Biofuel: Great Expectations

Let’s cut the biofuels industry some slack. After all, it took 1,631 U.S. automotive company failures to give birth to the massive auto industry that emerged.

There’s an old joke in magazine publishing (one since adapted to many other industries) that goes like this:

It’s been a long time since a new industrial sector has debuted — especially one aimed at the transportation sector. In a world more used to the costs and timelines of creating apps, iPads and other consumer electronics, investors have displayed a notable lack of enthusiasm for the timelines, the infrastructure dependencies, the capital requirements, and the risks in progressing to scale.

So let’s look back into history for some guidance. After all, it wasn’t so long ago that transportation industries were all the rage — steamships, railroads, airlines. Back in the 1890s, almost half of the stocks considered by Bradstreet’s (precursor of Dun & Bradstreet) as the leading stocks were railroads.

For something more recent, let’s look at the automobile manufacturing industry. It has long since achieved scale and transformed society. And it’s well worth a look back in understanding what it takes to make a successful and transformative new industry in the transportation sector. In particular, three items stand out at the dawn of the automotive era:

1. Infrastructure

Horse and buggy in the 1900s/Getty Images

Consider that there were no freeways, improved roads of any type suitable for automobile traffic, no fueling stations, and the dominant fuel (gasoline) was not broadly distributed even at the wholesale level. There were no pipelines, speed limits, highway patrols, motels, highway diners or fast-food outlets, driving maps or navigation aids of any meaningful kind, traffic lights or parking garages, and the steel, rubber, glass and plastics industries would have to invest zillions to re-tool their supply capabilities.

A daunting task — and overwhelmingly a crisis of capital. The automotive industry was generally not expected to supply any of it – capital, that is. Instead, the public supplied it through highway taxes, general taxes, fuel taxes, and road tolls — and private industry tossed in millions and millions.

So as we look at infrastructure challenges in renewables and we hear cries for “no government intervention in industrial markets” and “no picking winners and losers,” let’s keep all that public spending in mind.

2. Time to Scale

Dudgeon Steam Car, 1847/Automative Quarterly, 1971

We hear a lot of things like “we’ve been researching it for 20 years, with no results,” or “these technologies are always five years away.”

What about automobiles? Generally, the explosion in demand began to occur around 1908, with the development of the Model T. It’s instructive that the first automobile company — not basic research or lab work, but company formation — was formed in 1857. This company, Dudgeon Steam, died within 10 years of its birth and used a fuel technology (steam) that would ultimately not be a winner.

So, we have a 51-year stretch of innovation from first company formation to success at world-class scale. Reasons? One, cost. Two, infrastructure — which is to say, market access.

Begins to sound familiar, eh?

Edsel, a car make now synonymous with "failure"/ Getty images

3. Failure rate

We have heard an awful lot of blowback aimed at the Department of Energy for backing failed companies with loan guarantees -- despite the fact that the DOE recorded a lower default rate than the general project finance market during its loan guarantee heyday.

The loan guarantees were aimed at reducing the cost of capital sufficiently so that adequate returns in the early days existed for companies that built towards scale — given that investors have choices and focus on investments that maximize ROI, rather than maximize good public policy outcomes.

Let’s look at the failure rate for automobile manufacturers in the United States. Today, there are less than 10 that operate at scale. Add another 15 or so if you like to account for foreign makes that have U.S. manufacturing – e.g. Mercedes-Benz, Honda, Toyota, Nissan, and so on.

Now, let’s look at the fails: 1,631 in total – a auto company failure rate of something like 95 percent.

The auto companies were operating for an average of 4.86 years before they failed. The failure rate, over the history of the industry, in the U.S. averaged 10.64 companies per year. In the more intensive earlier stage, between 1895 (around the debut of the gasoline engine) and 1964, the failure rate was 21.39 companies per year.

In the most intensive development stage of the industry, when company launches were a regular occurrence and consolidation was rampant — the period between 1899 and 1930 -- the failure rate was an astonishing 42.7 companies per year.

Not an argument for embracing failure

Of course, failure is failure. It’s bad for investors. And just because there is a lot of failure in, say, the automobile industry, that doesn’t grant permission to fail to biofuels companies. Nor does it entitle them, automatically, to support on the public dime.

They have to work with public policymakers to build consensus on the value of accelerating biofuels at scale, and tie that perceived value to smart investments that will appropriately shorten a development timeline that would be experienced in the general market, sans incentives.

But it is instructive for observers to put time, infrastructure investment and failure rates in perspective.

No transformative transportation technology ever was built – railroads, river marine, cars, oil companies, or the airlines — without generous government support in the form of contracts, incentives, and infrastructure. So long as they are tied to generally agreed and positive public outcomes, they are popular and effective.

So when talking about the “crash” of the clean tech industry, let’s remember how long it took the auto industry to get up and rolling.

– This article was adapted with permission from an essay that first appeared in Biofuels Digest.

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