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Lindley Estes is a business writer for The Free Lance-Star and Fredericksburg.com. This blog is on Fredericksburg-area business. Send an e-mail to Lindley Estes.

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If electric car had succeeded, GM might not be fighting to stay afloat

THE BEST-RUN com- panies well under- stand the concept of creative destruction.

This essential but cruel part of capitalism ensures that new technologies will constantly come along and replace old ones. In this way, today’s monopolies become tomorrow’s has-beens.

This concept is hammered home in the excellent 2006 documentary "Who Killed the Electric Car?" It is about the creation and demise of General Motors’ electric car in the 1990s.

The documentary, like many, is rather one-sided, painting GM as a company unwilling to mass-market the EV1 electric model because of its possible negative effect on the future of the established product. It claims that there was a wide audience for the electric car.

The film points fingers at a number of people responsible for the death of this early line of electric cars–the oil companies, car makers, federal government and more. The documentary pins part of the blame on the California Air Resources Board, which eliminated stricter fuel-efficiency measures.

It’s unclear who is responsible, but one thing is not in question–GM, Ford and other American car makers were hurt by their unwillingness to develop newer, more fuel-efficient products a decade ago. Government standards may not have mandated this, but the consumer ultimately did.

One has to look only at their stock prices to know this is true. General Motors’ stock price hit a 50-year low last month, and Ford’s is still stuck about where it was a quarter-century ago.

Meanwhile, Toyota and Honda had the foresight to see the era of $4 a gallon (or more) gasoline, and prepare with smaller cars and fuel-efficient hybrid engines. Toyota is now closing in on GM as the No. 1 car company in the world, and Honda is nipping at Ford’s heels for the No. 3 spot.

The stock prices have responded–both Honda and Toyota shareholders have about doubled their money over the past five years.

Of course Honda and Toyota aren’t the only car companies that have grasped the current reality and begun focusing on more fuel-efficient cars. Ford and GM are doing the same, and this strategy may lead to a turnaround for the two giants down the road.

It’s possible that cars such as the Toyota Prius, which is now seen as the gold standard of fuel efficiency, may someday seem like gas guzzlers. Fortune magazine recently ran a cover story on Tesla Motors, which has developed an electric car with a range of more than 200 miles. The cars are prohibitively expensive for now, but that could change down the line.

The great investor Warren Buffett often says that he looks for companies that have "moats" protecting their business models from intruders seeking to break down their competitive advantage.

Capitalism ensures that there will always be competitors trying to invade these moats. As the example of the car companies shows, investors are well-served looking for the companies that are never satisfied with the status quo, but that are constantly adapting for the future.

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Permalink: http://news.fredericksburg.com/businessbrowser/2008/08/03/if-electric-car-had-succeeded-gm-might-not-be-fighting-to-stay-afloat/