Driving change: Innovation is key to the future of the U.S. auto industry by Stephanie N. Mehta @FortuneMagazine December 1, 2009, 11:37 AM EDT E-mail Tweet Facebook Google Plus Linkedin Share icons Government needs to support research for clean energy-powered cars. But auto makers need to make their own success. By Steve Westly and Mindy Lubber Former California Controller Westly invests in clean tech. Photo courtesy of Westly Group Lubber leads the Ceres coalition of investors and environmentalists. Photo: Laura Barisonzi America’s auto industry is at an unprecedented crossroads. At the core of the debate is whether American car companies can adapt to a changing marketplace where the demand for greater fuel efficiency and cutting edge design supersedes brand loyalty and vehicle size. The auto industry of tomorrow – which already is emerging – will be based on a different model. It will reward innovation. It will cater to new economic realities. It will listen to customers. The question is, will it be located in the U.S., or elsewhere? Foreign automakers are making shrewd moves to ensure their future growth. While June auto sales in the U.S. were down 28% from last year, June auto sales in China were up 48%. An Indian automaker, Tata Motors, ttm has answered the demand by a new generation of middle class workers in India who want cars but cannot afford to spend $20,000. Tata’s “Nano” sells for less than $2,500, and the company has received more than 200,000 orders in the last twelve months. The Nano is so cheap because it is made largely of plastic, and tops out at less than 50 mph, perfectly adequate for Indian driving needs. (Tata’s chairman recently said he also is planning to build a hybrid version of the Nano.) Innovation does not require plastics, although there are exciting new lightweight graphite materials on the horizon. Innovation can be made in design, fuel economy, power source, cost, financing, and areas we have not yet imagined. American car makers that get it One example of innovation is a company called Tesla Motors. Because of its nimble success in producing an all-electric vehicle – still on the drawing boards of the big American automakers – our venture capital firm and other forward-thinking money managers are investing in Tesla. Tesla already is selling a sporty two-seater, zero emission, electric car that goes 0 to 60 mph in less than four seconds with a range of 244 miles on one charge. They are also planning to produce a four-door sedan that will sell for less than $50,000. U.S. car companies can compete abroad when they innovate. Buick is one of the top five auto brands in China. Why? Buick moved quickly to redesign their cars for China’s business elite. The Buick logo was enlarged, seat-back televisions became standard, and the headlights took on a new angle to emulate the eyes of a fabled Chinese bird. They provided fine details, and added chrome and jewelry that would impress Chinese buyers. In short, they listened to the customer. Congress has an opportunity to encourage innovative approaches to the future. The broad national energy and climate change bill, passed by the House and now before the Senate, includes provisions to promote electric cars, create a plug-in infrastructure for vehicles, retool auto factories and create a tie-in with the national grid to power electric cars. The legislation also aggressively boosts creation of more renewable energy. Electric cars powered by clean energy are the Holy Grail for our transportation future. And getting there will create new industries and new jobs for thousands of American workers. The government should continue to invest in research and development, as called for in the energy and climate bill. It should invest in auto companies based on their innovation and potential, not just the size of their workforce. And it should continue to tighten requirements that automakers produce more efficient and lower-polluting vehicles. The Senate must pass the energy and climate change bill, but in the end, the auto industry must make its own success. Cars do not have to be made of steel and weigh 4,000 pounds. Automakers should take their cue from Steve Jobs, who reinvented Apple aapl in the 1990s. “Think different,” he urged. If the U.S. auto industry takes that advice, it will be around to see the future. Steve Westly is the former California State Controller and the managing partner of the Westly Group , a venture capital firm investing in clean tech. Mindy Lubber is president of Ceres , a coalition of investors and environmental groups, and director of the Investor Network on Climate Risk, a network of 80 investors with collective assets totaling more than $7 trillion.