Product Development Is Deflationary

Value add ultimately means paying less money on a long enough timeline

If you’ve ever gone through a product development process in chemicals, then you have likely been to customers to ask what they want (voice of the customer). The number 1 thing they often say is, “Price.” No one wants to pay more for the stuff they are buying. Ideally, they want better value for the same price or similar value for equivalent prices without having to do too much work on their end to make a new product work. This response is so common that you tend to just become numb to it.

That’s because most companies are already so lean that they cannot devote additional time to projects that might not pay off after a few months of work. This is one effect of Modern R&D Being Technical Service. Investment into big new products that might cost millions if they don’t work are often bets that feel too risky for chemical industry shareholders. The choice that the industry has broadly made over the last few decades has been one of trading risk for predictable free cash flow.

At a minimum this means that the industry at large is vulnerable to disruption, but only if you know why customers switch to new suppliers for their raw materials. Everything always goes back to price eventually and those prices can be real and measured in dollars or euros or they can be more existential such as carbon emissions.

If you are doing value added product development or working on innovating that next big thing, how do you go about selling into a market where everyone just wants stuff to be cheaper?

You Will Save Money

We can think about this from a few different directions and ultimately we end up saving money or cutting costs.

Cutting Costs With A New Alternative

Let’s start with the classic Nylon 6,6 use case where up all stocking and parachutes were made from high quality silk fibers derived from silk worms. If you’ve ever bought silk clothing you know how expensive that stuff can be, but the invention of Nylon allowed for this new synthetic alternative to supplant biobased silk fibers for not only parachutes and stockings, but helped unlock the “plastics age,'“ in which we are still existing.

The reason why Nylon worked is because it delivered enough strength to weight at a lower total cost than silk fiber. In a word—deflation. Sure, it’s also a story of synthetic polymer chemistry innovation delivering something new and very useful to the public at large, especially during WWII, but what about when there’s already a very useful polymer in existence?

Value Added = Lower Long Term Cost

Polymer chemists at DuPont eventually thought about, “well, if we can make Nylon from adipic acid and hexamethylene diamine, what about aromatic monomers?” This is how we got what is commercially known as Kevlar. Polymerization and processing of aromatic polyamides (shorthand name is Aramid) to yield brand name polymers like Kevlar and Nomex was non-trivial, but the value they presented was a bit like a superhero of thermoplastics. Aramids have higher heat resistance, are more durable, chemically resistant, and are more fire retardant than regular aliphatic nylons. Aramids are essentially Superman in a lot of ways.

Eventually Kevlar started to become synonymous with protective equipment and that brand security started in the 1970s. Here are two examples of cut resistant gloves from Uline:

1. Kevlar gloves are $11 per pair.

2. Dyneema gloves are $13 per pair

Dyneema is slightly more expensive than Kevlar, but that $2 is a promise of longevity and better performance over a longer period of time. The $2 dollars is worth it if your gloves last twice as long or longer. Dyneema is ultra high molecular weight polyethylene (thanks catalysis) and the really long polyethylene chains enable some of the properties that Kevlar has with much less raw material cost. Dyneema and Kevlar were both invented within a few years of each other. Dyneema didn’t become commercially available until the 1990s while Kevlar became a household name in protective clothing, but if Kevlar is Superman then it has a Kryptonite—water.

Polyamides and aramids derive a lot of their strength from abundant hydrogen bonding—specifically between the amide groups. Thus, one polymer chain in a polyamide strengthens its neighbor. Another molecule that is great at hydrogen bonding with itself, water, can infiltrate polyamides and disrupt the hydrogen bonding between the polymers by inserting itself and reducing that polymer-polymer interaction. This is why the majority of body armor comprised of Kevlar is actually encased in polyethylene too.

It took decades for Dyneema and Kevlar to become the brands that represent their respective synthetic polymers and for their uses to become widespread. Now, it’s hard to think of life without them.

Alternative Feedstock Products = Lower Costs

Right now, synthetic biology is having a moment as it did a couple of decades ago and I can’t tell if the bubble has deflated or if it’s just getting started. Either way, the product in this space will ultimately be the microbes and enzymes that can perform chemical reactions on non-petroleum feedstocks that in theory should cost less than petroleum.

This type of product development might be the riskiest. It’s about developing the tools to enable need feedstocks that are petroleum alternatives. Enzymes are nature’s catalysts so we can view their development similar to how we might think about catalysts to make Dyneema where we can make whole new types of polymers. We can also think of enzymes as catalysts that can perform similar chemical reactions to traditional organic chemistry, but at a fraction of the energy input. If you are a chemical company in Europe and you went through the national gas emergency then the concept of energy might not be available is likely still seared into your mind. Production of chemicals with minimal energy input sounds like a dream, but I think it’s becoming a reality now. It’s been decades in the making.

Microbial fermentation of chemicals from stuff like carbon dioxide, sugar, or plant oils might be the way forward, but it’s definitely a tricky proposition. Amyris, maybe the best success story we have right now is still facing some trouble getting to profitability. Their final pivot towards fine chemicals (e.g., personal care chemicals or sometimes pharma starting materials) was the right move as it allowed them to stop competing with companies like Neste and Shell. The biggest issue in my mind around microbial fermentation is that while costs to ferment the target molecule might be low getting it to an acceptable purity at a low enough cost (downstream processing) and producing it at scale is the challenge.

Downstream processing has been one major roadblock for poly(hydroxyalkanoates) or PHAs from getting to market. I wrote about Bioextrax’s process of using biology to assist the downstream processing of PHA microbes last year and they recently went public. I would be interested in hearing about any other start-ups out there using biological means to downstream process their target molecules as opposed to extractions with solvents (hey, we all need solvents sometimes).

I expect the space of microbial fermentation and enzyme catalysis to be a bit brutal in the coming years. We already saw the downfall of Zymergen and Ginkgo looks weak. I wrote about some of the challenges that these companies might have in entering the petrochemical space last week.

In the end the true value I want to see in this space is deflation of costs. If you can ferment X chemical at 20% less in total cost than it’s petroleum route and/or produce it from biomass with catalysis at 20% less than it’s incumbent process then you ultimately win. You get to take advantage of that pricing mismatch and generate bigger margins than everyone else until the rest of the market catches up (if they ever get there). Talk about shareholder value.

Conclusion

The way you know a product is going to be successful is to ultimately look at how deflationary it is to the end customer. This can either be done primarily in three ways:

1. Reducing real costs

2. Providing enough value with marginal markup that reduces long term costs

3. Coming up with a new thing that completely changes the paradigm

If you cannot speak to your product doing these things than you better hope you are solving a big regulatory challenge that will happen in the future and hope that regulatory change happens sooner than later.

Show me the money.

Tony