The Disposable Economy

How did we get here?

When it comes to products there is plenty of literature out there when it comes to product maturity, S-curves, early adopters, lagging adopters, and more. I’m not here to write about product development lifecycles, but I think there are a few concepts worth thinking about when it comes to growth and profitability.

The technology as we know it today is built primarily on growth, network effects, and ecosystems. You are either primarily an Android or Apple user (RIP Windows phone). You probably use Amazon, Adobe, Salesforce, Microsoft Office, Spotify, and a whole host of cloud supported software services either for work, in your personal life, or both. I think these companies have relied primarily on growth at a cost of losing money until they are so prevalent in society that we cannot think of not using them. Once that growth hits a certain point the money usually starts rolling in and eventually those companies become profitable (yeah, maybe even Uber can get there). I think we will be in a cost cutting cycle within established tech companies (e.g., no more room to grow) over the next decade as that market starts to show some signs of a zero-sum game.

I write about this with some confidence because I’ve worked in a similar business that grew very quickly from the late 1800s to about the 1970s. This industry probably “peaked” in the famous scene from “The Graduate” in 1967 with the famous “plastics” scene.

From about 1970 to present we have seen 50 years of gradual cost cutting in the areas of true innovation in favor of what one CEO I worked for endearingly termed, “cost engineering.” This is because real organic growth is difficult once your market is saturated. It’s faster and easier to remove cost and become more efficient (hello Six Sigma Black Belts) than it is to chase more organic growth. If you need to grow, then doing it in an “inorganic” way (Mergers and Acquisitions; hello private equity) is easier and long term helps on the cost engineering side. Consolidation helps remove cost by allowing for higher productivity. An engineering team supporting 1 plant can also probably support 2 plants without doubling their headcount. If not 2 then why not 3? Take this concept too far and you get burnout.

Remove enough cost over 50 years and you get to where we are now. If we think about Porter’s Five Forces, we can view how difficult it is to disrupt the industry.

1. Competition in the industry (3-4 big players who control majority of the market)

2. Potential of new entrants into the industry (Startups you are here)

3. Power of suppliers (your supply chain is also consolidated, see above)

4. Power of customers (people unwilling to pay significantly more)

5. Threat of substitute products (Only a concern if they can match price and performance)

The supply chain shocks we felt over the last 3 years are a product of the 50 years of continuous cost engineering. We have hit a point where plastic forks, spoons, bags, and containers are essentially single use and disposable. This is because to make the products cost efficient they are engineered to the absolute limit of acceptability and then sometimes even past it. Your Nikes flyknits might last you a year or two and then it’s time to get a new pair. If your stuff breaks then it’s usually more cost efficient to buy new ones as opposed to fixing the problem. Sometimes, things cannot even be fixed. If one thing is certain about a disposable economy it’s that it keeps the consumers spending, even if they cannot afford to do it.

This means if you are a startup interested in disrupting the chemical industry then you need to think about how you can become a new entrant into the industry that either competes directly by making an equivalent chemical product or by producing a substitute. For example, Origin Materials makes a precursor to terephthalic acid (used to make polyethylene terephthalate) via woodchips at a theoretical lower cost than crude oil. Another example is Solugen making water purification chemicals that are a substitute for well-known water purification chemicals.

Unliked “tech companies” chemical companies and their customers become profitable by scaling up and pushing labor costs towards zero and increasing bargaining power in buying materials for bulk costs. A 30,000-gallon reactor needs automated loading/unloading and can usually be operated by 2 people. A 50-gallon reactor may be manually loaded/unloaded and can usually be operated by 2 people. The labor costs for both reactors are the same.

If you are trying to solve the disposable economy problem first, then you are likely chasing the wrong problem. I’d rather see someone harnessing the disposable economy for economic success by creating value from literal trash.

One person’s trash is your feedstock.

Tony