Cargill, Dow, and Green Innovation

5 Dec 05

           Green technology is attracting a great deal of interest, both from investors and from customers.  Venture capitalists are investing billions of dollars in what one large investor calls the “burgeoning environmental technology sector.” General Electric expects its portfolio of 17 “ecomagination” products to double in sales over the next five years, to about $20 billion by 2010.  

One of the hottest of these new products is a corn-based plastic manufactured by Cargill called NatureWorks PLA (PLA).  PLA’s green credentials are good.  On the input side, PLA is made from corn, rather than petroleum.  On the waste side, PLA plastic biodegrades in about 45 days. Conventional plastic, made from PET, never biodegrades. 

Cargill’s corn-based plastic decomposes in 45 days

Cargill has been scaling up production of PLA and recently opened a new plant in Blair, Nebraska.  As oil prices have risen and PLA’s costs have come down, PLA is becoming less expensive than conventional PET plastics in many applications. 

“The early adopters were more influenced by environmental concerns than costs … but now we're competitive with petrochemicals, too.”

Kathleen M. Bader, chairwoman of NatureWorks, in The New York Times

These events have had a dramatic impact on PLA sales -- for the first six months of 2005, sales of PLA were 200 percent higher than sales during the first six months of 2004.      

            Cargill’s PLA represents innovation success driven by a supply shock.  The recent increases in oil prices have played a significant role in increasing PLA’s attractiveness to its industrial customers.  The four factor diagrams below show how improving relative price can play a major role in accelerating a product’s success.

Increasing petroleum prices improve attractiveness of Cargill’s PLA Substitute

            As is the case with many significant new industrial innovations, Cargill’s PLA took many years to develop.  Cargill scientist Pat Gruber began working on the concept in 1988, and Cargill built a test plant in 1994.  In 1995, Cargill created a joint venture with Dow Chemical to help bring the product to market.   

Cargill Dow existed for ten years.  At the end of 2004, however, Dow Chemical determined that the joint venture was not meeting the company’s growth or profitability hurdles. 

"We believe [industrial biotechnology] holds significant promise for the chemical industry in the long term … what gets tricky is determining the timeline … too much time was needed to get [this] to the next level.”

 George Blitz, business vice president of Dow Ventures, in Nature Biotechnology, June 2005

So, on 24 January 2005, Dow Chemical bought itself out of the Cargill-Dow joint venture, taking a loss that the journal Nature Biotechnology estimated at $750 million.  

Dow’s timing, of course, could not have been worse.   

George Blitz’ explanation for Dow’s withdrawal doesn’t factor in the potential for supply shocks which are, by definition, unpredictable.  Yet they can create significant demand for products quite rapidly, as has been demonstrated with PLA. 

            Why did Dow pull out while Cargill persevered? One reason may have been that the costs of the PLA joint venture for Dow were quite different from the costs absorbed by Cargill.   

Ø      First, the companies have different ownership structures.  Cargill is privately owned, while Dow is public.  As a result, Cargill’s owners may be a bit more patient for results than are Dow’s. 

Ø      Second, the contribution of the partners was different.  Cargill provided the technology and manufacturing expertise, while Dow provided the customers.  Many of these customers were initially buying Dow’s chemicals to make PET plastic, so as PLA sales increased, the sales of these other chemicals would start to decline.  This kind of potential cannibalization often serves as a major problem for companies trying to develop substitute technology.

Dow Chemical stands to be burnt twice by this disruptive technology.  First, they’ve already lost money on their initial venture.  Now, as the venture succeeds without them, it will take sales away from Dow’s plastics division.

Dow’s decision to pull out of the project may have made sense at the time.  If Dow’s management could make the decision again, however, I suspect that they would now want to stay in the venture.  Supply shocks change markets.

More Information:

1. Dow pulls out of Cargill venture.  From Nature Biotechnology, June 2005.
2. Green innovation is hot.  From The New York Times 22 Nov 2005
3. I wrote an earlier Update on ethanol E-85 gasoline, another corn-based petroleum substitute.
4. The four factor model of innovation performance is explained here, in an article at Harvard’s Working Knowledge web site.
5. Here’s a history of Cargill Dow in Industry Week, 2000.