By Stefan Heck and Matt Rogers
Conventional wisdom predicts stagnating economic growth, extreme resource depletion, accelerating commodity price inflation, and increasing pollution as consuming classes in emerging markets grow. Below, Stefan Heck and Matt Rogers argue that this growth will create an opportunity that will reframe the world’s economy and create opportunities for trillions of dollars in profits.
The challenges facing the world today as 2.5 billion people join the consuming classes in emerging markets are formidable. Conventional wisdom predicts stagnating economic growth, extreme resource depletion, accelerating commodity price inflation, and increasing pollution. We disagree. Rather than facing a crisis because of resource scarcity, we confront an opportunity that will reframe the world’s economy and create opportunities for trillions of dollars in profits.
Often, when people think about what they see as the coming resource crisis, they focus on the need for conservation. When companies enter the conversation, it’s frequently because they face a threat. For instance, as newspaper readership moves online and use of paper generally declines, the traditional model for pulp and paper companies is threatened: no longer will companies plant forests, cut them down, and turn them into paper with water and chemical intensive processes. But some companies are making lots of money on paper. One such company is Nine Dragons, founded by Yan Cheung.
Yan is the eldest of eight children of an army officer, and grew up in China during the Cultural Revolution. She began her career in a textile mill and then worked in a paper trading company in Shenzhen. She moved to Hong Kong in 1985 to set up her own paper trading company, Nine Dragons, and then to Los Angeles in 1990 to open the U.S. subsidiary.
Her insight? China was critically short of paper and didn’t have trees to cut down to make more. All this in a country that was on the cusp of becoming the manufacturing hub of the world, and nearly everything people buy from China involves paper in some form—wrapping, packaging and instructions. Her business model: buy waste paper in the United States for less than $100 a ton (compared with more than $500 a ton for virgin paper from trees), then buy capacity in shipping containers, which would otherwise have returned empty to China after having unloaded goods in the United States and which were available for pennies on the dollar. She then reprocessed the pulp into packaging material and sold it in a market where paper is chronically in short supply.[ms-protect-content id=”9932″]
As Yan’s business grew, she invested in techniques to reprocess paper with drastically low water usage. She also set up her plants in parts of China that are not suffering from the water shortage that Beijing or parts of Western China face.
With margins of more than 12 percent, Nine Dragons is 50 percent more profitable than International Paper. Boise Cascade, which has transformed itself into OfficeMax, an office products company, makes just above 1 percent margins.
Yan Cheung is now China’s richest woman and the wealthiest woman in the world who made, rather than inherited, her fortune. Stories like hers about the grand successes that will be possible in the resource revolution should be told more often. The point is that the talk of “less” is generally misguided. People talk of doing “less with less,” à la the traditional paper companies and their declining fortunes. People worry that we may actually face a future of “less with more,” à la conventional oil companies that have been spending more on exploration and development while finding smaller fields. In fact, as Yan shows dramatically, many companies will find ways to do “more with less.”
These opportunities don’t just lie in the future, but include plenty of people and companies that are prospering right now as part of the resource revolution and that can serve as exemplars for those thinking about getting into the game.
Big companies, which sometimes resist innovation, are leading the way in many cases. GE, while it missed the move to LEDs, has made a big push for resource productivity through what it calls ecoimagination. GE has also made a major bet on the “Internet of Things”, which will lead to lots of opportunities to do more with less both for GE and for other companies that can capitalize on the spreading network of devices that can sense and communicate with each other, without human intervention. IBM has its Smarter Planet initiative. Philips Electronics is leading the way to LEDs and much more efficient lighting. Sharp is innovating in solar. United Technologies are pushing large-scale storage of electricity, which could play a major role in taking grid technology from the nineteenth century well into the twenty-first. The State Grid Corporation in China is pioneering an architecture and techniques that could become the model for the rest of the world: building a system of high-voltage direct-current links from inland hydropower and renewable sources out to the coastal cities. Singapore Water is doing the same with desalination and treatment of water for reuse,issues that will become increasingly important for the rest of us.
Venture capitalists are pushing even harder, though their efforts have achieved scale only in limited areas thus far, such as solar. There are John Doerr, Michael Liuse, and John Denniston at Kleiner Perkins. For instance, Kaiima, the company that is trying to re-engineer crops to greatly increase yield, is a Kleiner company. There is Vinod Khosla, who is perhaps the one venture capitalist most identified with the resource revolution. Khosla, not known for lacking confidence, disdains investments that promise incremental improvement; investing instead in projects that he discovers have only a 10 percent chance of success but that will transform markets if they succeed. Alan Salzman and Stephan Dolezalek at VantagePoint Capital Partners have about $1 billion invested in cleantech. Ira Ehrenpreis at Technology Partners was an early backer of Tesla and a number of solar companies with disruptive technologies. Foundation Capital also has a major clean tech investing practice, led by Paul Holland, Steve Vassallo, and Warren “Bunny” Weiss, but took a different approach, largely focused on energy conservation and business model innovation.
The pantheon wouldn’t be complete without the individual innovators who have driven so much of their progress among them are Alan Mulally, who showed the way on system integration while at Boeing and does so now as the CEO ofFord; Yet-Ming Chan of A123, a leader in battery innovation; Shuji Nakamura and Eric Kim, pioneers in lighting; Don Sadoway, an important figure in grid storage; and Arun Majumdar, the initial director of ARPA-E, the research branch of the Department of Energy.
When we revisit the issue in twenty years, who will the giant successes be, the companies that become for the next century what Siemens, IBM, Ford, and others have been to the past century? It’s obviously too early to tell, because resource revolutions will play out through a lot of hard thinking by a lot of smart and creative people. But, to provide inspiration, here are six companies that could be shaped in the coming two decades and that could dominate for decades beyond:
Maximum Oil Recovery Enterprise (MORE)
An oil company will decrease the rate at which production from a well declines. Traditionally between 6 and 8 percent a year, the rate will drop to between 1 and 2 percent annually. MORE will use advanced sensor networks as well as newer operating techniques, such as steam injection, to recover between 60 and 70 percent of the oil in a field, up from the traditional 20 to 30 percent, all while avoiding the need to drill in remote, environmentally sensitive areas. These changes may seem to be just traditional improvements, not game-changers, but they would double the value of existing fields and existing companies. Remarkably, today, oil company valuations pay only for reserves valued at current production capabilities and rates, placing almost no value on these untapped resources, so the opportunity for value creation is massive.
Efficient Resilient Grid Operator (ERGO)
The power grid will shift away from an analog, hub-and-spoke system and become a digital, real-time network. The change will be on the order of the switch from the early phone system to the Internet. The new grid will connect multiple, distributed power generators rather than treat each generating plant as a largely discrete entity. The new grid will incorporate massive amounts of storage, so power can be generated whenever would be most efficient, can flow in both directions, and be re-routed to make up for faults or shortages. Digital transformers and other developments will sharply reduce the loss of power in transit. Advanced building controls will let users be incorporated into the management of the grid — rather than balance the grid just by adding excess power, as happens today, the grid will be balanced dynamically based on either additions of supply or reductions of demand in real time. Again, this new company we envision may seem to embody just an increase in complexity, but the effects of ERGO would be extraordinary. By managing the interconnection of hundreds of thousands of distributed generation sites and loads, ERGO would increase the efficiency of electricity generation and distribution by more than 50 percent. Instead of the myriad local networks we have today, the minimum efficient scale will suggest the nation should have three or four utilities rather than a hundred.
Home Unified Services (HOUSE)
This company will reach into our homes more completely than security, electric utility, media and content companies do today, providing customized personal services that anticipate a person’s actions and preferences to provide greater comfort and convenience. Based on individuals’ mobile devices, HOUSE will recognize preferences for light, temperature, music, photographs, and reflect those in the settings of the home (hotel room, office, or hospital room) over the course of the day as individuals move from room to room. Imagine your car GPS not only checking you into a hotel and setting the thermostat, but downloading your favorite family photos and TV programs to your room before you arrive. Today, the average home each year wastes the energy equivalent of an entire refrigerator, running full-time, just from having TVs, furnaces, air conditioners etc, ready to provide service or comfort whenever an individual wants. By making homes smarter about when services will actually be required, HOUSE will reduce energy requirements for the average home 20 to 30 percent and increase available services. On the hottest summer days, HOUSE may even send you a movie ticket or gift certificate to the shopping mall so you’ll leave and let HOUSE shut your home systems down for the early afternoon. The opportunities for similar companies to serve businesses are even larger:
Global Recovery Of Waste (GROW)
The most profitable miner in the world may be recovering high-value products from the waste streams around the world: gold and silver from consumer electronics, lithium from geothermal effluent, and high-value rare earth metals from electronics, using new microfluidic technologies. GROW will also provide heat, power, and fertilizer from neighborhoods’ organic waste. Our total material resource footprint will shrink from 86 metric tons per person annually, to a little more than our body weight.
Sensor Network Solutions (SENSO)
This global technology leader will deliver trillion-point, integrated sensor networks for companies and provide access to a marketplace of algorithm-based analysis of the sensor data. Much as Google search terms create a whole new field of research, SENSO will give small companies access to big data and the tools to make real-time business decisions based on it. The impact on competitiveness for countries that have a broad SENSO network in place will be dramatic.
Equipment As Service For You (EASY)
The world became quite comfortable with software as a service, and now we will see the development of equipment as a service. Rental companies already provide this at small scale, and GE provides engines as power by the hour. Soon every major equipment supplier will begin to deliver machine-by-the-hour services to complement equipment sales.
These six examples are just the beginning. The actual possibilities are far broader. The real benefits come not just from using less but also from the fact that managers can actually build whole new classes of capabilities. When a manager procedes to stop using CDs and switches to digital music files, that leader does not just do away with packaging and unsold merchandise; the change opens the way for the iPod and the iTunes store; then the iPhone; personal radio; compositions that go viral; and more apps than anyone could have imagined. Those who figure out how to invent the future will ride the resource revolution to unprecedented success.
Reprinted by permission of Amazon Publishing /New Harvest. Excerpted from Resource Revolution: How to Capture the Biggest Business Opportunity in a Century by Stefan Heck and Matt Rodgers. © All rights reserved.
About the Authors
Stefan Heck teaches innovation and resource economics at Stanford University. Previously, he was a Director at McKinsey where he co-founded and led McKinsey’s Global Clean Tech practice and the Sustainable Transformation practice. He has also led McKinsey’s semiconductor practice.
Matt Rogers is a Director with McKinsey & Company in San Francisco. He served as a senior advisor to the U.S. Secretary of Energy for the Recovery Act implementation from 2009 to 2010.