code standards or architectures.

A Strategy And A Plan

At the same time we need to recommit to a strategy and a plan for delivering that strategy.  In terms of the cloud that means:

- Setting a cloud transition goal.  In the same way that we have set a goal to give increased business to SMEs (which G-Cloud is underpinning), we should be setting the same goal to move government to commodity, i.e. cloud-based, IT where it makes sense.  10% of the total budget (including Capex and Opex, or CDEL and RDEL if you prefer) in the first year, increasing from there to 25% in 2 years and 50% in 5 years, say.

- Reviewing the long (36 month plus) contracts and testing them for value, current performance and overall delivery.  Are they supporting migration to the cloud?  Is the right framework being used (if it's not cloud but it is delivering, then use the right framework or other procurement option)?  It doesn't matter, in my view, whether it was valid in the first place or how the process was or wasn't followed originally, it matters whether there is value today and whether there are better options that will support the overall plan.  If it's not cloud, let's not call it cloud and let's get to the root of what is really going on with commodity technology in government.

- Overwhelmingly adopting an architecture founded on multiple shared and secure infrastructures. There's no need for a single architecture when the market provides so many commodity options - and spreading the business will foster innovation, increase the access points (and improve security through distributing data) and ensure that there is continued competitive tension.  Some of that infrastructure will be pure public cloud, some of it will be a shared government cloud (in the US, cloud providers maintain clones of their public infrastructure for federal government use - that may be one answer for specific areas; importantly, what I am not suggesting is that a department set up their own infrastructure and call it a cloud, thought there may be specific instances, in the security services, say, where data classifications may mean that's the only option).  

- Migrating all of government's commodity services to the cloud.  Commodity means email, directories, collaboration, HR, finance, service support, asset management and so on.  This doesn't have to be a wholesale "move now" approach, but one that looks at when it's sensible to close down existing applications and make the move.  No new applications should be built or deployed without first assessing whether there is a cloud alternative - this is a perfect place for a spending team to look at who is doing what and act as a hub for sharing what is going on across central and local government.  
  • I've been on the record for a long time as saying government should recognise that it doesn't collaborate with itself - having collaboration services inside the department's own firewall isn't collaboration, it's talking to yourself.  I believe that I even once suggested using a clone of Facebook for such collaboration.  Government doesn't need lots of collaboration tools - it needs one or two where everyone, including suppliers and even customers, can get to with appropriate segregation and reviews to make sure people can only see what they're supposed to see.  Whatever happened to Civil Pages I wonder?
- Putting in place a new test for Lot 3 (the old Lot 4) services to measure what is being purchased against its contribution to the department's cloud migration strategy.  This is a "cloud first" test - are you really using this capability to help you move to the cloud?  What is the objective, what are the milestones?  A follow on test to see how delivery is progressing will then allow a regular state of the cloud nation report to be published to see what is and isn't moving.  

- Working with local government, Devolved Administrations, the Health Service and others to see what they are doing in cloud.  With 84% of G-Cloud spend in central government, maybe the other folks are doing something different - maybe it's good, maybe it's not so good, but there are likely lessons to be learned.