Grupo de Economia da Energia

The future of biofuels IV: Brazilian position

In biofuels on 06/09/2010 at 00:40

By José Vitor Bomtempo

In the previous article, we discussed the nature of the ongoing innovation process. The importance of this process is that its evolution will define the structure of biofuels and bioproducts industry of the future. As a result, policies and strategies regarding the future of the biomass-based industry can not ignore this new structure under construction, due to losing current competitiveness later.

Our previous analyzes suggest that there are interesting opportunities ahead. The essential question is: Have strategies and policies in Brazil taken into account the opportunities and threats that this process brings us? Or do we believe undoubtedly that our competitive ethanol from sugar cane – which gives us an enviable competitive position in the current industry – is enough to ensure a prominent position in the industry of the future as well?

The two questions above summarize an issue that seems crucial to consider: competition in the industry of the future tends to be considerably different from what we have today in ethanol industry. The fact that we are leaders in this game – the first-generation biofuels – ensures us not necessarily a leadership position and even a prominent position in the industry of the future.

Then, it is important to understand how competition in the industry will change in the future due to the development of new biomass-based industry. The Brazilian ethanol industry achieved a competitive position and could maintain this position in the coming decades. Some authors, such as Goldemberg and Guardabassi, 2009, indicate a potential gain in productivity, even within the first-generation model, a factor of two. However, as discussed in the previous article, the industry is changing itself, and its dynamics of innovation suggests that a new industry is being built. As a result, competitive environment to be considered by the Brazilian industry should be extended beyond the production of ethanol. (We do not mention the biodiesel industry that despite considered as first-generation still has an immature industry structure in the Brazilian case).

How can we characterize the competitive environment of biofuels by comparing current industry to industry of the future? In the table below we make a comparison between the competitive environment of the current ethanol industry and its arrangement and the biofuels and bioproducts industry of the future.

Three different competitive arenas in biofuels and bioproducts

Arenas Ethanol New biofuels and bioproducts Integrated biomass industry
Industrial structure Known, but in progress Fluid Open, to be formed
Competitive strategy Position Innovation Innovation
Type of market Commodity Diversified, commodities and specialties Open, to be explored
Technological stage Mature, but in progress Laboratory/pilot/demonstration Laboratory
Brazilian position Very strong Potentially strong, but still weak Weak

Prepared by us

The first arena is competition in the ethanol market based on the position, in industry structure known (A biodiesel competition would have similar characteristics). But this industrial structure is changing due to new conversion technologies and new and better commodities. The competitiveness of Brazilian industry can be maintained even in the so-called ethanol second-generation. Firstly, the potential of gain in productivity of Brazilian industry is still significant even within the first-generation model. Secondly, the cellulosic ethanol will probably increase Brazilian productivity; it will not reduce it. Currently, only the liquid is converted into ethanol, which corresponds to approximately 1/3 of the energy contained in the sugarcane, and part of bagasse is converted into electricity. Even assuming the conversion of bagasse into electricity, there are at least agricultural wastes, which could be used to produce ethanol.

The Brazilian industry, however, should take into account how technology is developing. The industry has historically grown due to external technology, particularly in the case of industrial technology. Thus, except for some important initiatives in agronomy, the industry is what Pavitt called an “industry ruled by suppliers.” The ethanol production technology is incorporated in equipment and engineering projects purchased from specialized suppliers. New technology – genetic engineering and new processes for cellulosic ethanol – are more complex and tend to be proprietary. According to Pavitt’s typology, the biofuel industry of the future tends to be similar to a “science-based” industry. The competition in a science-based industry requires an internal capacity to develop, adapt or at least participate in technological development.

But the biofuels industry of the future will probably expand more the ethanol and biodiesel industry as we know it today. So we can identify a new arena of competition in new biofuels and bioproducts. The future of ethanol as dominant biofuel may be discussed. Ethanol is far from an ideal fuel. The adaptation of engine is no longer a problem. But in addition to an energy density 30% lower than the gasoline’s one, ethanol requires a dedicated infrastructure for transport and distribution. This is currently occurs in the USA as a real difficulty for the use and distribution of ethanol. For these reasons, the number of projects seeking production of drop in fuels – not requiring modifications to engines or infrastructure – is increasing. Thus, the market share of ethanol in the industry of the future is not guaranteed and can not be estimated at the current level of uncertainty. This is not necessarily a limitation to the competitiveness of Brazilian biofuel since sugarcane is a highly competitive commodity and can be the source of diversified products (fuels and chemicals) and not just ethanol.

The “new biofuels and bioproducts” arena, unlike the ethanol arena, is still in a fluid phase, which means that the industrial structure is undefined and open to innovative strategies. There is no commercial production at the moment, and in most of cases technologies are in the laboratory or pilot stage. As we mentioned before, the problem with the diverse arena is access to technology that does not tend to be available. The transition to a science-based industry is further enhanced in the “new biofuels and bioproducts” arena.

The third arena can be identified in the post-fossil scenario: biomass as a key feedstock for chemicals and energy. This arena brings great opportunities for players who can place themselves as industry leaders. The opportunities relate not only to technological development – new products and new processes – but also the shaping of the industrial structure (scale and scope of production, business models). Opportunities of this nature, as mentioned by Hamel and Prahalad, 1990, and Teece, 2007, require core competencies and outstanding organizational capabilities. Organizations must be able to identify the competences needed to compete in the new environment and develop capabilities to perceive and capture these opportunities.

This is certainly an ambitious agenda, but not far from the Brazilian comparative advantages. However, while government agencies and companies still focusing on their policies and strategies (ethanol), Brazil’s position in the not structured arenas of the future will remain weak.

Bibliography:

Goldemberg, J., Guardabassi, P. – “The potential of first-generation ethanol production from sugarcane”, Biofuels, Bioprod. Bioref., 4, 1, 17-24, 2009.

Hamel, G., Prahalad, C. – “The Core Competence of the Corporation”. Harvard Business Review, vol. 68, nr.3, p. 79-93, may-june 1990.

Teece, D. J. – “Explicating dynamics capabilities: The nature and microfoundations of (sustainable) enterprise performance”. Strategic Management Journal, 28:13, p. 1319-1350, December 2007

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