New Business Models to Succeed in Hot, Fresh Areas

The “New New”– Thoughts on Working out New Business Models to Succeed in Hot, Fresh Areas

It is often the case that consultancies act as a weather vane for the health of the chemical and related industries. If the industry is doing well, consultancies tend to thrive. We all know that since Q4 2008 all has not been well in the chemical sector and the economy in general. But now….now we at least are getting to see some “green shoots” of economic recovery. Companies who had frozen all discretionary spending over the past year or so are now coming out of their bunkers and beginning to talk again about projects previously put on hold. Things are still a little delicate and cautious. Some enquiries are still asking, “How much would it cost to…?”, “What if we wanted to do this…?”, and “How can we get growth after such a period of stagnation…?” Some are actually signing off and going ahead with projects, while others are holding their fire until the next quarter results. Petrochemical companies have been particularly cautious to spend any money at all.

I talk to a lot of CEOs and senior business developers. Hot areas seem to be solar energy/photovoltaics, biotech, bio-based chemicals and polymers, green chemistry, and general sustainability. Many have read or heard a lot about these areas, and the questions often asked are “How can we participate in this sector? Where? What kind of volume/value business can we expect and after how long?”

The trick is looking at the value chain and working out where each company can participate with their own particular set of capabilities and judging whether the area is already overcrowded and unprofitable. Most companies aren’t trying much to understand what’s happening on the markets now to exploit current potentials, as the crank-up time to participate in the markets might be several years. The key question is what technologies to bet on in the next 5-20 years. This is what is generally called the “new new,” new products for new problems. These are the hardest ones to forecast, and the hardest to develop into a good business, especially as the life cycles of these new technologies are often relatively short before the new improved version comes along.

Take solar energy (and I really am not a specialist). I can count about five houses with solar installations within a 100 meters in each direction on my street in Brussels. These have sprouted up in the last year, helped along by incentives to install them. According to the reading I have been doing from various sources, the total capacity of solar photovoltaic systems has been nearly doubling every two years in the United States and Europe and is expected to rise further. In the United States, the solar capacity in 2009 was roughly 45% higher than in 2008; and in the EU there is a total of 9,530 megawatts of solar capacity in 2009, up from about half that in 2007.

Interestingly, around 90%+ of total solar capacity in Europe is accounted for by just Germany and Spain. Spain alone quadrupled its solar capacity from 2007 to 2008, backed by government incentives. The cost of solar installations is falling, but still relatively high.

We have good news and bad news. Solar energy is miniscule – less than 0.1% of total electricity produced in the United States. Solar capacity remains at 1% of the total. The good news is that there is still fantastic growth going forward. Companies are right to wonder where they can get involved.

On the negative experience side, I also remember a number of years ago thinking that biofuels would be the great industry of the future. Recently, I read about the “bloated” biofuel industry and the trouble it is in. Some are desperately looking to, for example, the United Kingdom, which expecting that fuels will contain 3.5% biofuels by April this year. Success in these areas frequently depends on government incentives and/or “differentiated export taxes.” If these incentives are relied on as part of the business model to succeed and they dry up—or in some cases, taxes are raised—how viable then is the biofuels industry? The VDB in Germany estimates that the amount of B100 sold in the German market in 2009 was down over 80%, from a peak in 2007. I hope that the same fate does not await the solar industry.

Written  by Ian Butcher,

Senior Vice President
Managing Director – Kline Europe SA

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