Gaining a Competitive Advantage in the Global Bioethanol Industry
Strategic Options for Large Scale European Producers
MSc Thesis – Management Studies Group Wageningen University
David Borgman January 2009
Scientific advisors: Dr. Elizard de Vries Dr. Emiel Wubben Disclaimer: Information provided in this report by market experts and stakeholders (respondents) is confidential. No information from chapter 7 may be copied or reproduced without the explicit authorization of both the researcher and the respondent(s) involved. The respondents can not be held (legally) accountable in any way for the information provided in chapter 7 and the interview reports.
EU Bioethanol Firm Strategy MSc. Thesis - David Borgman Preface
This research is performed by David Borgman, and forms the MSc. thesis, the culminating element of the study Management, Economics and Consumer studies at Wageningen University. I would like to gratefully thank Dr. Elizard de Vries and Dr. Emiel Wubben for their guidance, support and feedback during the research period. This research has been a great learning experience and could not have been realized without their support. Furthermore, I would like to thank all the market experts and stakeholders for their valuable perspective. Their input has been crucial for the success of this research and has contributed to my enthusiasm and ambition for making a contribution to the development of renewable energy. Finally, I would like to thank my family for their continued support during this research period. Without them, I could not have realized this achievement.
This thesis has been a great learning experience, and I hope that it can serve as an input and inspiration for bioethanol producers, policy makers and scholars.
Wageningen, January 2009
David Borgman
EU Bioethanol Firm Strategy MSc. Thesis - David Borgman EU Bioethanol Firm Strategy MSc. Thesis - David Borgman Abstract
This explorative research is aimed at the formulation of strategic options for large scale EU bioethanol producers, which enable the firm to achieve a competitive advantage in comparison to Brazilian and U.S. producers. On the basis of a literature review, a theoretical framework is developed which serves as a phased model for the formulation of strategic options. The theoretical framework is based on the Industrial Organization paradigm and features various strategic management based models and techniques for the analysis of the industry, societal environmental factors, the selection of external and internal strategic factors, key success factors, comparison of the competitive position of bioethanol industries, and the formulation of strategic options. The first empirical step of this research concerns an analysis of the basic conditions and industry structure. From this analysis it becomes apparent that the EU bioethanol industry is in a relatively poor competitive position in comparison to the Brazilian and U.S. industries. Especially with regard to production costs, the energy balance of the production process, available land resources, governmental support and market protection, the EU industry can currently not compete with the Brazilian or U.S. industry. The development of advanced bioethanol (i.e. cellulosic ethanol) through biorefinery is identified as an important opportunity for the EU industry to improve its competitive position and to establish a competitive advantage. In addition, increased governmental support and the implementation of sustainability criteria are identified as important contributing factors for a competitive advantage. On the basis of several strategic factors, which were derived from the industry analysis, four strategic options for large scale EU producers have been formulated by the researcher. These four options are validated through eight in-depth interviews with bioethanol market experts and stakeholders. On the basis of these validation sessions the strategic options are adapted, which results in a reduction to three strategic options. These options include; a Strategic Alliance option with a (U.S) technology partner or U.S/Brazilian producer, a Global Strategy in which the large scale producer establishes production in the Brazilian and/or U.S. industries, and an Innovation option in which the large scale producer develops advanced bioethanol and/or diversifies with the production of high-end biobased products through biorefinery. The strategic options serve as the main recommendation for large scale EU bioethanol producers. The strategic options and market analysis (techniques) serve as an input for strategy development for large scale EU bioethanol producers. Several additional recommendations for further research are made with regard to the strategic options and EU governmental policy.
EU Bioethanol Firm Strategy MSc. Thesis - David Borgman EU Bioethanol Firm Strategy MSc. Thesis - David Borgman Table of Contents
Abstract
1 Introduction...... 1 1.1 Project context...... 1 1.2 Research description ...... 2 1.3 Research Objective...... 2 2 Methodology ...... 3 2.1 General research question...... 3 2.2 Research Strategy ...... 3 2.3 Research framework and Methods ...... 3 3 Literature Review ...... 5 3.1 Market analysis ...... 5 3.1.1 Market analysis - Industrial Organization ...... 6 3.1.2 Market analysis – Strategic Management...... 13 3.2 Competitive Position ...... 19 3.3 Strategy Formulation...... 23 3.3.1 Competitive Advantage...... 23 3.3.2 Generic Strategies ...... 24 3.4 Conclusions...... 35 3.5 Theoretical framework...... 37 4 Basic Conditions and Industry Structure ...... 41 4.1 Five Forces of Market Structure...... 41 4.1.1 Industry competitors ...... 41 4.1.2 Bargaining power of Suppliers...... 65 4.1.3 Bargaining Power of Buyers ...... 73 4.1.4 Threat of New Entrants...... 78 4.1.5 Threat of Substitutes...... 84 4.1.6 Conclusions Five Forces Model – Bioethanol industry...... 90 4.2 Societal environmental influences...... 91 4.2.1 Political-Legal factors...... 91 4.2.2 Economic factors ...... 95 4.2.3 Sociocultural factors ...... 99 4.2.4 Technological factors...... 102 4.3 Future market expectations...... 106 5 External and Internal Factor Analysis ...... 115 5.1 EFAS ...... 115 5.2 IFAS ...... 118 5.3 Industry Matrix...... 123
EU Bioethanol Firm Strategy MSc. Thesis - David Borgman 6 Conduct ...... 125 6.1 SFAS ...... 125 6.2 Strategic Options...... 127 7 Performance ...... 131 7.1 Measurement of Expected Performance ...... 131 7.2 Results of Interviews ...... 133 7.2.1 Results of open questions ...... 133 7.2.2 Results of Strategic option validation ...... 142 8 Conclusions, Discussion and Recommendations...... 155 8.1 Conclusions...... 155 8.2 Discussion ...... 158 8.3 Recommendations ...... 160
References List of Figures and Tables Appendix Appendix I: Research Framework Appendix II: Description of SFAS Matrix procedure Appendix III: Variables in the Societal Environment Appendix IV: Industry matrix formulation Appendix V: Formulation of an EFAS table Appendix VI: Interview – Strategic Option Assessment
EU Bioethanol Firm Strategy MSc. Thesis - David Borgman 1 Introduction
This first chapter provides a description of the project context, the research description and the research objective. The project context is presented in paragraph 1.1, the research description is formulated in paragraph 1.2, followed by the research objective in paragraph 1.3.
1.1 Project context
Fossil fuels have dominated the world’s energy regime for centuries. The extensive use of oil, natural gas, coal and other fossil fuels has contributed to significant social, economic, political and technological developments throughout the world, both positively as well negatively. Amongst the negative effects, the use of fossil fuels has lead to an increase of greenhouse gas emissions, which results in an increase of the global average temperature (global warming) (IPCC, 2007). In addition, the Western states are predominantly reliant on fossil resources from instable regimes, resulting in significant risks for their energy security (IEA, 2006). Furthermore, the limited supply of fossil resources makes their usage increasingly difficult, especially for oil, resulting in price increases, which impacts economies globally. These important drawbacks, amongst other reasons, have contributed to the quest for renewable energy sources, which can (partially) replace the use of fossil fuels. These renewable energy sources have the potential to reduce greenhouse gas emissions, and to improve the energy security and independence of nation states. Amongst the wide range of renewable energy sources, liquid biofuels are one of the candidates for replacing (part of the) fossil oil usage in the short term. Within the biofuel mix, bioethanol is the globally dominant fuel used today. With an average production growth rate of 15% per year between 2002 and 2006, it has shown strong market development (REN 21, 2007). Global bioethanol production is expected to reach 77 mln m3 in 2008. In 2007, The United States (U.S.) produced approximately 24.5 mln m3 for fuel purposes. Brazil followed with a level of 20 mln m3 (for fuel) (F.O. Lichts, 2008). The EU produced approximately 1.85 mln m3 of bioethanol for fuel purposes in 2007 (Ebio.org). Although it has a relatively low production level, the EU is one of the frontrunners in the use of biofuels in transportation. It relies on bioethanol imports, especially from Brazil, in order to meet demand. The motivations for biofuel production amongst the three regions differ. Where the main driver for the U.S. and Brazil is to reduce its dependency on foreign fuels, this is much less of an issue for Europe (eBio, 2006). For the European Union a more important driver is greenhouse gas reduction, in order to counter global warming, which can partially be achieved through the use of biofuels (eBio, 2006). However, a debate is heating up concerning the positive and negative effects of the use of biofuels. Scharlemann et al (2008) and Zah et al (2007) claim that the environmental and social impact is negative compared to fossil fuel, and even for some biofuels the net CO2 emissions do not contribute to a reduction of greenhouse gases. A general consensus has not yet been reached.
EU Bioethanol Firm Strategy 1 MSc. Thesis - David Borgman Despite this debate the biofuel-train keeps on rolling, fuelled and driven by policy makers and biofuel producers. The EU has set blending targets for the use of biofuels in transportation. In 12 EU member states 5.75% of fossil fuels should be replaced for biofuels by 2010. For 2020, a blending level of 10% is targeted (European Commission, 2007). A recent progress report by the European Commission shows that many countries will not achieve these targets at their current pace. Mandatory targets are also discussed in order to ensure that the EU achieves its ambitions. The report identifies that major steps are required in order to meet the proposed levels. However, the proposed levels are also subject to debate. A new Renewable Energy Directive is currently being discussed, in which it is unclear if the current levels are maintained. The governmental ambitions offer opportunities for biofuel producers in Europe, Brazil and the U.S., as well as other regions in the world. With a relative abundance of feedstock, relatively large production levels and economies of scale in Brazil and the U.S. compared to the EU, the researcher assumes that the competitive position of EU bioethanol producers can be considered weak. With clear advantages (feedstock availability, economies of scale) for Brazilian and American producers, a possible assumption is that it is difficult for EU producers to be competitive on a global scale or even be competitive with imports from overseas on their own domestic markets. It is unclear, at this time, whether individual EU producers can become major players in a global bioethanol market.
1.2 Research description
In this research the competitive position of EU industry is compared to the Brazilian and U.S. industry, and strategic options for EU producers to gain a competitive advantage over Brazilian and U.S. producers are formulated. This competitive advantage should at least entail that European producers can produce bioethanol competitively compared to Brazilian and U.S. imports. To contribute to the development of the EU market and its producers an analysis of the market and possible strategic options will be performed, in which the consultation of market experts and stakeholders is key. Producers and policy makers can take the formulated strategic options into account when setting their own strategy or formulating policy. The research is explorative in nature, which means that the research is approached from a relatively broad perspective and paves the way for more specific research.
1.3 Research Objective
The following research objective has been formulated for the purpose of this research: To support large scale European bioethanol producers in gaining a competitive advantage over Brazilian and American (U.S.) producers on a global scale within two decades, by providing relevant competitive strategic options, formulated on the basis of strategic management- and industrial organization- theory, analysis of the European competitive position and the consultation of market experts and stakeholders.
EU Bioethanol Firm Strategy 2 MSc. Thesis - David Borgman 2 Methodology
This chapter discusses the research framework and methods used for achieving the objective of this research. The general research question is presented in paragraph 2.1, followed by the applied research strategy in paragraph 2.2, and a discussion of the research framework and applied methods in paragraph 2.3.
2.1 General research question
The research objective has been formulated in the form of a question - the general research question: What are suitable strategic options which can support large scale European bioethanol producers in gaining a competitive advantage over their Brazilian and American (U.S.) counterparts on a global scale within two decades? From the general research question several specific research questions have been derived. These specific research questions are presented at the beginning of each subsequent chapter, and form the foundation for the phases of the research framework (2.3).
2.2 Research Strategy
Two research strategies are combined in this research, desk research and the case study strategies. The desk research strategy is applied to a literature study and to the empirical part (market research) of this research. To specify this research to large scale EU bioethanol producers the case study strategy is utilized. The research framework description will specify the research strategies further. As this project is not performed for a particular bioethanol producer and focuses on large scale EU producers, an outside-in approach is used. This means that the market and competitive position is taken as a starting point in formulating strategic options.
2.3 Research framework and Methods
The research framework is depicted in appendix I. The following section describes the four phases of the research project and the corresponding methods used.
Phase 1: Theoretical Framework In the first phase a literature review contributes to the formulation of a theoretical framework with regard to market analysis, strategy formulation, competitive advantage and competitive positioning. The initial focus in this literature review is on theories with regard to market analysis, industrial organization theory, competition / competitive advantage and strategy (formulation). The theoretical framework provides the foundation for the execution of a market analysis, the comparison of the competitive position of the U.S., Brazilian and EU bioethanol industries and the formulation of strategic
EU Bioethanol Firm Strategy 3 MSc. Thesis - David Borgman options for large scale EU producers to gain a competitive advantage. The desk research strategy applies to this phase of the research. Content-analysis is the dominant research method used.
Phase 2: Market Analysis and Competitive position assessment In the second phase the current global bioethanol market is analyzed, with a focus on the U.S., Brazilian and EU industries. In the market analysis the current state of the market will be described and relevant expectations with regard to future market development will be discussed. The theoretical framework provides the grounds for (market) analysis and the assessment criteria required in establishing the competitive position of the EU industry and its producers in comparison to the U.S., and Brazilian industries. The desk research and case study strategies are applied to this phase of the research. Content-analysis is the dominant research method used in this phase.
Phase 3: Strategy formulation On the basis of the results from the first two phases, the theoretical framework and the market analysis, several strategic options are formulated in the third phase. The strategic options are aimed at large scale EU producers and should enable them to gain a competitive advantage in the global bioethanol market within two decades. The base level of this competitive advantage is that the firm can at least be competitive with bioethanol imports (outside EU). The proposed strategies will not be tailored to specific organizations, but are formulated generically for all large scale EU producers. The purpose of the generic formulation is that all large scale EU producers can take advantage of the findings of this research and the strategic options. In order to validate the suitability of the strategic options, the options are presented to several market experts and stakeholders by the means of semi-structured interviews. The goal of these interviews is to validate and improve the suitability of the strategic options for enabling a large scale EU producers to gain a competitive advantage. The feedback presented by the experts and stakeholders will be used in the fourth and final phase of the research. The selection of market experts and stakeholders is performed through both theory-based and snowball sampling. The desk research and case study strategies are applied to this phase of the research. Content-analysis is used for the formulation of the strategic options. Face-to-face interviews are used for the validation of the options.
Phase 4: Adaptation, final reporting and publication In the final phase of the research the results of the interviews will be used to adjust and structure the proposed strategic options where necessary and to finalize the market analysis with relevant insights provided by the experts. The final report is drafted and presented.
EU Bioethanol Firm Strategy 4 MSc. Thesis - David Borgman 3 Literature Review
This third chapter revolves around the development of the theoretical framework on the basis of a literature review. It represents the first phase of this research (appendix I). In this phase, the theoretical framework is formed by answering the following three research questions: - On the basis of which theories, models and concepts derived from strategic management – and industrial organization literature, can the global bioethanol market be analyzed? - On the basis of which theories, models and concepts, derived from strategic management – and industrial organization literature, can a comparison between the competitive position of the European, Brazilian and U.S. bioethanol market be made? - Which theories with regard to (firm) strategy, competition, competitive advantage and positioning are relevant to take into consideration when formulating strategic options for large scale European bioethanol producers?
Answering these questions is based on a literature review of Strategic management- and Industrial organization- theory, which is presented in this chapter. The answers form the theoretical framework with regard to market analysis, competitive position and strategy formulation, which is phase 1 of the research framework (Appendix I). The end result of the literature review, the theoretical framework, is presented in the final paragraph (3.5), preceded by a more in depth description of relevant theories and techniques used for its formulation. Paragraph 3.1 delves into market analysis theories, models and concepts, from both an Industrial Organization and Strategic Management perspective. Paragraph 3.2 discusses theories and techniques used for the assessment of a competitive position. In paragraph 3.3 various strategies are discussed which are relevant for the strategy formulation phase of this research. Paragraph 3.4 features the most important conclusions with regard to the first three paragraphs, and is followed by the discussion of the theoretical framework in paragraph 3.5.
3.1 Market analysis
This first paragraph of the literature study revolves around the first research question: On the basis of which theories, models and concepts derived from strategic management – and industrial organization literature, can the global bioethanol market be analyzed? The paragraph is divided into two research fields: Industrial Organization (IO) and Strategic Management. These two fields are discussed subsequently, in paragraphs 3.1.1 and 3.1.2 respectively.
EU Bioethanol Firm Strategy 5 MSc. Thesis - David Borgman 3.1.1 Market analysis - Industrial Organization
The industrial organization approach is particularly relevant in the market analysis stage of this research, as it seeks ‘to explain why markets are organized as they are and behave in the way they do’ (Burgess, 1989). The field of Industrial Organization revolves mainly around the IO paradigm. The IO paradigm is formed by the IO framework. ‘It is just a general expression of relationship between the attributes which seem to characterize (or are associated with) an industry’ (Burgess, 1989). The framework is illustrated in the following diagram:
Basic Conditions
Structure
Conduct
Performance
Figure 3.4: Industrial Organization Paradigm (Burgess, 1989)
The framework provides the outlines for research within the industrial organization field. Burgess (1989) explains the workings of the framework: ‘[the] industrial organization analyst assumes that certain attributes, basic conditions, are given and that all the other attributes are logically determined by a chain of causation’. ‘The basis conditions are the primary determinants of the market or the industry structure. The structure of the industry is the primary cause of the conduct by the participants in the industry, and conduct explains or accounts for market performance. Thus, markets are analyzed or classified by the way in which their attributes fit into the framework’ (Burgess, 1989).
The major premise of this framework is that industry and market performance is determined by the structure of the market. The conduct is regarded as of lesser importance as it logically follows from the market or industry structure. However, there are two distinctively different perspectives within the IO field; the Structuralists approach and the Behavioral approach. Structuralists follow the framework step by step and regard structure as the most important determinant of performance, while the Behavioralists find that conduct does really matter and is thus a major determinant of both performance as well as structure. According to the Behavioralists, conduct (strategy) can alter the basic conditions and structure through for example research and development, which brings new technology to the industry and market, altering the possibilities and boundaries of the basic conditions and structure (Burgess, 1989). In order to establish a better understanding of this framework, and its
EU Bioethanol Firm Strategy 6 MSc. Thesis - David Borgman application in market analysis the Basic conditions and Structural determinants are discussed, as these elements of the IO framework seek to explain market structure.
Basic conditions Burgess (1989) does not elaborate extensively on the basic conditions present in a market or industry. Three basic conditions are identified: Consumer demand Supply Political environment Qualifying these elements as basic conditions is in contrast to Porter’s Five Forces model (1985) and Wheelen and Hunger’s addition of a sixth force (2005). In the latter two models, the power of buyers (demand) and suppliers are considered to be structural determinants. And in Wheelen and Hunger’s six forces model, governmental influence is included in the sixth force (other stakeholders). However, when examining the characteristics of the three basic conditions more closely, they hold closer relation to the factors presented of the Societal environment put forward by Wheelen and Hunger (2005). Considering the wide range of factors in both the ESTEMPLE analysis as well as the Societal environment, the range of basic conditions presented by Burgess (1989) seems rather limited. But perhaps it depends to a large extent on the type of industry as to which factors should be deemed relevant in the analysis of the basic conditions.
Structure With regard to ‘structure’, Burgess (1989) provides a more elaborate explanation of the analysis techniques involved. Each of the following four structural determinants are discussed. Economies of scale Barriers to entry Industry concentration Product differentiation These four determinants also form an important part of the assessment of Porter’s (1985) structural determinants in the Five Forces model.
Economies of Scale Burgess (1989) defines economies of scale as ‘the reductions in average total cost which result from increases in the scale of the firm’. The term ‘scale’ may be interpreted in numerous ways, ‘the most common usage refers to the size, in terms of production capacity, of a single plant’ (Burgess, 1989). But, as Burgess (1989) discusses, there are also other interpretation of scale, ‘[scale] is often used to refer to dimensions such as the number of activities- products, locations, stages of production, and so on- in which the firm is engaged. It is also used to designate the total amount of experience or volume of output which the firm has accumulated over time. Given this frame of reference scope may be
EU Bioethanol Firm Strategy 7 MSc. Thesis - David Borgman substituted for scale.’ Thus Economies of Scope might be more appropriate in describing ‘the breadth or depth of the firm’s activity’ (Burgess, 1989).
According to Burgess (1989) there are several sources of scale economies. Burgess (1989) provides a simple ‘taxonomy’ to sort the sources of scale economies, which has two main categories: Plant economies (‘explained by scale of the production process’) Firm economies (‘result of organization and operation of supporting activities’)
Measuring economies of scale Burgess (1989) indicates that it may be difficult to measure economies of scale in an independent and sound manner (from a purely economic perspective). Nonetheless, Burgess (1989) suggests several methods to measure the economies of scale in a particular industry.
Measuring plant economies For the measurement of plant economies Burgess (1989) suggests three different methods (in order of highest accuracy): Statistical estimation of cost curves Engineering estimates of minimum efficient scale Survivor method (statistical inference of optimal scale) The third and final method may prove to be most appropriate in this research, given the time scope and available information, as the other two methods require a vast amount of time and/or inaccesible information.
Measuring firm economies Burgess (1989) suggests only one technique to measure firm economies, ‘the multi-plant technique’. This ‘extremely research-intensive’ technique examines ‘the full scope of the firm’s activities’ (Burgess, 1989). The technique attempts to identify a ‘minimum efficient scale’ (MES) for each of the firm’s activities (ranging from advertising to research and so on). This MES can be measured through the techniques proposed for the measurement of plant economies.
Research application The multi-plant technique is well beyond the scope of this research, as it would be a research in itself. Measuring plant economies through the survivor method might be the only feasible technique, considering the time frame and availability of information for this research. In this research the relativity of economies of scale or scope among the three different regions (EU, U.S., Brazil) is perhaps more important than the absolute scale achieved on plant or firm level. In focusing on large scale producers in the European Union, one may perhaps assume that economies
EU Bioethanol Firm Strategy 8 MSc. Thesis - David Borgman of scale advantages are already present. However, economies of scale for American and Brazilian producers may be of a different order, influenced by different regional factors. Regional conditions may thus be an important factor in establishing the relativity of economies of scale. In addition, the measurement of economies of scale might prove to be difficult, as it may be impossible to gather the right and sufficient data within the timeframe of this research. Thus in establishing economies of scale as an entry barrier, it is likely that the analysis will be merely on an indicative level, rather than establishing estimated cost curves in production and other firm activities (advertising, etc.).
Barriers to entry According to Burgess (1989) entry barriers ‘are those economic factors which may give certain firms an advantage over the competition’. Burgess (1989) lists three general sources of barriers to entry: Natural causes Superior performance Strategic behavior (course of action) These three sources create the circumstances in which the following four barriers to entry may occur (Burgess, 1989): Absolute cost barriers to entry Relative cost barriers to entry High fixed costs as barriers to entry Contestability and sunk costs
Absolute cost barriers to entry ‘Ownership by a manufacturer of a critical natural resource may serve as the source of a barrier to entry’ (Burgess, 1989). Such ownership would result in an absolute cost advantage, often resulting in lower resource costs in comparison to existing or potential rivals.
Relative cost barriers to entry According to Burgess (1989) the ‘[possession] of an established share of the market may also serve as a barrier to entry’. Possession of a large market share acts as a relative cost barrier to entry. A firm with a large market share can exploit economies of scale to compete with firms with weaker positions in the market. ‘Superior performance in competition may be responsible for [this] barrier to entry’ (Burgess, 1989). In addition to superior performance in competition, Burgess (1989) lists ‘Product differentiation’ as the primary reason for the successful firm’s relative cost advantage’.
High fixed costs as barriers to entry Burgess (1989) emphasizes that ‘[strategic] behavior is presumed to be responsible for those barriers which are intentionally thrown up by the established firm’. A strategy which has the aim to gain
EU Bioethanol Firm Strategy 9 MSc. Thesis - David Borgman sufficient market share to monopolize the market is one which aims to install high fixed costs (Burgess, 1989).
Contestability and sunk costs The notion of contestable markets revolves around the ‘concept of liquid fixed investment’. Burgess (1989) explains that ‘if [an] investment is easily liquidated, the firm could withdraw without sustaining heavy losses’. In that case the risk of entry is small and the market structure can be termed contestable. ‘A contestable market is one where fixed costs […] are not sunk. Instead, they are liquid, so that a firm can enter, try its luck, and if necessary, exit without taking a loss’ (Burgess, 1989).
Research application All in all, the orientation of IO, at least from Burgess’s perspective (1989) is solely on economic factors. Costs are the main unit of analysis in the IO case. Compared to Porter’s list of barriers to entry this may seem as a rather narrow perspective. For the purpose of this research, the exact measurement of barriers to entry might be relatively unimportant. The main concern with formulating strategic options with a generic application for multiple large scale producers, would be to acknowledge the presence of certain barriers to entry and to provide relative indications of the height of these barriers, within and between regions (EU, U.S., Brazil). Exact measurement is beyond the scope and timeframe of this research.
Industry concentration ‘Concentration […] measures the degree of market domination’ (Burgess, 1989). According to Burgess (1989) concentration is affected by two factors: ‘The number of firms in the market’ The relative size of these firms Burgess (1989) notes that at ‘the extremes of market structure, a monopoly would have the highest level of concentration (100% of the market supplied by one firm), while a perfectly competitive market would have the lowest level (100% of the market supplied by N, a large number of firms)’. ‘[Generally], concentration is a function of the number of firms and the degree of inequality in their size (Burgess, 1989). For a given number of firms, concentration increases with inequality. For a given degree of inequality (assume all firms in a market are the same size, for example), concentration decreases with number’ (Burgess, 1989). According to Burgess (1989) ‘concentration represents the massing of production or sales in a few firms’. The concentration level can be visualized through a concentration curve. Thus measuring industry concentration can offer an indication of market structure. Burgess (1989) even states that ‘concentration is the single most important attribute of market structure’, while noting that industry concentration is the most researched factor in the field.
EU Bioethanol Firm Strategy 10 MSc. Thesis - David Borgman Measures of Concentration Burgess (1989) describes several techniques to measure industry concentration: Concentration curve Concentration ratio (‘an unweighted sum of the market shares of the n largest firms in the market’) Herfindahl-Hirschman index (a weighted sum of the market shares of all the firms in the market’) (Burgess, 1989) The concentration ratio and Herfindahl are most suitable for this research, as they require information which is likely available and the process fits within the research timeframe.
Product differentiation The final structural determinant Burgess (1989) discusses is product differentiation. Burgess (1989) defines product differentiation as a measure for ‘the degree of independence possessed by a seller in the market’. Independence is explained as the ability of the supplier of a differentiated product ‘to set its price independent of the prices which competitors have established for their own products’ (Burgess, 1989).
Measurement of product differentiation Burgess (1989) states that ‘differentiation is a matter that involves the status of the individual product […] rather than the status of the market (or the industry) as a whole’. This makes the measurement of product differentiation difficult (Burgess, 1989). Data collection is especially considered to be difficult. Nonetheless, Burgess (1989) presents several methods for the measurement of product differentiation; Seller independence, Buyer attachment, Seller effort to differentiate. However, these three methods are not suitable for the use in this research, due to time constraints and likely information availability issues. This makes the measurement of product differentiation very difficult, especially from a consumer perspective. However, product differences may simply be observed by the products bioethanol producers offer.
Conduct ‘Conduct is the term used in reference to the behavior of firms in the market’ (Burgess, 1989). Industrial organization deals also with the firm’s market behavior – ‘that is, how the firm reacts to the conditions imposed by the market structure and interacts with rivals’ (Burgess, 1989). Analyzing firm conduct is especially interesting in the case of market imperfection, as the behavior of the firm – its conduct – can be a major determinant of performance. Conduct may be interpreted as the strategy a firm implements in order to adapt to – and influence the structure of the industry and the firms competitive environment. Although conduct is constrained by industry structure and basic conditions, Burgess (1989), concludes that it is also capable of altering the market environment / structure and even the basic conditions.
EU Bioethanol Firm Strategy 11 MSc. Thesis - David Borgman Although the relative importance of conduct is recognized through the influence it may have in shaping the other elements of the IO paradigm, it is not considered as the most important determining factor of firm success. Generally, the IO perspective on the strategic behavior (conduct) of the firm is that it can influence price (to gain market power), research and development (product design), product differentiation, advertising, and so on, too some extent. But these have not been translated into actual (generic) strategies. Strategic management theory will likely offer these generic strategies, which may form a basis for the formulation of strategic options for large scale EU bioethanol producers.
Performance The final attribute of the IO paradigm is performance. The unit of analysis is the market – market performance. ‘Performance is the description of and, often by implication, a judgment about the results of market behavior’ (Burgess, 1989). As the market is created for buyers and sellers, Burgess, concludes that ‘performance should be judged first in terms of the interests of the market participants’. But non-participants may also be affected, and therefore ‘may also have an interest in the market’s performance. If production or consumption of a product results in lowering (or raising) the well-being of the rest of society, there are spillovers from the market. In that event, the description or evaluation of market performance would not be complete without taking into account all the results’ (Burgess, 1989). Thus Burgess pleads for a holistic view of market performance, one which goes beyond the market participants and includes more than just the direct environment.
Dimensions of performance Burgess (1989) states that there are three dimensions of performance: ‘efficiency’ ‘fairness’ ‘progress’ Burgess (1989) explains further, [efficiency] involves how well the market makes use of available resources. Fairness involves how equitably markets distribute the benefits of economic activity to the participants. Progress concerns how effectively the market nurtures the changes which yield new and better products and production techniques’.
Conclusion – Research application This concludes the discussion of Industrial Organization theory and the application for the analysis of markets. The IO paradigm offers a clear structure for the analysis of an industry. It also supports the structure of this research, as was discussed through the research framework. Conduct (strategy) follows from the basic conditions and structure, which relates to an approach of market analysis followed by strategy formulation. Burgess (1989) offers various measurement techniques in order to assess the elements of the IO paradigm. A major drawback of many of the discussed techniques is their strong focus on economic factors and, consequently, the required intensive statistical analysis.
EU Bioethanol Firm Strategy 12 MSc. Thesis - David Borgman Many of these techniques and their orientation (e.g. firm economies) are beyond the scope and timeframe of this research. In addition, they may also require sources of information which are not (publicly) available to the researcher. In comparing the three different industries (U.S., Brazil, EU), the relativity of these factors is more important than exact measurement. The IO paradigm could form the foundation for this research. Strategic management literature could offer more suitable approaches and techniques for the analysis of the Basic conditions and Structure, which may be more fitting within the scope and timeframe of this research. In addition, Strategic Management theory may also be more suitable for the formulation of strategic options, which can be performed in the Conduct stage of the IO paradigm. Paragraph 3.4 provides an overview of the most important conclusions of the literature review.
3.1.2 Market analysis – Strategic Management
The perspective provided by the field of Industrial Organization, particularly the IO paradigm, may be regarded as a foundation for the discussion of the Strategic Management perspective. Strategic Management approaches for the analysis of markets and industries hold clear relations with the analysis of basic conditions and structure of the IO paradigm. Several Strategic Management theories have an IO background. However, generally, Strategic Management theories leave more room for the strategy (conduct) to influence basic conditions and structure. This research is performed from an outside-in perspective. Analyzing markets and industries (and its environment) in which firms operate is a dominant method for identifying important influences which an organization is - or group of organizations are- subject to. This section will describe suitable techniques which may be applied in analyzing the bioethanol market / industry. The focus of this discussion is on suitable methods which analyze the basic conditions and structure of the IO paradigm, and which form a basis for the formulation of strategic options (conduct).
The External Environment The basic conditions and structure may be considered as the external environment a firm is subject to. Analysis the external environment can be considered as a first step for an outside-in approach, in order to formulate strategic options. Various approaches to scanning and monitoring the external environment are recognized throughout literature. A comprehensive approach for analyzing the environment in which a firm operates is provided by Wheelen and Hunger (2005), depicted in figure 3.5.
EU Bioethanol Firm Strategy 13 MSc. Thesis - David Borgman Structure Culture Resources
Figure 3.5: Environmental variables: Societal, Task and Internal Environment (adapted from Wheelen and Hunger, 2005)
In Wheelen and Hunger’s (2005) approach, the environment is divided into the societal, task and internal environments. These correspond to a large degree with a macro-meso-micro approach, put forward by Angwin et al (2007). The task environment is also referred to as the ‘industry’. Combined, the task and societal environment, form the external environment. For each level of environment different analyses are used which, in combination, contribute to the identification of relevant strategic options. In figure 3.6 this process of different analyses is visualized.
The societal environment is defined as ‘general factors that do not directly touch on the short-run activities of the organization but that can, and often do, influence its long-run decisions’ (Wheelen and Hunger, 2005). The four forces are defined as: ‘Economic forces that regulate the exchange of materials, money, energy and information’ ‘Technological forces that generate problem-solving inventions’ ‘Political-legal forces that allocate power and provide constraining and protecting laws and regulations’ ‘Sociocultural forces that regulate the values, mores, and customs of society’ (Wheelen and Hunger, 2005)
EU Bioethanol Firm Strategy 14 MSc. Thesis - David Borgman These four factors are summarized as a PEST analysis. Angwin et al (2007) suggest to extend this analysis with Ecological, Ethical, Legal and Media factors, resulting in an ESTEMPLE analysis. This more elaborate approach is beyond the timeframe of this research however. Where Angwin et al (2007) only offer a limited outlook on important variables within each category, Wheelen and Hunger (2005) provide a more extensive list of possible variables (Appendix III: table 3.3). It is important to note, as Wheelen and Hunger (2005) stress, that not all variables listed may be relevant for all industries and firms. A more focused selection of relevant variables is required for a particular industry. Wheelen and Hunger also list important variables that are relevant in an international context (Appendix III: table 3.4).
After analyzing the macro, or societal environmental variables, several analyses are useful in establishing an understanding of the market, community, competitors, suppliers, government and other interest groups. On the basis of these combined analyses, relevant strategic factors for the strategy formulation process can be selected (Wheelen and Hunger, 2005). This process is visualized in figure 3.6.
Analysis of Societal Environment
Economic, Sociocultural, Technological, Political-Legal Factors
Market Analysis
Community Competitor Analysis Analysis
Supplier Analysis
Selection of Interest Group Strategic Factors Government Analysis Analysis Opportunities & Threats
Figure 3.6: Scanning External Environment (adapted from Wheelen and Hunger, 2005)
The main instrument Wheelen and Hunger (2005) offer for analyzing the market, competitors, suppliers, government, community and interest groups, is an adapted model of Porter’s Five Forces model (1985). This is perhaps one of the most well known methods for the analysis of industries and the competitive environment. According to Angwin et al (2007) it is an ‘encapsulation of decades of
EU Bioethanol Firm Strategy 15 MSc. Thesis - David Borgman industrial organization economics research and thinking into a framework that captures the resultant theories and findings for non-economist managers’.
Potential Entrants
Threat of new entrants
Bargaining Industry power of competitors buyers Suppliers Buyers Bargaining power of Rivalry among suppliers existing firms
Threat of substitute products or services
Substitutes
Figure 3.7: The Five Forces of industry structure (Porter, 1985)
The model is perhaps a prime example of the influence of the field of Industrial Organization on the field of Strategic Management. Angwin et al (2007) explain that there are ‘three broad dynamics’ to the forces model, power, entry and rivalry, which interact and determine the ‘attractiveness of an industry’. Angwin et al (2007) add ‘[these] dynamics all influence the degree to which firms have control over pricing, particularly in terms of being able to increase prices to lift margins or even just to compensate for increased costs’. Thus the main orientation in the forces model is of an economic nature. This is perhaps also the main criticism of scholars with a systemic or processual perspective, as they argue that there are also other factors which influence an industry and its attractiveness. Angwin et al (2007) give a brief explanation of the characteristics of the three dynamics:
Power The dynamic of power is represented by the horizontal axis in figure 2.5. Angwin et al (2007) state that the ‘buyer-supplier relationships are power-based struggles focused on capturing as much long-term value for the firm as possible while giving enough to the other buyer or supplier to keep it in business’. The balance of power changes over time, according to Angwin et al (2007), this influences the firm’s ability to capture value directly.
Entry / substitution The vertical axis of the Five Forces model is represented by the potential entrance of rival firms and substitution by other products which meets the same needs. ‘These both act to keep a cap on industry
EU Bioethanol Firm Strategy 16 MSc. Thesis - David Borgman pricing’ (Angwin et al, 2007). Without the threat of entrants or substitute products, firms would only be influenced in their price setting by the power of buyers and suppliers and the rivals in the industry.
Rivalry The dimension of rivalry influences both the horizontal as well as the vertical axis. It represents ‘the impact of the ongoing direct competition between industry participants. The more that the industry reassembles perfect competition, the fiercer becomes the price competition and the more unattractive it becomes’ (Angwin et al, 2007). Angwin, Cummings and Smith (2007) stress that rivalry is driven by more than just industry structure. ‘[Managers] with different personalities and from different local and international cultures have different goals and different ways of dealing with competition’ (Angwin et al, 2007). These differences have an influence on how competitors act within a particular industry and thus the industry structure.
Structural determinants – Forces model The relative strength of the five forces is determinant by various structural determinants. Porter (1985) lists over 40 determinants. Thus, the application of the Five Forces model can result in a substantial analysis. Adding a sixth force, as Wheelen et al (2005) suggest, extends the analysis even further.
Industry life cycle According to Angwin et al (2007) it also relevant to take the stage of the industry life cycle into account in analyzing markets or industries. Each stage requires a different approach towards strategy formulation and competition. The life cycle stage is therefore relevant for the formulation of strategic options, the aim of this research. Four distinct stages can be identified; introduction, growth, maturity and decline. Angwin et al (2007) stress that ‘[at] each stage of [the] cycle each industry has its own critical success factors (CSFs) that all firms must address to be successful’. They add, that ‘[those] attributes that give a competitive edge initially (win-the-game) become a standard requirement (in-the- game) as competitors imitate and improve on the original’ (Angwin et al, 2007). Furthermore, Angwin et al (2007) stress that the life cycle does not predict the future of particular industry, it only gives a ‘description of the past’, because industries can be ‘de-matured by innovation or new thinking’. In assessing which key factors are relevant for the industry and the analysis of competitors the approach of Angwin, Cummings and Smith (2007) toward the industry life cycle may provide some assistance. Angwin et al (2007) identified several generic critical success factors for each stage of the industry life cycle: Introduction – CSF: Product o Product features o Product benefits o Product functions Growth – CSF:
EU Bioethanol Firm Strategy 17 MSc. Thesis - David Borgman o Superior marketing (distribution channels and brand reputation) o Superior operating processes (production, logistics, service) Maturity – CSF: o Superior marketing and distribution o Cost reduction Decline – CSF: o Finance (environmental fit) In the introduction stage of the lifecycle it is all about the product and the ability of a firm to establish product features, benefits and functions which are competitive. In the growth stage it is all about distinguishing through superiority in marketing and in operations. In the maturity stage the market is saturated and efficiency (cost reduction) and superior marketing and distribution are the main factors for success. The final stage, decline, asks for a solid financial structure and policy which ensures the firm can cope with the decline of the industry (Angwin et al, 2007). These CSF’s can be taken into account with the formulation of the strategic options for large scale EU bioethanol producer.
Synthesis of External factors To complete the analysis of the external environment (societal and task), Wheelen and Hunger (2005) suggest the use of an External Factors Analysis Summary table, or simply EFAS table. Wheelen and Hunger (2005) define the table as ‘one way to organize the external factors into the generally accepted categories of opportunities and threats as well as to analyze how well a particular company’s management (rating) is responding to these specific factors in light of the perceived importance (weight) of these factors to the company’. The initial unit of analysis is the European Union as a bioethanol producing region and its large scale producers. The EFAS table should therefore be adapted to regional level (EU vs. U.S. / Brazil) or it should apply to a group of cases (large scale European producers vs. U.S. / Brazilian producers). In table 3.5 an example of EFAS is given for a generic industry. Table 3.5: External Factor Analysis Summary (EFAS table): Generic example External factors (1) Weight (2) Rating (3) Weighted Score (4) Comments (5)
Opportunities
Economic integration of EU .20 3.0 .60 Positive for trade
……. .- - . - - . - - ……..
Economic development of Asia .10 1.0 .10 ………..
Threats
Government regulations .30 4.5 1.35 Inhibitor for…. ….. . - - . - - . - - …….
New technology .05 3.6 .18 …….. Total scores 1.00 3.70
Adapted from Wheelen and Hunger (2005)
EU Bioethanol Firm Strategy 18 MSc. Thesis - David Borgman A description of the formulation and use of the EFAS table is provided in appendix V. The EFAS method offers a clear overview of the position of a particular region, group of firms or firm, and in its ability to deal with the external environment. This method may also be applicable in other contexts, for example in comparing different firms on a competitive basis, or assessing the internal environment of a region, group of firms or firm. It also may prove to be applicable as a method to select relevant strategic factors and having the market experts and stakeholders measure their relative importance. Furthermore, it helps to quantify the importance of what is mostly qualitative data. Paragraph 3.3 and 3.4 will review more possible applications of a Factor Analysis Summary table.
Conclusion – Research Application The discussed strategic management theories and methods have been selected from a more extensive review of literature. The application of the Societal and Task Environment analysis (Wheelen and Hunger, 2005) offers a clear and applicable process of market analysis and identification of important strategic factors. Combined with the IO based application of Porter’s Five Forces model the market analysis can result in the analysis of basic conditions and structure of the IO paradigm. The Five Forces model does have drawbacks in terms of its predominantly economic orientation, and the time intensity of the analysis. Not all structural determinants of the model may therefore be relevant or applicable within this research. A one-on-one application of the model is therefore unlikely in this research. The External Factor Analysis Summary table (EFAS) offers a clear method for selecting the most important external factors which influence the large scale EU producers. It forms an important element for the selection of strategic factors and the formulation of strategic options. Paragraph 3.4 will elaborate further on relevant conclusions with regard to this paragraph.
3.2 Competitive Position
This second paragraph of the literature study deals with the following research question: On the basis of which theories, models and concepts, derived from strategic management – and industrial organization literature, can a comparison between the competitive position of the European, Brazilian and U.S. bioethanol market be made?
Paragraph 3.1 has discussed several methods and approaches which may be used to analyze markets. Some of these methods and approaches are closely connected to the assessment and comparison of competitive positions. The comparison of the competitive positions is to a large extent based on the results of the market analysis. For example, the application of Porter’s Five Forces model will, in addition to an assessment of market structure, likely yield information relevant for the assessment of the EU competitive position in the bioethanol industry. The following discussion takes this in consideration.
EU Bioethanol Firm Strategy 19 MSc. Thesis - David Borgman Comparing Competitors In order to assess the relative strength of competitors, Wheelen and Hunger (2005) propose, in essence, two methods to compare competitors: the Industry Matrix and the Synthesis of Internal Factors. The Industry Matrix is based on key success factors. Wheelen et al (2005) note that ‘within an industry there are usually certain variables – key success factors – that a company’s management must understand in order to be successful’. Wheelen and Hunger (2005) define these key factors as ‘variables that can significantly affect the overall competitive positions of companies within any particular industry’. According to Wheelen et al (2005) these factors vary per industry, but ‘they are crucial to succeed within that industry’. Wheelen et al (2005) continue by stating that ‘they are usually determined by the economic and technological characteristics of the industry and by the competitive weapons on which the firm in the industry have built their strategies’. In order to compare these key success factors between several firms or in our case geographic regions or groups of firms, Wheelen and Hunger (2005) propose to use an industry matrix. The ‘industry matrix summarizes the key success factors within a particular industry’, and assigns ‘a weight for each factor, based on how important that factor is for success within the industry’ (Wheelen and Hunger, 2005). In addition, ‘the matrix also specifies how well various competitive factors in the industry are responding to each factor’ (Wheelen et al, 2005). An example of an industry matrix is presented in table 3.6. A description of the steps to be taken is provided in appendix IV.
Table 3.6: Industry matrix Key success Weight Company A Company A Company B Company B factors (1) (2) Rating (3) weighted score (4) Rating (5) weighted score (6) KSF 1 .10 4.0 .40 2.0 .20 …… .- - . - - . - - …….. KSF 10 .10 1.0 .10 ……….. Total scores 1.00 3.70 3.20
Adapted from Wheelen and Hunger (2005)
The industry matrix may also be suitable in comparing the competitive position, with regard to the key success factors, of groups of firms, or nations / geographic regions. In referring to the research question, the characteristics on which the comparison of the competitive position will be based, depends, in Wheelen and Hunger’s (2005) view on the key success factors of the particular industry which is studied. These key success factors may well be derived from the determinants proposed through Porter’s Diamond (1990) in explaining a nation’s competitive advantage. In addition to the industry matrix, Wheelen and Hunger (2005) offer another method which may be used to assess the position of competitors. It is part of a series of factor analyses. This method is similar to the Synthesis of External Factors (Wheelen and Hunger, 2005) which was discussed in the section on market analysis. But instead in looking at the external environment and its opportunities
EU Bioethanol Firm Strategy 20 MSc. Thesis - David Borgman and threats, the Synthesis of Internal Factors (table 3.7) assesses the internal environment of a firm or industry and its strengths and weaknesses. The following excerpt from Wheelen and Hunger (2005) explains its application.
Table 3.7: Internal Factor Analysis Summary (IFAS Table) Internal factors (1) Weight (2) Rating (3) Weighted Score (4) Comments (5) Strengths
Production technology .20 3.0 .60 Proprietary assets
Experience in distribution .10 1.0 .10 ………..
Weaknesses
Financial position .30 4.5 1.35 Inhibitor for… ….. . - - . - - . - - …….
Location .05 3.6 .18 …….. Total scores 1.00 3.70
Adapted from Wheelen and Hunger (2005)
Wheelen et al (2005) provide a similar description for the practical use of the IFAS table as was the case for the EFAS table – see appendix V: By applying the IFAS method a better understanding of the competitive position of a firm or industry may be gained. Assessing the competitive position for various firms or geographic sections (e.g. EU) of a market or industry. The quantitative measurement and weighing of strengths and weaknesses makes it easier to compare relative positions.
Strategic Factors Analysis Summary (SFAS) Matrix The culminating element of Wheelen and Hunger’s (2005) Factor Matrices is the Strategic Factors Analysis Summary (SFAS) Matrix. By combining the EFAS (table 3.5), IFAS (table 3.7) matrices important strategic factors can be identified which are relevant for the formulation of a suitable strategy (Wheelen and Hunger, 2005). Based on the EFAS and IFAS tables there are likely too many factors to ‘use in strategy formulation’ (Wheelen et al, 2005). ‘The SFAS matrix requires a strategic decision maker to condense [the identified] strengths, weaknesses, opportunities, and threats into fewer than 10 strategic factors. This is done by reviewing and revising the weight given [to] each factor. The revised weights reflects the priority of each factor as a determinant of the company’s future success. The highest-weighted EFAS and IFAS factors should appear in the SFAS Matrix’ (Wheelen et al, 2005). Table 3.11 depicts an example of an SFAS Matrix. Appendix II provides an explanation of the required steps.
EU Bioethanol Firm Strategy 21 MSc. Thesis - David Borgman Table 3.11: Example of an SFAS Matrix
Duration I n t e r m e S L d h o i
Strategic Weight Rating Weighted a o n t r e g Factors (1) (2) (3) Score (4) t Comments (5)
S1 Quality products .20 3.0 .60 X
S3 Technology .20 3.0 .60 X Proprietary assets
W5 Financial .10 1.0 .10 X ……….. position
O1 Cooperation EU .- - . - - . - - X
T3 Exchange rates .30 4.5 1.35 X Inhibitor for…
T5 resources .05 3.6 .18 X …….. Total scores 1.00 3.70 Adapted from Wheelen and Hunger (2005)
The codes in front of the strategic factors represent the most important Strengths (S), Weaknesses (W), Opportunities (O) and Threats (T) identified by the EFAS and IFAS matrices. On the basis of the Strategic Factors identified in the SFAS matrix the most essential elements can be taken into account in the formulation of suitable strategic options.
Conclusion - Research application The proposed methods and characteristics in this paragraph are either focused at firm level analysis or the analysis of nations. For the purpose of this research, several levels of analysis are required. The competitive analysis will focus on the nation-states (or group of nation-states – EU) which influence and contribute to the position of a group of competitors (large scale producers). The group of competitors from a European perspective will be all large scale producers, with the measure of ‘large’ scale being determined by the market analysis. Approaching a group of heterogeneous firms as a single unit of analysis, is of course difficult as each competitor has its own unique position and circumstances. However, they are also important similarities (large scale, national influences) and perhaps also factors which may apply to subgroups of firms within the group of large scale producers. Many of these aspects will most likely become apparent through the market analysis, the results of which will further shape the comparison of the competitive positions. It is clear that the application of the IFAS, Industry Matrix, and SFAS, combined with EFAS offer a structured approach, and contribute to the formulation of strategic options. Thus following Wheelen and Hunger’s (2005) approach may result in a structured and profound analysis. Paragraph 3.4 will elaborate further on relevant conclusions with regard to this paragraph.
EU Bioethanol Firm Strategy 22 MSc. Thesis - David Borgman 3.3 Strategy Formulation
This third paragraph of the literature study was initially focused at the following research question: Which theories with regard to (firm) strategy, competition, competitive advantage and positioning are relevant to take into consideration when formulating strategic options for large scale European bioethanol producers? However, as the literature review progressed and the SFAS approach of Wheelen and Hunger (2005) emerged, answering this question has been narrowed to a formulation of ‘competitive advantage’ (3.3.1) and a discussion of (generic) strategies (3.3.2). The discussion of the generic strategies results in a long list of strategies, which are relevant for the formulation of strategic options. Therefore, this discussion may not be directly relevant for the formulation of the Theoretical Framework, but it will prove its value during the process of formulating strategic options (chapter 6).
3.3.1 Competitive Advantage
An important key term in this research is competitive advantage. In order to compare competitive positions, and formulate suitable strategic options it is important to define this term. An overview paper by Rumelt (2003), puts forward various definitions of a competitive advantage. The conclusion of the article is however, that ‘the strategy area is in need of a clear definition of competitive advantage, or it needs to stop employing a concept that cannot be defined’ (Rumelt, 2003). Thereby Rumelt (2003) indicates that a universal definition is lacking. For the purpose of this research it is important to define the term, in order to be able to formulate strategic options which seek to gain a competitive advantage. According to Rumelt (2003) ‘there is disagreement or confusion about whether competitive advantage means winning the game or having enough distinctive resources to maintain a position in the game’. Considering that the EU bioethanol industry is considerably smaller than the U.S. and Brazilian industry, the approach to competitive advantage for the purpose of this research perhaps favours the latter part of this discussion. In other words, ‘having enough distinctive resources to maintain a position in the game’ (Rumelt, 2003). After maintaining the position in the game an expansion of that position may be possible. The perspective from which the strategic options for large scale EU competitors, would thus be defined with a base level of maintaining its position from which it can potentially further improve its position in the global industry. The following definition will be used for the purpose of this research: ‘most forms of competitive advantage mean either that a firm can produce some service or product that its customers value [more] than those produced by competitors or that it can produce its service or product at a lower cost than its competitors’ (Saloner, Shepard and Podolny, 2001). In other words, a competitive advantage is defined as: the firm offers a product or service ‘that its customers value [more] than those produced by competitors or that it’ can offer at lower costs than its competitors. The definition provided by Saloner et al (2001), captures the essence of the previously described perspective, because it can potentially ensure the maintaining of the firm’s position and a further improvement in the global industry when the firm outperforms its competitors.
EU Bioethanol Firm Strategy 23 MSc. Thesis - David Borgman 3.3.2 Generic Strategies
In the following paragraph various generic strategies are discussed, which form input for the formulation of strategic options for large scale EU bioethanol producers.
Porter’s Generic Competitive Strategies Perhaps one of the most recognizable contributions to strategy are the three generic competitive strategies by Porter (1985). These strategies follow from the analysis of the five competitive forces as Porter (1998) notes by the following statement: ‘[in] coping with the five competitive forces, there are three potential successful generic strategic approaches to outperforming other firms in an industry: 1 Overall cost leadership 2 Differentiation 3 Focus’ (Porter, 1998) Furthermore, Porter (1998) explains that a firm may ‘successfully pursue more than one approach as its primary target, though this rarely possible […]. Effectively implementing any of these generic strategies usually requires total commitment and supporting organizational arrangements that are diluted if there is more than one primary target’. Each of the strategies is discussed in more detail, in order to get a more profound insight into their implications.
Overall cost leadership The aim of this first generic strategy is ‘to achieve overall cost leadership in an industry through a set of functional policies aimed at this objective’ (Porter, 1998). The requirements to achieve this goal includes the ‘aggressive construction of efficient-scale facilities, vigorous pursuit of cost reductions from experience, tight cost and overhead control, avoidance of marginal customer accounts, and cost minimization in areas like R&D, service, sales force, advertising, and so on’ (Porter, 1998). The result of this strategy is ‘a low-cost position [which] yields the firm above-average returns in its industry despite the presence of strong competitive forces’ (Porter, 1998).
Differentiation According to Porter (1998) ‘differentiating the product or service offering of the firm, [creates] something that is perceived industry wide as being unique’. Porter (1998) explains that differentiation can take various forms, such as: ‘Design or brand image Technology Features ([product/service]) Customer service Dealer network’ Porter (1998) stresses that ‘the differentiation strategy does not allow the firm to ignore costs, but rather they are not the primary strategic target’. Differentiation may be a viable strategy for receiving above-average returns as ‘it creates a defensible position for coping with the five competitive forces’
EU Bioethanol Firm Strategy 24 MSc. Thesis - David Borgman (Porter, 1998). Furthermore, differentiation may provide ‘insulation’ against competitors due to the creation of brand loyalty of customers and lower price sensitivity (Porter, 1998).
Focus The final strategy Porter (1998) proposes, ‘is focusing on a particular buyer group, segment of the product line, or geographic market’. Porter (1998) notes it may take many forms, but the ‘entire focus strategy is built around serving a particular target very well, and each functional policy is developed with this in mind’. The underline factor of the focus strategy is ‘that the firm is […] able to serve its narrow strategic target more effectively or efficiently than competitors who are competing more broadly’ (Porter, 1998). According to Porter (1998) this results in the firm either achieving ‘differentiation from better meeting the needs of the particular target, or lower costs in serving this target, or both’. Thus, one may define these strategies as a cost-focus or differentiation-focus strategies. However, it does not achieve these positions for the industry as a whole, but specifically for its ‘narrow market target’ (Porter, 1998). An implication of the focus strategy is that there may be some limitations to the overall market share which can be achieved (Porter, 1998). Thus, according to Porter (1998), focus ‘involves a trade-off between profitability and sales volume’. The three generic strategies are depicted in the following figure (3.10).
Strategic Advantage
Uniqueness Perceived by the Customers Low Cost Position t
e Differentiation Overall g
r Industrywide a
T Cost Leadership
c i g e t a r t
S Particular Focus Segment only
Figure 3.10: Three Generic Strategies (adapted from Porter (1998))
Stuck in the middle Porter (1998) states that a firm who fails ‘to develop its strategy in at least one of the three directions – a firm that is “stuck in the middle” – is in an extremely poor strategic situation’. According to Porter (1998) the firm would lack ‘the market share, capital investment, and resolve to play the low-cost game, the industrywide differentiation necessary to obviate the need for a low-cost position, or the focus to create differentiation or a low-cost position in a more limited sphere’. Furthermore, the firm ‘is almost guaranteed low profitability, either [losing] the high volume customers who demand low prices or [it] must bid away its profits to get this business away from low-cost firms’ (Porter, 1998). And it may also lose ‘high-margin businesses […] to the firms who are focused on high-margin targets or have achieved differentiation overall’ (Porter, 1998). Thus, a firm should make a clear choice for a certain strategy and should not seek the best of both worlds.
EU Bioethanol Firm Strategy 25 MSc. Thesis - David Borgman Bowman’s Strategic Clock Not all authors agree that Porter’s (1998) strategic ‘stuck in the middle’ problem is an issue. ‘Another set of generic strategies does acknowledge the possibility of a high-value/low-cost strategy – the strategic clock (fig. 3.11) (Angwin et al, 2007).
Figure 3.11: The strategic clock (Bowman (1988)) The strategic clock offers five viable generic strategies, with the sixth, seventh and eight strategies of the clock likely ending up in failure. Angwin et al (2007) explain that ‘the strategic clock suggests that viable strategy options depend in how the firm’s offering is perceived by the market in terms of its price (Porter’s cost advantage) relative to other offering and its relative perceived use value (Porter’s differentiation)’. The low price strategy offers ‘a standard perceived use value at low price, a differentiation strategy offers a high perceived use value at a standard price’ (Angwin et al, 2007). These options are similar to Porter’s cost leader and differentiation strategies. However, the strategic clock goes beyond Porter’s set of generic strategies in suggesting that a high value / low-cost strategy is viable – the hybrid. And it more or less verifies the high-value / high-price (focused differentiator), and low-value / low-price (no frills) generic strategies, which Porter suggested through his focus orientation (Angwin et al, 2007). However an important distinction is Bowman’s (1988) ‘reorientation to price as an advantage rather than cost’ (Angwin et al, 2007).
Barney’s Business and Corporate Strategies Further additions to Porter’s and Bowman’s strategies are provided by Barney (2002). Barney (2002) recognizes several types of strategies within two categories – business and corporate strategies. Barney (2002) defines business strategies as ‘the specific actions that firms can take within a particular market or industry. Corporate strategies go beyond a single market or industry and can be defined as the ‘actions firms can take to gain competitive advantage by leveraging their resources and capabilities across several markets or industries simultaneously’ (Barney, 2002). The several business and corporate strategies are discussed subsequently.
EU Bioethanol Firm Strategy 26 MSc. Thesis - David Borgman Business strategies Barney (2002) identifies the following business strategies: Vertical integration Cost leadership Product differentiation Flexibility Tacit collusion Cost leadership and Product differentiation correspond with the previously discussed strategies, and will therefore not be discussed further.
Vertical integration According to Barney (2002) the vertical integration strategy may be the most ‘fundamental’ of all business strategies. Barney (2002) states that ‘a firm’s vertical integration choices define which business functions it will be in and which business functions it will not be in’. They ‘help define the strategic reason for the existence of a firm’ (Barney, 2002). Barney (2002) connects his vertical integration strategy to the value chain. The value chain is the ‘set of discrete activities that must be accomplished to design, build, sell, and distribute a product or service’ (Barney, 2002). The level of vertical integration is defined by the ‘number of stages in a product’s or service’s value chain a firm engages in’ (Barney, 2002). Furthermore, Barney (2002) distinguishes two forms of integration, forward- and backward-vertical integration. Forward integration can be defined as firms increasing ‘the number of value chain stages that they engage in, and those new stages bring them closer to direct interaction with a product’s or service’s ultimate customer’ (Barney, 2002). Backward integration moves in the opposite direction and brings the firm closer to the manufacturing process, or ‘farther away from a product’s or service’s ultimate customer’ (Barney, 2002). According to Barney (2002) a firm’s decision for a certain level of vertical integration depends on the governance structure a firm opt for, the level of uncertainty for further vertical integration, and the competitive advantage the firm has in different sections of the value chain. A firm ‘should vertically integrate into business functions where they currently enjoy a competitive advantage’ (Barney, 2002). It may be difficult to term vertical integration in itself as a strategy. Perhaps it should be regarded as prerequisite decision for further strategizing, as the number of stages the firm is active in does not fully explain the position of the firm. However, Barney (2002) stresses that ‘a firm may pursue several business strategies simultaneously’, leaving vertical integration not necessarily as a stand-alone strategy.
Flexibility The fourth strategy Barney (2002) discusses is that of flexibility . Barney (2002) stresses that the presence of risk and uncertainty has been mostly ignored in the previously discussed business strategies. According to Barney (2002) ‘an important attribute of any strategy under conditions of high uncertainty is flexibility, that is, the ability to change direction quickly and at low cost, given
EU Bioethanol Firm Strategy 27 MSc. Thesis - David Borgman unanticipated changes in the competitive situation within which a firm is operating’. Barney’s notion of flexibility relies heavily on an economic approach in which real option theory and the calculation of net present values. Such calculations are beyond the scope of this research, as they are more suitable for the application within a specific organization. Barney’s (2002) strategy to remain flexible in a firm holds some similarities with the Evolutionary approach presented by Whittington (2001). Although the Evolutionary approach is predominately aimed at being efficient as a firm, flexibility as a strategy perhaps also requires a high level of efficiency. Otherwise flexibility may prove to costly and the firm may fail in adapting to the ever changing market environment.
Tacit Collusion The final business strategy which Barney (2002) discusses is tacit collusion. According to Barney (2002) tacit collusion ‘exists when firms coordinate their production and pricing strategies indirectly by observing the output and pricing decisions of other firms’. This approach is considered by Barney (2002) as a form of cooperation. Barney (2002) lists several forms of cooperative strategies, such as: Explicit collusion (illegal price agreements among firms) Tacit collusion Joint ventures Licensing agreements Distribution agreements and supply contracts According to Barney (2002) these strategies ‘can be organized into two broad categories: collusive strategies and strategic alliances’. Barney (2002) notes that a collusive strategy exists when firms within an industry cooperate to ‘reduce industry competitiveness and raise prices above the fully competitive level’. Barney (2002) focuses on tacit collusion specifically as his fifth strategy. Tacit collusion occurs ‘when production output in an industry is below competitive levels and prices are above competitive levels, but where firms have not directly negotiated these agreements’. This is a clear distinction with strategic alliances, where, according to Barney (2002), ‘industry competitiveness is not reduced’. Thus tacit collusion may have as underlying goal to deter entry by other firms, as prices are raised above the competitive level. Tacit collusion is specifically a business strategy, because it only exist among firms within an industry. This is not necessarily the case with strategic alliances.
Corporate strategies Unlike the business strategies, which applies to a single business, corporate strategies are ‘actions firms take to gain competitive advantage by operating in multiple businesses simultaneously’. This type of strategy is especially relevant for large scale firms, such as the large scale bioethanol producers studied in this research. Barney (2002) identifies three corporate strategies, each of which will be discussed briefly: Strategic alliances Corporate diversification
EU Bioethanol Firm Strategy 28 MSc. Thesis - David Borgman International strategies
Strategic alliances According to Barney (2002) ‘a strategic alliance exists whenever two or more independent organizations cooperate in the development, manufacture, or sale of products or services’. Unlike tacit collusion, strategic alliances are possible between firms from different businesses / industries. Barney (2002) identifies three categories of strategic alliance: Non-equity alliance Equity-alliances Joint ventures In a non-equity alliance ‘[firms] do not take equity positions in each other or form an independent organizational unit to manage their cooperative efforts’ (Barney, 2002). The alliance is established through a contractual agreement, such as a licensing agreement, a supply agreement, and/or a distribution agreement, and many others. In an equity alliance such contracts / agreements are supplemented with ‘equity holdings’ in the partnering firm (Barney, 2002). ‘In a joint venture, cooperating firms create a legally independent firm in which they invest and from which they share any profits that are created’ (Barney, 2002). This strategy was also suggested on business level, but the orientation is in that case more narrow – e.g. a single business unit.
Corporate diversification According to Barney (2002) ‘a firm that has brought multiple businesses within its boundaries has implemented a corporate diversification strategy’. Bringing multiple businesses within the boundaries of the firm may be performed in several different ways. Barney (2002) lists three forms of diversification: limited corporate diversification, related corporate diversification, and unrelated corporate diversification. These forms will not be discussed further at this time.
International strategies International strategy is the final strategy Barney (2002) discusses. Barney (2002) states that an international strategy is implemented when ‘firms […] operate in multiple countries’. International strategies are, according to Barney (2002) ‘a special case of the diversification strategies’. Therefore much of the previously described diversification strategies may be applied here as well. An important distinction between a domestic diversification strategy and an international strategy is the difference in ‘potential sources of economies of scope’. The following sources may be distinguished (Barney, 2002): To gain access to new customers for current products or services To gain access to low-cost factors of production To develop new core competencies To leverage current core competencies in new ways To manage corporate risk These sources of economies of scope differ especially in the sense that the firm seeks to extend its current resources and capabilities. As a result the firm creates possibilities for growth and a
EU Bioethanol Firm Strategy 29 MSc. Thesis - David Borgman strengthening of its core competencies. Other than suggesting the ‘transnational’ strategy, Barney’s (2002) description of different types of international strategies is very limited. The following section will discuss international strategies in more detail.
International Strategy A more comprehensive approach toward International strategy is provided by Prahalad and Doz (1987). They list four international strategies, which are based on their ‘global integration / local responsiveness grid’ (fig 3.12).
Figure 3.12 Global integration / local responsiveness grid (Adapted from Prahalad and Doz (1987))
International strategy According to Angwin et al (2007), firms engage in an international strategy when they ‘have just begun to expand overseas but do not perceive a dominance of either dimension [(Prahalad and Doz Grid)] and no need to customize a product, and its high and distinctive value gives few incentives to invest in scale economies’. Agwin et al (2007) note, that in this stage the firm may not be able to fully compete in the international market, and is thus forced to follow its competitors.
Global strategy ‘Emphasizes economies of scale through the standardization of products and services’ (Angwin et al, 2007). According to Angwin et al (2007), this strategy is especially suited for ‘high volume production and very efficient logistics and distribution systems’. Production may be concentrated in a limited amount of locations, thus certainly not being present in all geographic markets. Angwin et al (2007) consider this ‘geographic concentration and isolation from target markets’ as a clear weakness.
Multidomestic strategy In a multidomestic strategy, the firm adapts its products and services to the needs of the local market (Angwin et al, 2007). Adaption leads to increased cost, such as tailored packaging and ‘service at the
EU Bioethanol Firm Strategy 30 MSc. Thesis - David Borgman point of sale’, but according to Angwin et al (2007) ‘there are advantages in greater flexibility and responsiveness to local demands, as well as allowing differential pricing across different markets’.
Transnational strategy The final international strategy discussed by Prahalad and Doz (1987) is the transnational strategy, which was also referred to by Barney (2002). The ‘transnational strategy’ seeks to optimize the tradeoffs between global and multidomestic strategies by dispersing the firm’s resources according to their most beneficial location’ (Angwin et al, 2007). Through a transnational strategy activities are becoming increasingly more decentralized closer to the customer, while activities ‘further away are more centralized as less adaptation is required’ (Angwin et al, 2007). Angwin et al (2007) stress that local adjustment should be realized fully, and internal (international) tensions within the organization should be well managed in order to prevent failure.
Wheelen and Hunger’s Directional Strategies A different perspective on corporate strategy, in comparison to Barney’s discussion, is provided by Wheelen and Hunger (2005). Their interpretation of corporate strategy focuses on the notion of directional strategy. According to Wheelen et al (2005) ‘corporate strategy is primarily about the choice of direction for a firm as a whole and the management of its business or product portfolio’. This choice for direction culminates in a certain directional strategies. Wheelen and Hunger (2005) state that ‘a corporation’s directional strategy is composed of three general orientations’: Growth strategies (expand the company’s activities) Stability strategies (make no change to the company’s current activities) Retrenchment strategies (reduce the company’s level of activities) Once a company has chosen for a general direction, a company can select a more specific corporate strategy (table 3.10). Of these strategies, only the first category (Growth) is discussed, the other categories hold less relevance for a growing bioethanol market.
Table 3.10: Corporate Directional Strategies Growth Stability Retrenchment Concentration Pause/Proceed with Caution Turnaround Vertical growth No Change Captive Company Horizontal growth Profit Sell-Out / Divestment Bankruptcy / Liquidation Diversification Concentric Conglomerate Adapted from Wheelen and Hunger (2005)
EU Bioethanol Firm Strategy 31 MSc. Thesis - David Borgman Growth strategies According to Wheelen and Hunger (2005) ‘a corporation can grow internally by expanding its operations both globally and domestically, or it can grow externally through mergers, acquisitions, and strategic alliances’. Wheelen et al (2005) list two key reasons for the attractiveness of growth strategies: Growth ‘may mask flaws in a company – flaws that would be immediately evident in a stable or declining market’. Growth ‘can create a large amount of organizational slack (unused resources) that can be used to quickly resolve problems and conflicts between departments and divisions’. In addition, it may provide ‘a big cushion for turnaround in case a strategic error is made’, and large firms have a more powerful bargaining position than smaller firms. ‘A growing firm offers more opportunities for advancement, promotion, and interesting jobs. The marketplace and potential investors tend to view a growing corporation as a “winner” or “on the move”. Large firms are also more difficult to acquire than are smaller ones; thus an executive’s job in a large firm is more secure’. As noted in table 3.10, the two basic growth strategies revolve around concentration and diversification. Each will be discussed briefly in the following section.
Concentration According to Wheelen and Hunger (2005) concentration as a strategy for growth makes sense ‘if a company’s current product lines have real growth potential’. Two concentration strategies can be identified: vertical growth and horizontal growth. Wheelen and Hunger (2005) state that ‘growing firms in a growing industry tend to choose these strategies before they try diversification’. ‘Vertical growth can be achieved by taking over a function previously provided by a supplier or by a distributor’ (Wheelen and Hunger, 2005). In essence, the firm becomes its own supplier or distributor. Reasons for this may be ‘to reduce costs, gain control over a scarce resource, guarantee quality of a key input, or obtain access to potential customers’ (Wheelen et al, 2005). According to Wheelen and Hunger (2005) vertical growth results in vertical integration. A firm may integrate forward or backwards through the value chain. This was also discussed by Barney (2002). Wheelen et al (2005) state that vertical growth ‘is a logical strategy for a corporation or business unit with a strong competitive position in a highly attractive industry – especially when technology is predictable and markets are growing’. Horizontal growth can be achieved ‘by expanding [the firm’s] products into other geographical locations and/or by increasing the range of products and services it offers to current markets’ (Wheelen et al, 2005). If the firm increases its range of products and services, ‘the company expands sideways at the same location on the industry’s value chain’ (Wheelen et al, 2005). Horizontal growth leads to further horizontal integration, which is ‘the degree to which a firm operates in multiple geographic locations at the same point on an industry’s value chain’ (Wheelen and Hunger, 2005).
EU Bioethanol Firm Strategy 32 MSc. Thesis - David Borgman Diversification In mature industries, with limited to none potential for growth, firms are faced with a consolidating industry and ‘have reached the limits of growth using vertical and horizontal growth strategies’ (Wheelen et al, 2005). In such an industry, a diversification strategy may be the only choice for continued firm growth (Wheelen et al, 2005). Such a strategy may not be directly relevant for a growing industry such as the bioethanol industry, but it could be a strategy of potential entrants from mature industries. Two diversification strategies are identified by Wheelen et al (2005), concentric and conglomerate. Concentric diversification into a related industry may be an option for growth, in the case ‘a firm has a strong competitive position but industry attractiveness is low’ (Wheelen et al, 2005). A prerequisite for the success of a concentric diversification strategy is that the company’s ‘products and processes are related in some way’, and it is able to use its distinctive core competences in doing so (Wheelen et al, 2005). Conglomerate (unrelated) diversification may be defined as ‘diversifying into an industry unrelated to its current one’ (Wheelen and Hunger, 2005). This may be a suitable strategy if the ‘current industry is unattractive and […] the firm lacks outstanding abilities or skills that it could easily transfer to related products or services in other industries’ (Wheelen et al, 2005). Both diversification strategies are similar, if not identical, to those described by Barney (2002). In addition to the growth perspective provided by Wheelen and Hunger (2005), Whittington (2001) describes three growth strategies. According to Whittington (2001), Innovation, Diversification and Internationalization are suitable strategies for growth. Both Diversification and Internationalization have been described through other authors in this chapter, therefore only the innovation strategy is discussed at this time.
Innovation Whittington (2001) states that ‘innovation should be at the heart of strategy’. In the Classical sense, ‘a strong market orientation is essential for successful innovation’. In order to innovate effectively, the firm should seek out ‘customer needs and [match] them with appropriate product or service offerings’ (Whittinton, 2001). The Classicists advice is to ‘keep close to your customers’ (Whittington, 2001). However, Processualists state that the ‘market-oriented approach to innovation [overestimates] the flexibility of organizations and markets’ (Whittington, 2001). According to the Processualists ‘organizational capabilities and perceptions of opportunity are in practice highly sticky, tending to become fixed in particular tracks’ (Whittington, 2001). Innovation as a deliberate strategy is perhaps only applicable from a Classicists point of view. Both the Processual and Evolutionary approaches seek not to ‘push’ innovation, but argue that innovation should run its course through incrementalism and the quest for efficiency. For the purpose of this research, innovation, is considered as a generic strategy.
EU Bioethanol Firm Strategy 33 MSc. Thesis - David Borgman Conclusion – Research Application Various generic strategies have been discussed in this paragraph. Table 3.11 provides a selection of the discussed generic strategies.
Table 3.11: Long list of generic strategies – input for strategic option formulation Generic Strategy Author(s) Differentiation Porter (1998), Bowman (1988) Product Differentiation Barney (2002) Cost Leadership Porter (1998), Barney (2002) Low price, Low price/ low added value Bowman (1988) Focus Porter (1998) Focused differentiation Bowman (1998) Concentration (Vertical, Horizontal growth) Wheelen and Hunger (2005) Hybrid (low cost – differentiation) Bowman (1988)
Vertical integration Barney (2002) Flexibility Barney (2002) Strategic Alliance Barney (2002) Corporate diversification Barney (2002)
International Strategies Barney (2002), Whittington (2001), - International strategy Prahalad & Doz (1987) - Global strategy - Multidomestic strategy - Transnational strategy Innovation Whittington (2001) Stability Wheelen and Hunger (2005) Retrenchment Wheelen and Hunger (2005)
Apart from Tacit collusion, all discussed strategies are included in the long list. Tacit collusion is not included due its partial overlap with the strategic alliance strategy, and the ‘illegal’ nature of explicit collusion (which is included in the description). The distinction between business and corporate strategies is not specified in table 3.11. However, apart from vertical integration and flexibility, the strategies are generally focused at corporate level strategy. The formulated strategic options of chapter 6 will likely be applied on corporate level, but this may differ from firm to firm, depending on their level diversification in different industries. The long list of strategies, combined with the market analysis form the basis for the formulation of the strategic options for large scale EU producers. Paragraph 3.4 will elaborate further on relevant conclusions with regard to this paragraph.
EU Bioethanol Firm Strategy 34 MSc. Thesis - David Borgman 3.4 Conclusions
Throughout the literature review a considerable amount of information has been uncovered with regard to market analysis, competitive positions, and the formulation of strategies. This paragraph summarizes the most important findings, which will result in the design of a theoretical framework (3.5). The conclusions are divided into four sections; market analysis, competitive position, strategy formulation, and general.
Market Analysis The factors and methods proposed by Industrial Organization (IO) theory offer quantifiable measurement techniques for some of the structural attributes presented by Porter (1985). However, the measurement of firm economies, the exact measurement of the other barriers to entry and product differentiation is beyond the scope of this research. The measurement of industry concentration through either the concentration ratio or Hirshmann-Herfindahl index (Burgess, 1989) should be possible in this research. For the analysis of the environment of the firm, two approaches were suggested: Macro-Meso- Micro (ESTEMPLE) by Agwin et al (2007), and the Societal, Task and Internal Environment by Wheelen and Hunger (2005). Both show obvious similarities, but Wheelen and Hunger’s (2005) approach seems to be more comprehensive as it integrates the External and Internal environment. The five forces of industry structure model by Porter (1985) has a predominantly economic focus. Important elements of the model, such as entry barriers, are based on Industrial Organization findings. Investigating all of the proposed factors is beyond the scope of this research, partially due to time constraints, and partially because not all factors may be relevant for the bioethanol market. The Synthesis of External factors proposed by Wheelen and Hunger (2005) supports the selection of relevant external factors, and makes the influence and importance of these factors more quantifiable.
Competitive Position Wheelen and Hunger (2005) offer two suitable methods which provide a focused method in comparing different competitors – the Industry Matrix and the Synthesis of Internal Factors (IFAS). By culminating the competitive analysis into these two frameworks, a clear and solid structure of the competitive assessment is pursued. The market analysis (basic conditions and structure) will likely provide the required input for the Industry Matrix and IFAS table. Wheelen and Hunger’s (2005) Strategic Factor Analysis Summary Matrix (SFAS) concludes the process of external and internal analysis by identifying the most important strategic factors. On the basis of these factors, strategic options can be formulated.
EU Bioethanol Firm Strategy 35 MSc. Thesis - David Borgman Strategy Formulation Competitive advantage is defined as: the firm offers a product or service ‘that its customers value [more] than those produced by competitors or that it’ can offer at lower costs than its competitors (based on Saloner et al (2001)). Several (generic) strategies offer a basis for the formulation of more specified strategic options in the strategy formulation phase of this research. Influences of Porter’s (1985) three generic strategies can be found with various other authors discussed in the paragraph. A clear distinction is required in the strategy formulation phase between business and corporate strategies, as both deal with different units of analysis. With regard to the process of strategy formulation, most of the discussed authors agree when the strategic options follow ‘logically’ from a process of external and internal analyses (e.g. market analysis and competitive assessment). The long list of generic strategies forms important input for the formulation of strategic options in chapter 6. Combined with the results of the market analysis, the long list should result in suitable strategic options.
General The character and design of this research lends itself towards Classical techniques, recognized by Whittington (2001). This may be the cause of the researcher being strongly influenced by Western (Anglo-Saxon) scholars. However, the use of Classical techniques is perhaps best suited for the target audience and is supported by the Systemic approach (Whittington, 2001), which suggests that these techniques are embedded in the Western – Anglo-Saxon culture. The IO paradigm generally supports the structure of this research, with conduct (strategy) following from the basic conditions and structure (market analysis, competitive assessment). Wheelen and Hunger’s (2005) three stage Strategic Factor analysis - EFAS, IFAS and SFAS matrices – provide a clear structure for the process of market analysis, competitive assessment and formulating strategic options. Applying these matrices in this research is preferable. Various levels of analysis have been identified for different techniques; global, (multi-)national, group of firms, the firm. All of these levels hold relevance in this research. This makes the selection of these levels at different stages of the research an important task which should be treated with care.
EU Bioethanol Firm Strategy 36 MSc. Thesis - David Borgman 3.5 Theoretical framework
On the basis of the conclusions of paragraph 3.4 and the literature sections, the following theoretical framework (fig 3.13) has been constructed. An explanation and argumentation is provided below.
Figure 3.13: Theoretical Framework
EU Bioethanol Firm Strategy 37 MSc. Thesis - David Borgman The Industrial Organization paradigm of Basic conditions – Structure – Conduct – Performance is used as a basis for the theoretical framework. However, the paradigm is put in a different context as both Conduct and Performance are not measured for the bioethanol market. Instead these two elements of the paradigm serve as a foundation for the formulation of strategic options (Conduct) and the measurement of the expected performance (Performance) through the perspectives of market experts and stakeholders. Furthermore, the factors deemed relevant for the Basic Conditions and Structure under the IO paradigm are extended with Strategic Management insights, discussed throughout the literature study. Between the elements of the IO paradigm (and the theoretical framework) a feedback loop is depicted by the dashed-arrows. This feedback loop indicates that the Basic Conditions and Structure may influence Performance and Conduct, and vice versa. The following sections will describe the theoretical framework in more detail.
Basic conditions & Structure The first two steps of the IO paradigm are integrated under the influence of Strategic Management insights. The basic conditions described by Burgess (1989) are very limited, as are the indicators of structure, in comparison to relevant factors listed by several Strategic Management authors. Therefore, basic conditions and structure will be described on the basis of an interpretation of Porter’s (1985) Five Forces model and the Societal Environmental influences suggested by Wheelen and Hunger (2005). Industrial Organization measurement techniques will be used for the measurement of a number of Porter’s (1985) factors.
Five Forces of Industry Structure The aim of utilizing the Five Forces model (Porter, 1985) is to gain an understanding of the structure of bioethanol industry at a primarily indicative level. Measuring all of the structural determinants quantifiable exact is beyond the scope and timeframe of this research, and may perhaps not be relevant for its purpose. The end result of the analysis should entail an understanding of the global market structure, with national nuances where relevant. Especially with respect to Suppliers, Industry Competitors and Buyers it is relevant to specify national circumstances (European, Brazilian and American), such as location and size, in order to gain a profound understanding of the industry. The application of the Five Forces model forms the core of the market analysis. With regard to the development of the industry for the coming two decades, the analysis will predominantly focus on present expectations and forecasts in the market with respect to: Industry growth (industry life cycle) The selection of this aspect is based on the industry life cycle (Angwin et al (2007). Industry growth is placed in a wider context, as also influencing factors such as mobility trends are included. These elements are clear indicators of potential (future) industry development. The selection of these factors may be adjusted during the research, as more information is uncovered.
EU Bioethanol Firm Strategy 38 MSc. Thesis - David Borgman Societal Environment Influences The analysis of influences of the societal environment will be based on relevant factors listed by Wheelen and Hunger (2005) in table 2.3 – 2.4 (Appendix V). The combination of these factors accounts for the Systemic perspective (Whittington, 2001) in this research, and will provide further ground for the competitive comparison of the EU, Brazil and the U.S.. The factors discussed will therefore be specified, where relevant, for each country. The aim is not to provide a description for all the elements listed by Wheelen and Hunger (2005), but only those that hold relevance for the bioethanol industry, now and in the coming two decades. With the analysis of these factors, relevance is the most important determinant of whether or not a factor is included. Factors are deemed relevant if they have an (expected) influence on the structure of the industry within the coming two decades. A perspective on relevance will be developed as the research progresses, and characterizes the explorative nature of this research. Furthermore, a lack of information sources or time availability may exclude certain factors from analysis.
External - Internal Factor and Industry Matrices The most important results of the analysis of the basic conditions and structure are summarized in an intermediary step. In this step the External Factor Analysis Summary Matrix, the Internal Factor Analysis Summary Matrices, and the Industry Matrix are formulated. The EFAS table will particularly look at the EU industry’s external environment. Three IFAS matrices are formulated for the EU, Brazil and the United States, in order to assess the strengths and weaknesses of each of the three industries. The Industry Matrix compares the relative performance of each of the three industries on the basis of key success factors. The key success factors are distilled from the findings of the market analysis. Combined, the matrices form the input for the next stage of the theoretical framework.
Conduct In the Conduct stage of the theoretical framework the strategic options are formulated for large scale European producers. These options will be based on the previous steps, of which the key strategic factors are summarized in the Strategic Factor Analysis Summary Matrix (paragraph 3.2). In formulating the strategic options, the strategy long list of paragraph 3.3 and the findings of the market analysis will serve as a foundation. The researcher has to provide the required insight in order to formulate relevant strategic options.
Performance The final stage of the theoretical framework is based on the IO paradigm and assesses the potential/expected performance of the strategic options.The key success factor’s identified through the industry matrix offers ground for the assessment of the potential performance. A strategic option is required to address several key success factors in order to be able to achieve a competitive advantage. The assessment will be based on interviews with market experts and stakeholders, with which the researcher discusses the strategic options.
EU Bioethanol Firm Strategy 39 MSc. Thesis - David Borgman EU Bioethanol Firm Strategy 40 MSc. Thesis - David Borgman 4 Basic Conditions and Industry Structure
This chapter will describe the basic conditions and industry structure of the bioethanol market, as was proposed through the theoretical framework (3.5). The chapter revolves around the following two research questions: - What is the current state of the global transportation bioethanol market? (4.1, 4.2) - How is the bioethanol market expected to develop over the coming two decades? (4.3) Paragraph 4.1 describes the elements of the five forces model (Porter, 1985) for the bioethanol market. Paragraph 4.2 will delve into the influences the external environment has on the bioethanol market. Finally, paragraph 4.3 will discuss several expectations with regard to growth forecasts and industry development.
Figure 4.1: Basic Conditions and Structure (Theoretical framework)
4.1 Five Forces of Market Structure
This paragraph describes the Five Forces of Market Structure (Porter, 1990) for the bioethanol market, as proposed through chapter 3. A brief market introduction provides an overview of the global market and its main characteristics. The Five Forces description is focused at Brazil, the U.S. and the EU. It is important to note that the researcher has made various additions to the Five Forces analysis, in order to offer a more comprehensive analysis. Clarifications and argumentation is provided with each of these additions.
4.1.1 Industry competitors
This section describes the first of five forces for the bioethanol industry – industry competitors. Several structural determinants (Porter, 1985) for the competing firms in the industry are discussed. In describing these structural determinants, the focus is on Brazilian, American (U.S.) and European
EU Bioethanol Firm Strategy 41 MSc. Thesis - David Borgman (EU) firms. Several additions to the five forces are made by the researcher, starting with the number of competitors, production volumes, self sufficiency and import / export levels.
Number of Competitors and Industry concentration This paragraph describes the number of competitors and industry concentration for the U.S, Brazilian and EU markets. In addition, various other figures such as; production capacity and capacity expansions, leading firms, import and export levels are included in order to provide a comprehensive picture of the three analyzed industries. The eight leading firms of each industry are identified in order to qualify the concept ‘large scale producer’, and to be able to calculate the industry concentration levels.
Number of competitors The three largest bioethanol markets each have their distinct features, obviously differing in size and number of production plants. Table 4.1a provides an overview of important indicators with respect to market size and capacity.
Table 4.1a: Market overview – United States, Brazil, European Union United States Brazil European Union Plants in production 166 230 sugar and ethanol 44 ± 100 ethanol Plants under construction 62 25-30 25 Plant expansions 7 N/A N/A Number of Firms 126 N/A 27 Total installed capacity ± 37,1 mln m3 N/A 4,372 mln m3 Total production 2007 26 mln m3 22,6 mln m3 3,6 mln m3 Total production / capacity (%) 70% N/A 82% Total capacity (incl. expansions / construction) ± 51,4 mln m3 N/A 7,72 mln m3 Total capacity increase compared to current installed capacity (%) 38,5% N/A 86% Projected Production 2008 33,7 mln m3 26,1 mln m3 4,52 mln m3 Projected Production increase (%) 29,6% 15,5% 25,5% Transportation Fuel Ethanol Prod. (‘07) 24,5 mln m3 20 mln m3 1,85 mln m3 Fuel ethanol share in ’07 national prod. 94,2% 88,5% 51,3% Based on data: RFA website, RFA (2008), UNICA (2008), Ebio website, F.O. Licht (2008) The most obvious differences between the three markets, is the number of production plants relative to the total production (capacity). With a total of 166 bioethanol plants, The Unites Sates manages to produce 26 mln m3 of bioethanol, which is an average production of approximately 156.600 m3 per plant. The Brazilian market requires approximately double the number of plants (± 330) to produce 22,6 mln m3 of bioethanol, 3,4 mln m3 less than the U.S.. This represents an average production of
EU Bioethanol Firm Strategy 42 MSc. Thesis - David Borgman approximately 68.500 m3 per plant. This indicates that U.S. plants have, on average, a larger scale than those in Brazil. The figures for the European (EU) market are more modest compared to the other two. A total number of 44 plants are active within the EU, producing 3,6 mln m3 of bioethanol, a production average of approximately 81.800 m3 per plant. However, in comparison to the United States, the European plants are using more of their capacity for production (82% vs. 70%). With regard to capacity increases, figures are only available for the U.S. and EU markets. The figures provided include plants under construction and expansions of current facilities. It is unclear when these plants will go into production. The European Union shows the strongest relative increase in capacity, with an additional 86% capacity under construction, which is to be added to the current capacity, resulting in a total of 7,72 mln m3. The United States has an additional 38,5% of capacity under construction, which will increase its current capacity by approximately 14,3 mln m3, bringing the total to approximately 51,4 mln m3. Figures with respect to capacity for the Brazilian market are unfortunately not available. The Brazilian market is, with regard to capacity, less transparent than the other two markets. Most of the indicators of table 3.1 could not be assessed for the Brazilian market as most of the information is not (publicly) available.
Fuel ethanol The total bioethanol production is not solely dedicated to transportation purposes. Bioethanol is also used in various other industries, e.g. chemicals, drinks and food. The share of fuel ethanol is however dominant, but large differences can be observed between the three regions. The U.S. and Brazil dedicate around 90% of their bioethanol production to fuel ethanol, while the EU delivers a much lower share (51,3%) for fuel purposes. In 2007, total global fuel ethanol production accounted for approximately 77,3% (49.6 mln m3) of total global bioethanol production. For 2008, this figure is expected to rise to 82,3% (63.4 mln m3), due to further implementation of biofuel programs and policies (F.O. Licht, 2008).
Self-sufficiency, Import and Export Table 4.1b provides an overview of bioethanol production, imports and exports for the U.S., Brazil and the EU in 2007.
Table 4.1b: U.S., Brazil & EU bioethanol production, internal market allocation, export, imports – 2007 United States Brazil EU Production 26 mln m3 22,6 mln m3 3,6 mln m3 Internal market allocation 26 mln m3 18,4 mln m3 3,6 mln m3 Export - 3,6 – 4,2* mln m3 - Import 1,61 mln* m3 - 0,97 - 1,37* mln m3 * = estimates. Sources: RFA (2008), UNICA (2008), Ebio (2008) Of the three largest global bioethanol regions, Brazil is the only net exporter and therefore also the only self-sufficient country. The production level of 22,6 mln m3 is based on a different source (F.O Licht, 2008) than the figures for internal market allocation and surplus export (UNICA, 2008). This
EU Bioethanol Firm Strategy 43 MSc. Thesis - David Borgman explains the range provided for Brazilian surplus export. The 3,6 mln m3 is based on UNICA estimates, while the 4,2 mln m3 is based on the difference between production and internal market allocation of table 3.1b. Approximately 44% of U.S. imports originate from Brazil in 2007. Jamaica and El Salvador contributed an additional 35% (RFA, 2008). European imports originated mainly from Brazil as well, between 55 – 68% (depending on data source) (Ebio, 2008). Brazil plays an important role in the bioethanol trade market, as it has a yearly surplus which it can export. The U.S. and EU are reliant on imports to secure their current bioethanol needs. An important discussion with regard to trade and market protection has emerged at the World Trade Organization Doha round in 2007. Currently, bioethanol is regarded as an ‘agricultural good’. This has important consequences for the trade tariffs that a country may apply for bioethanol under WTO agreements. The classification of bioethanol as an agricultural good, allows the EU, the U.S., and other bioethanol importing countries, to use relatively high import tariffs. These tariffs are an important factor for the protection of the domestic bioethanol industry (EU, U.S.), as Brazilian bioethanol has a lower cost base. To stimulate global trade, and improve Brazil’s export position, Brazil (amongst other countries) has proposed to classify bioethanol as an ‘environmental good’. Environmental goods are traded without or with low import/export tariffs. Such a change would have a big impact on bioethanol industries with a relatively high cost base compared to the Brazilian industry, as it would likely result in an increase of imports. Although, the proposal has been rejected in the Doha round, it remains up for discussion in future WTO meetings. The outcome is uncertain, but it is certainly a development which could have a significant impact on the world markets (ICTSD (2007), WTO (2007), EurActiv (2008)).
Large Scale Producers and Industry Concentration Industry concentration is a relevant indicator for the scale and intensity of competition within the bioethanol industry. In order to measure the degree of industry concentration, it is necessary to identify the eight largest producers in each market (U.S., Br, EU), to calculate the C8-ratio (Burgess, 1989). Table 4.2: Large Scale U.S. producers and Industry Concentration Company Capacity: Mln. m3/year # of Plants Feedstock POET 5,038 23 Corn VeraSun Energy 4,126 11 Corn Archer Daniels Midland 4,050 7 Corn, Barley The Andersons 1,041 3 Corn White Energy 0,939 3 Corn, Wheat, Starch Hawkeye Renewables 0,833 2 Corn Aventine Renewable Energy 0,784 3 Corn Abengoa Bioenergy 0,750 4 Corn Total 17,561 56 Total Capacity 37,100 166 Industry concentration ratio (C4) 38,42% 26,51% Industry concentration ratio (C8) 47,33% 33,73% Source / Adapted from: RFA (2008), Corporate websites 2007/2008
EU Bioethanol Firm Strategy 44 MSc. Thesis - David Borgman The three largest global players of the bioethanol market can be found in the United States, represented by POET, VeraSun Energy and Archer Daniels Midland (Table 3.2). With a capacity of over 4 million m3 each, these three firms are important players in the U.S. market. This is also reflected in the measure of industry concentration. The four largest firms represent 38,4% of the total U.S. capacity, and own 26,5% of the nation’s bioethanol plants. Less than half of the market is represented by the 8 largest firms (47,33%), owning one third of the total bioethanol plants in The United States. The 8th largest firm, Abengoa Bioenergy, is actually a EU player. This Spanish company owns four bioethanol plants in The United States, ensuring a position in the largest ethanol producing country in the world. In addition, Abengoa Bioenergy, also has activities in the Brazilian market with two additional plants. VeraSun Energy (11 plants) and Archer Daniels Midland (7) utilize (on average) larger plants in comparison to POET (23). Where VeraSun Energy and Archer Daniels Midland (ADM) produce approximately 4 mln m3 with 11 and 7 plants respectively, POET requires substantially more plants, 23 in total, in order to produce approximately 5 mln m3. This translates in an average plant size of approximately 375.000 m3 for VeraSun, 578.500 m3 for ADM, and 220.000 for POET. In interpreting these figures, it is important to note that capacity does not represent actual production levels. On the basis of production, the presented top eight largest companies may be in a different order, or may include different companies. Unfortunately, production figures are not publicly available for all companies, making it nearly impossible to present such an overview. The preferred feedstock in The United States is Corn. Only two of the 8 largest U.S. producers also utilize other crops, such as Barley and Wheat.
Table 4.3: Large Scale Brazilian producers and Industry Concentration Company Production: Mln. m3/year # of Plants Feedstock Copersucar 2,800 29 Sugarcane Cosan 1,300 17 Sugarcane Santelisa Vale / Crystalsev 1,227 11 Sugarcane Bioagencia 1,125 16 Sugarcane Sao Martinho S.A 0,520 2 Sugarcane Guarani 0,400 5 Sugarcane Coimex Trading Company 0,390 N/A Sugarcane Grupo Bazan 0,232 2 Sugarcane Total 7,994 82 Total Production 2007 22,610 330 Industry concentration ratio (4) 28,54% 22,12% Industry concentration ratio (8) 35,35% 24,85% (Source / Adapted from: UNICA, F.O Licht, Corporate websites 2007/2008)
The figures provided for the Brazilian market do not represent production capacity as these figures are not (publicly) available. Instead the (latest) production figures are presented in order to list the 8
EU Bioethanol Firm Strategy 45 MSc. Thesis - David Borgman largest Brazilian producers of bioethanol. Generally, the Brazilian market is characterized by cooperatives, in which a large number of local (small scale) sugarcane farmers supply the sugar and bioethanol plants. Typically, a single cooperative has multiple plants, each supplied by local farmers in the surrounding area. Copersucar is, at least in terms of output, by far the largest cooperative bioethanol producer in Brazil, with 2,8 mln m3 of bioethanol produced during the 2006/2007 harvest. It produces more than double than any other Brazilian competitor, with nearly double the number of bioethanol plants than any other Brazilian producer. It has an average production level of approximately 96.500 m3 per plant, while the 2nd-4th largest competitors have an average production level ranging from approximately 70.000 m3 – 110.000 m3 per year. A substantial gap in production between the four largest producers and the 5th-8th largest producers can be observed. However, the four largest producers own a larger amount of plants in comparison to the 5th-8th largest. In addition to Abengoa Bioenergy, another European producer is present in the Brazilian market on a large scale. The French company Tereos (Europe’s second largest producer) has a majority share in the Brazilian producer Guarani. With regard to industry concentration, the Brazilian market is less concentrated than the U.S. market. Although each of the four largest producers are substantially larger than any other Brazilian producer, their share in total production is little over a quarter (28,54%), while utilizing over a fifth (22,12%) of the total number of plants in Brazil. The industry concentration at 8 firms is approximately 7% higher at 35,35%. The increase in plant size is obvious here as well, as the share of the total amount of plants utilized rises only by 2,73% to little under a quarter (24,85%) of the total amount of plants in Brazil.
Table 4.4: Large Scale EU producers and Industry Concentration
Capacity: # of Company Country Mln. m3/year Plants Feedstock Südzucker Germany 1,170 5 Wheat, Maize, Sugar Juice Abengoa Bioenergy Spain 0,771 4 Barley, Wheat, Maize, Wine alcohol Tereos France 0,740 6 Sugar Juice, Wheat ENSUS United Kingdom 0,400 1 Wheat Verbio AG Germany 0,330 2 Cereals, Sugar Juice Cristal Union France 0,290 3 Sugar Juice, Sugar Beat, Wine alcohol AlcoBioFuel Belgium 0,150 1 Wheat SEKAB Sweden 0,100 2 Wine alcohol, Pulp Total 3,951 24 Total Capacity 4,372 44 Industry concentration ratio (C4) 70,47% 36,36% Industry concentration ratio (C8) 90,37% 54,55% Source / Adapted from: Ebio website, Corporate Websites, (2007/2008)
EU Bioethanol Firm Strategy 46 MSc. Thesis - David Borgman The European market is distinctively different in comparison to the previously discussed markets. Obviously, the market size is substantially smaller than the other two, but important differences can also be seen in plant size, feedstock use and industry concentration. Generally, the eight largest EU producers use a diversified feedstock base, with wheat being the dominant feedstock. In comparison to the Brazilian market, EU bioethanol plants are on average larger, requiring a larger feedstock base per plant. The EU market is more densely concentrated compared to the U.S. and Brazilian markets. The four largest EU firms retain a market share of 70,47%, while utilizing over one third of the number of EU plants (36,36%). For the eight largest firms, the concentration is 90,37%, leaving little room for other competitors. It is obvious that the eight largest firms utilize large scale plants considering the amount of plants utilized is 54,55%. This leaves approximately 45% of the total amount of plants for little over 10% of the remaining capacity in the market. The largest EU firm, Südzucker, is represented by several firms in which it has majority stakes (Cropenergies AG, Agrana, Hungrana). Through these companies it is active in Germany, Austria, Belgium, France and Hungary. The second and third largest firms are both active in the Brazilian market. Abengoa Bioenergy, is on a global scale the largest EU firm. When its American (U.S.) and Brazilian activities are included its total capacity amounts 1,65 mln m3. In addition, Abengoa Bioenergy is currently building a plant with a capacity of 0,48 mln m3 in the Port of Rotterdam, The Netherlands (abengoabioenergy.com). This would bring their total capacity to a total of 2,13 mln m3, which would make it the fifth largest player in the world. In addition to its French activities, Tereos is also active in Brazil, through Guarani. If we add the production figures of this subsidiary to the capacity of Tereos in the EU, a combined production/capacity emerges of 1,14 mln m3. ENSUS, listed in table 3.4 as the fourth largest producer is currently not in production. Its single plant, with a capacity of 0.400 mln m3, is still under construction and will be one of the largest plants in the world. It is expected to go in production in early 2009 (ensusgroup.com)
Large Scale Producers and Industry Concentration on Global Scale An accurate assessment of industry concentration on a global scale with a high degree of accuracy is very difficult, due to information discrepancies. Production and capacity figures are not available for all large scale producers. The largest Brazilian producers only list production figures, while the U.S. and EU producers mainly list their capacity. In addition, the total global capacity is unknown, leaving only the global production figures as an important input for the calculation of industry concentration. Nonetheless, Table 3.5 provides an overview of the ‘potential’ industry concentration ratio for the year 2007. The figures are calculated, under the assumption that the U.S. and EU firms would have produced at maximum capacity.
EU Bioethanol Firm Strategy 47 MSc. Thesis - David Borgman Table 4.5: Large Scale Producers and Industry Concentration – Global Capacity: Mln. Prod.: Mln # of Company Country m3/year m3/year Plants Feedstock POET U.S. 5,038 3,527 23 Corn VeraSun Energy U.S. 4,126 2,888 11 Corn Archer Daniels Midland U.S. 4,050 2,835 7 Corn, Barley Copersucar Brazil 2,800 2,800 29 Sugarcane Abengoa Bioenergy Spain 1,650 1,254 10 Barley, Wheat, Maize, Wine alcohol, Sugarcane Cosan Brazil 1,300 1,300 17 Sugarcane Santelisa Vale / Crystalsev Brazil 1,227 1,227 11 Sugarcane Wheat, Maize, Sugar Südzucker Germany 1,170 0,963 5 Juice Total 21,361 16,794 113 Total Global Production (2007) 64,126 64,126 ? Industry concentration ratio (C4) 24,97% 18,79% Industry concentration ratio (C8) 33,31% 26,19% Source / Adapted from: RFA website, RFA (2008), UNICA (2008), Ebio, F.O. Licht (2008), Corp. Websites
The dominance of the U.S. and Brazil is stressed through table 3.5. Effectively, the first seven producers are active in the U.S. and/or Brazil. Abengoa Bioenergy is the only producer active in all three regions. Under the assumption that the U.S. and EU producers have produced at maximum capacity in 2007, the industry concentration for the first four producers is approximately 25%, indicating that the four largest bioethanol producers would represent one quarter of the market. For the eight largest producers this figure is approximately one third. Obviously, no major conclusions may be drawn from the figures in table 3.5, as both production and capacity figures are used. However, the figures do give an indication of the potential of the 4-8 largest firms and the industry concentration. The fourth column of the table (Prod: Mln m3/year) may provide a more accurate calculation of the industry concentration ratio. In order to calculate the production figures of the U.S. and EU producers, the production/capacity percentages of table 3.1 are used. These figures indicate that the U.S., on average, produces at 70% of its total plant capacity, and the EU at 82,34%. Assuming that the large scale producers of table 3.5 produce at those percentages of their capacity, adjusted concentration ratio’s are calculated. The new figures indicate that the four largest firms represent 18,79% of the market, and the eight largest little over a quarter at 26,19%. As with the other two concentration ratio’s these figures are merely indicative and subject to assumptions, decreasing their accuracy.
Conclusion – Large Scale Producers and Industry Concentration In comparing the three industries, major differences in industry concentration can be observed. The EU industry is relatively densely concentrated compared to the other two industries, with 8 firms
EU Bioethanol Firm Strategy 48 MSc. Thesis - David Borgman owning 90% of total industry capacity. Nearly half, 47%, of U.S. capacity is owned by the eight largest firms in this industry. Brazil has the lowest concentration ratio for eight firms, with approximately 35%. A low concentration ratio may indicate a highly competitive industry. In the case of the bioethanol industry, this would likely result in strong competition for feedstock. Thus, this may be the case for the Brazilian industry, and to a lesser extent for the U.S. industry, while the EU industry is perhaps a less intensive competitive environment. Perhaps a coincidence, but the Brazilian C4 and C8 ratio’s are remarkably similar to the global ratio’s. Globally, the C4-ratio is 25% and the C8-ratio is 33%. The Brazilian figures are 28,5% (C4) and 35% (C8), which closely mirrors the global figures. Thus from an industry concentration perspective, the Brazilian industry is perhaps a representative case for the global industry. However, the global ratio’s are subject to assumptions, and would require further statistical analysis to offer concrete evidence for a correlation between the global and Brazilian situation. This is beyond the scope of this research.
Diversity of competitors The degree of diversity of the market rivals may have an important influence on strategic behavior and the competitive environment. Especially on a global scale the large scale bioethanol producers are diverse in nature. Obviously, their country of origin and its conditions is an important determinant of the activities of the firm. Each country is discussed briefly, highlighting its main features and competitors.
United States The American market, the largest globally, is characterized by large scale competitors and on average large scale plants (relative to the Brazilian / EU markets). The main feedstock used for the production of bioethanol is corn (RFA, 2008). Interestingly, three largest competitors, POET, VeraSun Energy and Archer Daniels Midland (ADM), all have a different ownership structure. POET, the largest global producer, does not have a majority stake in all its facilities. Many plants are owned by farmers and other local investors, while POET holds a minority stake. Six business units, which include: Design & Construction, Plant Management, Nutrition, Ethanol Products, Research, and Risk Management, are responsible for the operations of the firm (POETenergy.com). VeraSun Energy, on the other hand, is a publicly listed firm on the New York Stock Exchange (NYSE). It was founded in 2001 and seeks to expand quickly through its public financing on the stock exchange. In 2007 it acquired three bioethanol plants from ASAlliances Biofuels, underlining its pursuit of expansion. It has announced several more plants and with its current additional capacity under construction it seeks to become the largest producer (on the basis of capacity) by the end of 2008. It is dedicated to the production of bioethanol, Dried Distillers Grain and Solubles (DDGS) and Wet Distillers Grain and Solubles (WDGS). Both DDGS and WDGS are used for the feed industry (VeraSun.com). Archer Daniels Midland is distinctively different from the other two firms. With its diversified structure it caters to various market within the agricultural sector, amongst which it produces food, feed and fuel products. ADM is a global player through its various product groups, and like VeraSun, listed on the
EU Bioethanol Firm Strategy 49 MSc. Thesis - David Borgman NYSE. Ethanol production is solely based in the U.S., but ADM also produces biodiesel in Germany (ADMworld.com). With three distinctly different firms, in terms of structure and ownership, it is obvious there are more ways than one towards industry leadership. On industry level, approximately 25% of the total production capacity is owned by farmers (RFA, 2008).
Brazil The Brazilian market reaches its scale through large numbers. The market is characterized by large cooperatives, in which farmers are united to supply their sugarcane harvest to local sugar and bioethanol plants. In addition to producing sugar and ethanol, many of the plants also produce bioelectricity by burning bagasse (waste product from sugarcane). This electricity is used in the sugar and bioethanol production process, and in some cases delivered back to the power grid (UNICA, 2008). This results in an efficient process, which combined with relatively low feedstock costs, ensures favorable conditions for Brazilian producers on the global market. Copersucar, Brazil’s largest bioethanol producer, represents 33 sugar and ethanol plants. The plants are run by cooperative owners, with Copersucar providing additional technical support, logistics and research (Copersucar.com.br). Cosan, the second largest Brazilian competitor, has a majority stake in all of its sugar and bioethanol production units. Cosan is listed on the NYSE, thus it is not organized through a cooperative. Instead, Cosan seeks strategic alliances with various other producers and supporting companies. In addition, it seeks to expand through the acquisition of other, mainly domestic, firms (Cosan.com.br). The third largest Brazilian producer, Santelisa Vale, came into existence after a merger between Vale do Rosario and Santa Elisa, two family owned sugar and ethanol producers. Santelisa Vale holds a majority stake in Crystalsev, another large scale bioethanol producer. Their production figures are combined in tables 3.3 and 3.5. In 2007, the American bank Goldman Sachs invested $210 mln in the company, acquiring a minority stake (Reuters, 2007). The majority of the firm is still family owned (santelisavale.com.br, crystalsev.com.br). As with the U.S. market, the three largest Brazilian firms each have a distinctly different ownership structure, verifying that there are multiple ways to become a leading company in the industry.
European Union The EU market is more densely concentrated than the other two discussed markets (table 3.4). Generally, EU producers utilize a limited amount of large scale plants, compared to the U.S. and Brazilian market. The feedstock is more diversified, mainly using various types of cereals and sugar beet (Ebio.org). Roughly, the market is divided into two types of producers; established sugar producers who produce both sugar as well as ethanol, and ‘new’ producers who utilize purpose built ethanol plants. Südzucker, Tereos and Cristal Union are prime examples of sugar producers also producing ethanol, and Abengoa Bioenergy and Ensus examples of dedicated ethanol producers. An important determinant of the differences between the EU firms may be their respective country of origin and its history (politics, legislation, etc.)
EU Bioethanol Firm Strategy 50 MSc. Thesis - David Borgman The three largest EU firms, Südzucker, Abengoa Bioenergy and Tereos, each have their own distinctive features. Südzucker is a diversified company, active in both food as well non-food applications, and is Europe’s largest sugar company. It is publicly listed on the German stock exchange. Südzucker’s main bioethanol activities are performed by its subsidiary Cropenergies AG. In order to support its production facilities, Cropenergies AG has acquired a tank storage facility in the harbor of Dunkirk, Belgium. This facility adds flexibility in logistics and storage. Abengoa Bioenergy is the EU’s second largest bioethanol producer, however it is the largest EU producer if its U.S. and Brazilian plants are included. Abengoa Bioenergy is a subsidiary of Abengoa, a technology company aimed at the infrastructure, environment and energy sectors (abengoa.com). Abengoa is listed on the Madrid stock exchange (Spain). Abengoa is truly a global player, and this is also reflected in its Bioenergy activities. Abengoa Bioenergy is the only bioethanol producer which is active in the world’s three largest markets; the U.S., Brazil and the EU (abengoabioenergy.com). This holds to a lesser extent for Tereos, the French sugar and bioethanol producer. Tereos is, like Abengoa Bioenergy, also active in Brazil through one of its subsidiaries. Tereos is a cooperative of approximately 12.000 French farmers, represented through 12 cooperatives (tereos.com). It utilizes both sugar beet as well as cereals for the production of bioethanol (and sugarcane in Brazil). Again, the three leading firms distinguish themselves by different ownership structures and industrial backgrounds. Yet, they share a strong market position in the EU.
Industry growth: competition for market share Industry growth is an important determinant of industry structure, as the degree of growth may influence (amongst others) the industry’s attractiveness and strategic behavior by its competitors. Table 4.6 provides an overview of the production levels for the period 1999-2008 in mln m3.
Table 4.6: World, U.S., Brazil and EU production and growth rates 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008* World production 31,42 29,56 31,36 34,11 39,12 40,77 44,36 51,34 64,12 77,09 World growth (%) -5,92% 6,09% 8,77% 14,69% 4,22% 8,81% 15,73% 24,89% 20,23% U.S. production 6,98 7,6 8,12 9,59 12,06 14,31 16,21 19,85 26 33,78 U.S. growth (%) 8,88% 6,84% 18,10% 25,76% 18,66% 13,28% 22,46% 30,98% 29,92% Brazil production 12,97 10,66 11,43 12,56 14,72 14,66 15,89 17,83 22,55 26,1 Brazil growth % -17,81% 7,22% 9,89% 17,20% -0,41% 8,39% 12,21% 26,47% 15,74% EU production 2,4 2,45 2,62 2,55 2,5 2,49 2,82 3,41 3,6 4,52 EU growth % 2,08% 6,94% -2,67% -1,96% -0,40% 13,25% 20,92% 5,57% 25,56% production in mln m3 * = projected production
Adapted from: F.O. Licht, March, 2008
Table 4.6 shows that world production has grown steadily, yet also inconsistently. While global production declined from 1999 to 2000, all other years show substantial growth. However, after the
EU Bioethanol Firm Strategy 51 MSc. Thesis - David Borgman growth rate rose steadily from 2001 to 2003 to double digit figures, it dropped to little over 4% in 2004. During 2004 a decline can be observed in both Brazilian as well as EU production. In the last three years (including projected 2008) world growth has returned to double digits, with 2007 showing the largest increase in growth for the entire period. The inconsistent growth pattern requires further investigation, it may have multiple causes. The U.S. shows the strongest growth pattern of the three discussed regions/countries. Since 2002 it has shown a strong double digit growth per year. In addition, every year it also shows a larger growth rate than the global market. This indicates that it is increasing its market share year by year. With such a strong growth pattern the question arises as to how long the U.S. can keep such a growth rate going. It is, like all nations, limited by its resources. Further investigation is required into the limits of its feedstock base and expected future growth. Brazil follows the global growth rates more closely, mirroring double and single digit growth year by year (except 1999). It is worth noting however, that during the 97/98 harvest Brazil produced over 15 mln m3 of bioethanol (UNICA, 2008). It showed a significant drop from 1999 to 2000, after which it recovered towards 2003. In 2004 a small decline can be observed, a year in which the world as a whole shows a weaker growth rate compared to most other years. From 2005 onwards Brazilian production has grown steadily. However, it has not exceeded world market growth in the last four years, indicating that it is (slightly) loosing market share (especially to the U.S.). The EU shows only minor growth from 1999-2001. From 2002-2004 a decline in bioethanol production can be observed. However, its first double digit growth arose during 2005, which it further increased in 2006. The EU dropped back to single digit growth in 2007, but its largest growth rate is expected for the year 2008. The EU’s erratic growth pattern requires further investigation, as it lacks both stability and consistency. The following table (4.7) shows the average growth rate per year for the period 1999- 2008 and the total production growth for that period.
Table 4.7: Average yearly & total growth in bioethanol production 1999-2008 – World, U.S., Brazil, EU Average Yearly Growth (%) Total Growth % 1999-2008 World 10,83% 145,35% U.S. 19,43% 383,95% Brazil 8,77% 101,23% EU 7,70% 88,33%
Based on: F.O. Licht, March, 2008
The world’s average yearly bioethanol production growth rate for the period 1999-2008 is 10,83%. This is a benchmark figure for any producing nation or firm to be wary of. As long as a nation or firm has a higher production growth than the world’s growth rate for a particular year, it is expanding its market share. In comparing the three leading nations/regions with the world’s average production growth rate, it becomes apparent that during the period 1999-2008, the U.S. has outperformed the
EU Bioethanol Firm Strategy 52 MSc. Thesis - David Borgman world market. It has nearly double the yearly average growth rate, indicating that it has gained market share. Brazil and the EU have produced below the average world market growth rate. During the 1999-2008 period the world has more than doubled its production (145,35%). The U.S. is expected to produce nearly quadruple the amount of its 1999 production. Brazil will likely double its production and the EU shows the weakest growth of the three with an increase of 88,33% compared to 1999 levels (F.O. Licht, 2008).
Industry Life Cycle (ILC) The current and historic growth of the industry is an important determinant for identifying the stage of the industry life cycle. Although not considered in Porter’s Five Forces model, the ILC is included here to assess the relative maturity of the three discussed industries. Differences in the life cycle stage between the three industries could influence their relative competitiveness and future prospects.
United States Since the year 2002, growth of the U.S bioethanol industry has remained in double digits. Considering the growth figures and the relative size of the industry in comparison to the other two industries, one could argue that the U.S industry is in the growth stage of the industry life cycle. In this stage superior operating processes and marketing are critical factors for success of a firm in the industry (Angwin et al, 2007).
Brazil Despite Brazil’s long history in ethanol production, the industry still shows double digit growth. This could classify the Brazilian industry as being in the growth stage. However, the Brazilian growth level is relatively low in comparison to U.S and world industry growth. This could indicate that the Brazilian industry is past its prime growth level and is moving towards the end of the growth stage. However, as Angwin et al (2007) concluded, an industry can reinvigorate itself and move backwards in the life cycle.
European Union The EU industry has only recently (2005) achieved double digit growth (table 4.6). Combined with the highest growth level projected for 2008, one could conclude that the EU is at the beginning of the growth stage of the industry life cycle.
Another interesting data set is provided by the (American) Renewable Fuels Association (table 3.8). The following table (4.7) depicts the growth in U.S. production facilities from 1999-2008, and shows the total number of plants under construction in each year. Unfortunately these figures are not available for the other markets.
EU Bioethanol Firm Strategy 53 MSc. Thesis - David Borgman Table 4.7: Total number of U.S. bioethanol plants in production and under construction (1999-2008) 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 Total U.S. plants 50 54 56 61 68 72 81 95 110 134 Growth (%) 8,00% 3,70% 8,93% 11,48% 5,88% 12,50% 17,28% 15,79% 21,82% Plants U/C* 5 6 5 13 11 15 16 31 76 77
Source: RFA website * = Under Construction
During the 1999-2008 period the number of U.S. bioethanol plants has risen consistently. Especially since 2005 more and more production plants have been added. However, these number are expected to rise even further in the coming years, considering the large number of plants that are currently under construction (77). This figure nearly doubled from 2005 to 2006, more than doubled from 2006 to 2007, but only increased with one plant in 2008. Especially the fact that the additional number of plants that went into construction in 2008 only rose by one is interesting for the market. This can of course have many reasons, but it could be cause for concern as one may assume that producers will likely base their decision for further expansion on future market growth. One explanation may be the corn-based production cap beyond 2015, mandated by the U.S. government (Energy Security and Independence Act, 2007). In addition, the Energy Security and Independence Act has put a legal constraint on the construction of corn-based ethanol plants beyond 2012 (Alternet, 2007). Considering the construction time required for a plant, it is unlikely that construction of new corn-based plants will commence beyond 2009. Another interesting aspect arises when the growth rate of the number of plants is compared with the U.S. production growth rate of table 3.6. Year by year, the U.S. bioethanol production growth rate consistently outperforms the growth rate of the number of production plants. This perhaps indicates that the scale of the U.S. bioethanol production plants has increased over the period 1999-2008. However, more research would be required for confirmation. Future growth expectations are discussed in section 4.4.
Capacity Augmented in Large Increments According to Porter (1990) ‘capacity expansion is one of the most significant strategic decisions faced by firms’, due to the ‘amount of capital’ and the ‘complexity of the decision-making problem’. If capacity can only be added in large increments, the capital requirement and the complexity of the decision- making problem will likely result in a complex and difficult situation for a firm which seeks to expand. Within the bioethanol market, one could assume that there are roughly two options for a firm to expand its production capacity; expansion of an existing plant, and expansion through the construction or acquisition of a new plant. The two options may differ substantially in capital requirement and complexity. Generally, one could assume that the construction of a new plant results in a more complex situation for the firm.
EU Bioethanol Firm Strategy 54 MSc. Thesis - David Borgman Through the construction of a new bioethanol plant, capacity is added in a relatively large increment. In a competitive environment, where multiple rivals add capacity through the construction of new plants, large increment additions may have far reaching effects on market development and the competitive positions of firms. From the time the decision to expand has been taken to the completion of the plant, several years will likely have past (Ethanol Producer Magazine, 2008). During that time, market conditions may have changed significantly. Factors such as the ethanol price, feedstock prices and availability, are just a few variables which may have altered the state of competition and the abilities the firm has. In comparing the three previously discussed countries/regions, a substantial amount of extra capacity is added both to the U.S. and EU market. Table 4.1 indicated that the U.S. producers plan to expand the total U.S. capacity by 38,5%. The EU producers plan to expand the EU’s capacity by 86%. Both figures indicate that producers may expect further market growth and favorable conditions when their new production facilities come online. Capacity figures for the Brazilian market are unfortunately not available. However, there are some important indicators which assess the capacity (expansion) for the Brazilian market. Production is expected to rise by approximately 15% in 2008 (compared to 2007), which requires the use of more capacity (spare or new). As noted earlier, on average, plants in Brazil are generally smaller than those in the U.S. and the EU. In adding capacity, the assumption may be made that the construction of a smaller plant requires less capital and construction time, making the decision making process less complex. This improves the flexibility of the firm in deciding whether or not to expand. In addition, a large number of Brazil’s ethanol producers are also sugar producers (with the same facility). The production ratio, sugar vs. ethanol, can be adjusted at the producers discretion. As sugar and bioethanol prices vary, the producer can allocate its capacity to the favorable end product. All in all, this makes the adding of capacity perhaps less of a (strategic) concern for Brazilian producers compared to large scale U.S. and EU producers. With firms seeking to gain a leading position in the bioethanol market, simply adding capacity may bring the risk of over capacity. The time lag, between the decision for construction and actual production, can result in over capacity. The availability of feedstock, its price and the bioethanol price may change unfavorably, potentially leaving firms which currently invest heavily in additional capacity in a difficult situation as soon as production comes online.
Costs Porter’s (1990) assessment of costs is particularly focused at the presence of (high) fixed, storage and switching costs. According to Porter (1990) the presence of high fixed costs increases the pressure on firms to fill their maximum capacity, as their fixed costs per unit are likely to be the lowest at maximum production. Fixed costs may also be a leading determinant for success in the bioethanol industry, as in a global (commodity) market a producer may perhaps only have a limited influence on the selling price of its end products. Thus, minimizing costs may be an important ‘tool’ for the producer to ensure its
EU Bioethanol Firm Strategy 55 MSc. Thesis - David Borgman profitability. Within an industrialized industry, such as the bioethanol industry, the production facility is also an important cost factor. The initial investment costs of a typical bioethanol plant is estimated at € 50-100 mln per 100.000 ton capacity (Biofuels Corporation, 2008). The investment / construction costs are, obviously, by far the largest fixed cost factor for the bioethanol producer. Such an investment is likely to pressure the firm to operate as efficiently as possible, reducing (variable) costs and improving profitability, which is required to generate a positive return on investment. For the purpose of our discussion, other cost factors such as production costs are included in this section. Although these factors are not initially included in Porter’s (1990) discussion of costs, it has become apparent that production costs are an important competitive factor in this industry. Disregarding this factor would unlikely result in a proper analysis of the competitive environment in which the EU bioethanol industry is active.
Cost Comparison U.S., Brazil, EU Some important differences between the (fixed) cost levels of the analyzed regions can be observed. Earlier sections in this chapter have indicated that the average production facility size differs per region. Brazil has, on average, smaller production facilities than those seen in the U.S. and the EU. This may result in a lower initial investment for the construction of a plant. As Brazilian capacity is also used in smaller increments, Brazilian producers may be more flexible in utilizing their capacity and feel (relatively) less pressured to produce at maximum capacity. However, larger economies of scale in production may help to reduce the per unit cost for U.S. and EU producers. Yet, this can not be observed in figure 4.2. In addition to differing plant construction costs due to differing plant sizes, Brazilian producers also have an advantage in bioethanol production costs. Figure 4.2 gives an overview of various biofuel types and their cost per liter in Euro’s.
Figure 4.2: Biofuel cost estimates for different regions (Source: Schmitz, 2007)
EU Bioethanol Firm Strategy 56 MSc. Thesis - David Borgman Through figure 4.2 it becomes apparent that EU wheat and beet based ethanol is over 10 Eurocents per liter more expensive than U.S. corn based ethanol, and more than 20 Eurocents more expensive than Brazilian sugarcane based ethanol. As billions of liters are produced, such a cost advantage clearly generates a competitive advantage for Brazilian producers. An important factor in low Brazilian production costs, is the use of bagasse (a sugarcane waste product) in the generation of bioelectricity. This bioelectricity is used during the bioethanol production process. This process ensures the reduction of energy costs (UNICA, 2008). American and European producers do not generally use waste products from their feedstock for the production of (bio-) electricity. In addition, labor and land costs are generally lower than those in the U.S. and Europe. This creates a relatively low cost base for Brazilian producers in comparison to the U.S. and EU. From a trade perspective, this lower cost base creates flexibility for the Brazilian producer in determining its bioethanol (export) price. From a cost perspective, Brazilian producers have a competitive advantage in comparison to U.S. and EU producers. This offers them a strong competitive position on the global market. A more in depth view with regard to Brazilian ethanol costs is provided by figures 4.3, 4.4 and table 4.8.
Figure 4.3: Production cost structure – Brazilian cane based ethanol 1990 (Source: Zuurbier, 2008)
Figure 4.3 provides an overview of the cost structure of Brazilian ethanol around 1990. Unfortunately more recent data could not be uncovered at this time. However, the figure indicates that feedstock costs (77%) are by far the largest cost factor for the production of ethanol. Labor costs only make up 4% of the production costs of ethanol, but that does not include the labor required for the harvesting of sugarcane. For the competitive position of the EU industry, the final costs of imported Brazilian bioethanol is a more important factor than the actual production costs. The EU firm competes directly with the import price, and only indirectly with the Brazilian production costs. Table 4.8 provides an overview of the export costs of Brazilian ethanol to the Port of Rotterdam in 2006.
EU Bioethanol Firm Strategy 57 MSc. Thesis - David Borgman Table 4.8: Brazilian bioethanol export costs to Rotterdam - 2006
Source: Zuurbier (2008) Transportation costs within Brazil (Freight) and Transportation to EU are the dominant cost factors for exporting ethanol to the Port of Rotterdam in the EU. Combined these transportation costs represent approximately 80% of the total export costs. However, this table does not take import tariffs into account, which represent additional costs for the importing party (e.g. EU based petroleum firm). Figure 4.4 provides an overview of the final costs of Brazilian ethanol in the Port of Rotterdam (PoR) in 2006. It takes an average ethanol 2006 price (F.O.B) of U.S.$400 / hectoliter into account, which results in a final price of U.S.$545,72 / hectoliter in the PoR (Zuurbier, 2008). If we compare this price with the EU bioethanol liter prices of figure 4.2, it becomes apparent that imported Brazilian bioethanol is very competitive. The EU price per hectoliter ranges from approximately €400 - €600 in 2007 (figure 4.2 multiplied by 1000 liters). The prices are difficult to compare due to varying exchange rates ($ vs. €), but the following calculation example could serve as an indicator. In 2007, the exchange rate of the €/$ hovered around 1,35 (1€ = $ 1,35). Using this rate, imported Brazilian ethanol into Rotterdam (EU) would cost around €403 per hectoliter ($545 / $1,35), making it instantly competitive with EU wheat- and sugar beet-based ethanol. This also shows that exchange rates can have a large influence on the competitiveness of the EU industry compared to Brazilian imports. A strengthening U.S. dollar favors EU producers in this case, while a stronger Euro favors Brazilian exports. However, for our discussion the cost structure is more important than the actual price, as it can identify the root cause of the competitiveness of Brazilian imported ethanol. The cost structure presented in figure 4.4, indicates that production costs are the dominant cost factor in the final PoR costs. The trade margin represents 22% of the final costs, making it the second most important cost factor. The combined transportation costs of Logistic costs and Ocean Freight, represent approximately 18% of the costs. The import tariff is also a major factor influencing the final costs at 14,8%.
EU Bioethanol Firm Strategy 58 MSc. Thesis - David Borgman Figure 4.4: Final costs Brazilian bioethanol in Port of Rotterdam in 2006 U.S.$ (Source: Zuurbier, 2008)
Unfortunately, cost structure figures could not be uncovered for U.S or EU ethanol. However, as figure 4.2 indicated, the production costs per liter of EU and U.S. bioethanol are substantially higher than Brazilian ethanol. Production costs are also the dominant cost factor in imported Brazilian ethanol to the PoR in the EU. Lowering production costs should therefore be a priority for EU produce, in order to improve the competitiveness of EU bioethanol.
Lack of Differentiation or Switching Costs An important indicator of the volatility of competition is the lack of product differentiation and/or switching costs (Porter, 1990). The bioethanol market has an apparent lack of differentiation when observed from bioethanol end-use. Apart from differences in specification and standards between U.S., Brazilian and EU bioethanol, the end product is identical and has an identical use. However as the comparison of production costs has shown (figure 4.2), there is a difference in the type of feedstock used and its costs in production. End users of bioethanol may have different preferences with regard to specifications and standards, but also with regard to the origin of the raw materials. Differences can be observed with regard to greenhouse gas savings per feedstock used. This, amongst other issues, raises certain sustainability questions, which may differ per region. This topic will be discussed further in paragraph 4.2.3. Switching costs form another important cost concern for bioethanol producers. Switching costs may for example occur when a bioethanol producer changes its feedstock type. Most bioethanol plants are not suited for one-on-one feedstock substitution. Changing feedstock type, from for example wheat to sugarcane, requires alterations of the production process and thus the production facility. In addition to changes to the facility itself it is likely that staff would require additional training to handle the new feedstock. The production time which is lost during the feedstock alteration period generates additional ‘costs’. The height of the feedstock costs, however, may make a change in input a viable option for the firm. In case the preferred and currently used feedstock becomes too expensive relative to other feedstock options, it could make sense to change its feedstock type to a more viable option.
EU Bioethanol Firm Strategy 59 MSc. Thesis - David Borgman A future concern for producers, with regard to switching costs, is the emergence of advanced biofuels. Advanced biofuels, cellulose based, require a different production process and can use different feedstock options (e.g. wood). This requires different production facilities. Although the production of advanced biofuels are currently not commercially viable, producers will have to incur relatively large switching costs (new facilities) if they decide to switch to this process in the future. The switch from conventional bioethanol to advanced bioethanol is an important concern in deciding to construct a new production plant, as after the construction period significant production process innovation may have occurred.
Strategic Stakes In an industry where ‘a number of firms have high stakes in achieving success’, rivalry can be volatile (Porter, 1990). The bioethanol industry is characterized by high market growth both globally as well as on regional level (U.S., Brazil, EU). Each of the discussed markets show three to four leading firms competing for the top spot in their domestic market (and global market). In a growing industry these leading firms (and others) have a particular interest in establishing themselves as the largest and most important player. Gaining an early lead may provide various competitive advantages, and can deter entry of other firms to the market. Especially for undiversified firms, who made bioethanol production their main activity, it is important to be successful as their (profitable) existence relies on it. Considering the current status of the market and its expected development (further growth), the stakes are high for (leading) firms to succeed and to become global leaders. This creates a volatile market environment in which a large scale producer needs to be especially wary of its competition.
Exit barriers Porter (1990) lists types of exit barriers which may keep firms in a certain business, even when this has negative effects on the company. Furthermore Porter (1990) stresses that ‘when exit barriers are high, excess capacity does not leave the industry’. Even though firms are losing competitively, ‘they grimly hang on and, […] resort to extreme tactics’ (Porter, 1990). Several exit barriers are discussed subsequently.
Specialized assets Due to the specialized nature of a bioethanol plant there are significant exit barriers for the firm. Dedicated bioethanol facilities are not easily converted to produce other end products, and in addition conversion would likely require a substantial amount of capital, time and knowledge. Combined sugar and ethanol plants would prove more flexible in ceasing ethanol production, as they could focus on sugar production. However, if feedstock issues (price, availability, etc) cause the firm to exit production, shifting to sugar production may not be a solution. Brazil has relatively a large share of combined sugar / ethanol plants in comparison to the U.S. and EU.
EU Bioethanol Firm Strategy 60 MSc. Thesis - David Borgman Carolan, Joshi and Dale (2007) state that ‘entry and exit barriers are huge, as the capital requirements for biorefineries are enormous, as are the costs of abandoning one’. However, although conversion for alternative uses may be ‘infeasible’, salvaging components of a single facility may be feasible for a multi-plant firm (Carolan et al, 2007). Should the exiting firm have the opportunity to sell its facilities to other producers, this is likely its best exit option from a financial point of view.
Fixed costs of exit The fixed costs of exit are also likely to be high. In liquidating a plant, the selling price will likely be lower than its value for the firm whilst in production. The conversion of a plant will require additional capital, increasing its fixed costs. The firm is also likely to have various contracts (e.g. suppliers, employees) which may have to be violated in order to exit the industry. This is likely to generate additional (settlement) costs.
Strategic (inter)relationships Dedicated bioethanol producers, whose sole business is the production and marketing of bioethanol, will suffer the least from strategic interrelationships between business units. They will not have to depend on other business units (and vice versa) as may be the case in diversified firms who produce multiple (sugar crops) related products. Cooperative firms have high exit barriers, as the firm is (partly) owned by its suppliers, the farmers. It is likely that long term contracts between the feedstock suppliers (farmers) and the ethanol producer are in place. Violating such an agreement may be illegal or very costly. In addition to (internal) supplier contracts, contracts with buyers, such as oil companies or traders may also result in a barrier for exit.
Emotional barriers Emotional barriers may lead to ‘unwillingness to make economically justified exit decisions’ (Porter, 1990). This is difficult to assess for an entire market. It is likely to differ per type of company, the decision makers involved, the cultural background, etc. However, some general remarks may be valid. Firms which are embedded in the local society may have more difficulty in exiting their industry. This is perhaps the case for cooperative bioethanol producers who directly employ thousands of farmers. In addition, firms who have been in business for a long period of time, e.g. several decades, may also have more difficulty in exiting a business which they helped to build during the years. Brazil has a long history in sugar and bioethanol production. In addition, many Brazilian firms are cooperatives. Within the EU there are also several sugar cooperatives (e.g. Tereos), with a relatively long history and large amount of cooperative farmers. These types of firms will likely have more emotional barriers than more recent dedicated bioethanol producers, who are owned by investment firms – which demand a positive return on investment.
EU Bioethanol Firm Strategy 61 MSc. Thesis - David Borgman Government and social restrictions Other exit barriers are raised through the presence of government support and the social responsibility producers have to their (local) community. The three discussed markets are strongly supported by their domestic governments through measures such as subsidies, import/export tariffs, and so on. Governments have an interest in securing their energy supply and meeting greenhouse gas reduction targets, etc. The government is therefore likely to support any of its domestic producers. Government support may result in certain obligations for the firm to remain in business. The producer also has a social responsibility to the community (which may also be stressed by the government). Large scale firms employ a large amount of workers, directly as well as indirectly (suppliers, related and supporting industries). Exiting the industry results in job loss. The firm may be pressured by its employees (cooperatives, unions) and community to remain in business. In Brazil, where the sugar and ethanol industry is a major industry this is much more likely than in the U.S. and the EU, where compared to other industries, the bioethanol industry is relatively small.
Location of industry competitors Although not considered as a structural determinant by Porter (1990), the locations of bioethanol plants are a relevant issue, as the locations of production and consumption often differ. Bioethanol for transportation purposes is mostly blended with gasoline (E5, E10, E85, etc) in the EU and the U.S. (Brazil also offers pure bioethanol on a relatively large scale), this requires (in most cases) transportation from the production facility to the blending facility. The blended bioethanol-gasoline mix is than transported to petrol stations throughout the country. The location of the production facility is therefore an important factor in transportation (costs).
Location U.S. producers Figure 4.5 provides an overview of the bioethanol production facilities in The United States. The purple dots represents facilities in production, and the yellow squares indicate plants that are currently under construction.
Figure 4.5: Biorefinery locations U.S. (Source: RFA, 2008)
EU Bioethanol Firm Strategy 62 MSc. Thesis - David Borgman The vast majority of plants is located in the Mid-West region of the U.S.. This area is known as the corn belt. Production of bioethanol takes place within the direct vicinity of feedstock supply in order to reduce transportation costs of a relatively low cost input. However, consumption of bioethanol for transportation purposes is not limited to its main production area. It is for example also used along the east coast, Texas and California. Over 50% of the gasoline sold in the U.S. is blended with bioethanol, mostly E10 (10% ethanol, 90% gasoline) (RFA, 2008).
Location Brazilian producers
Figure 4.6: Sugar and Bioethanol production facilities in Brazil, 2007 (Source: Moraes, 2008)
In figure 4.6, the red dots represent current sugar and bioethanol production facilities. The blue triangles represent facilities that are currently under construction. Brazilian bioethanol production is predominantly located in the sugarcane production area’s of the Center-South region and the North- East coastal area. The state of Sao Paula houses the largest share of bioethanol producers, over 100. The sugarcane industry association, UNICA, represents most of the producers in that region. Bioethanol for transportation purposes is used throughout the country, supplying Brazil’s large fleet of flex-fuel cars with a self-sufficient supply of fuel (UNICA, 2008). Flex-fuel cars can drive on regular gasoline, blended gasoline-ethanol mixes, and pure ethanol. This topic is discussed further in section 4.2.4. Production of bioethanol in the vicinity of the coastal seaports is favorable for Brazil’s export position. Brazil supplies both the U.S. and EU market with bioethanol.
EU Bioethanol Firm Strategy 63 MSc. Thesis - David Borgman Location EU producers
Figure 4.7: EU bioethanol production facilities (Location source: EBIO website, 2008)
Production facilities within the EU are less concentrated than those in the U.S. or Brazil (figure 4.7). Northern France has the largest concentration of ethanol producers in Europe, mainly due to its large sugarbeet and wheat production. Germany and Spain are second and third, in terms of bioethanol production facilities. Bioethanol is blended and used for transportation purposes throughout the EU. The leading EU consuming nations are France, Germany, Spain and Sweden. This topic will be discussed further in paragraph 4.2.4.
Conclusion – Industry Competitors This concludes the discussion of the first industry force of the five forces model, industry competitors. The paragraph has provided an overview of the size and concentration of the three industries. The U.S. industry, the largest global producer, is characterized by relatively large scale plants, diverse ownership structures of the leading firms, a relatively high industry growth rate, an average concentration ratio compared to the other two industries, and a relatively densely geographical concentrated production area. In addition, the U.S. bioethanol production costs are relatively high in comparison to low-cost producer Brazil. The Brazilian industry is characterized by low costs, and generally smaller scale production facilities than those seen in the U.S.. It has the lowest industry concentration ratio of the three industries, which is remarkably similar to the global concentration ratio’s. An explanation for this similarity has not been pursued. Like the U.S. industry, the Brazilian production facilities are also densely concentrated in a particular geographical area. Brazil is the only self-sufficient producer and exporter of bioethanol. The cost structure of exported ethanol to the EU is dominated by production costs (42%) and a trade margin (20%), transportation costs represent less than 20% of total costs.
EU Bioethanol Firm Strategy 64 MSc. Thesis - David Borgman The EU industry is characterized by a high industry concentration ratio (C8 = 90%), a small production capacity, relatively high production costs compared to Brazil, and the slowest industry growth in the last decade of the three industries. Geographically, production of EU ethanol seems to be less concentrated in particular area than seen in Brazil or the U.S.. On a general level, one may conclude that exit barriers for bioethanol producers are relatively high due to large investment costs and highly specific assets. These factors make it difficult to exit the industry. All in all the industry attractiveness varies per industry. The highly competitive production costs of Brazilian ethanol on a global scale, adds to the attractiveness of the Brazilian industry. However the large number of competitors and relatively low concentration ratio, may indicate a highly competitive environment. The U.S. industry may achieve relatively large economies of scale, but can not compete on the basis of costs with Brazil. The industry concentration ratio is average compared to the other two industries, perhaps making it also averagely attractive. The attractiveness of the EU industry is relatively low, considering the high production costs and low industry growth. However, with a high concentration ratio, there may be room for more competitors. Other factors, not discussed in this section, may also influence industry attractiveness. Therefore, more specific conclusions relevant for the formulation of the strategic options are formulated in chapter 5.
4.1.2 Bargaining power of Suppliers
According to Porter (1990) ‘suppliers can exert bargaining power over participants in an industry by threatening to raise prices or reduce the quality of purchased goods and services’. Thus the degree of supplier power is an important indicator of industry structure and of the power and possibilities competitors have in their industry. A bioethanol producer is reliant on a narrow range of different suppliers, such as feedstock suppliers (corn, wheat, sugarcane, etc.), enzyme suppliers (for fermentation) and energy suppliers (electricity, water). Several indicators may explain the bargaining power of suppliers, these will be discussed subsequently.
Supplier concentration and Differentiation of Inputs The degree of supplier concentration versus industry concentration is an important indicator of supplier power. Suppliers may have a powerful position if they are present in relatively few numbers in comparison to the industry competitors (Porter, 1990). In such a situation, bioethanol producers would likely have to compete for feedstock, as the supplier has the power to sell its products to the highest bidder. Currently, this is not the case for the bioethanol industry. Feedstock, such as sugarcane, corn and wheat, is produced by thousands of farmers worldwide, both in cooperatives as well as independently. However, bioethanol producers do have to compete with food and feed production. This adds a substantial amount of potential customers for the supplier (feedstock producer), contributing to a stronger bargaining position. Bioethanol producers seek to subdue this power position of the supplier by pursuing long term supply contracts. This may be realized through the set- up of a cooperative organization (in which farmers own a share of the firm) or contracts with feedstock traders or individual producers.
EU Bioethanol Firm Strategy 65 MSc. Thesis - David Borgman The three discussed markets all have their unique characteristics, which influence supplier power.
United States U.S. feedstock supply is characterized by the use of a single feedstock type, predominantly corn. Approximately 17% of the 2007 U.S. corn harvest was dedicated for bioethanol production (RFA, 2008). This share is expected to increase further over the coming years. The reliance on a single feedstock, which is also used for food and feed production, results in a strong bargaining position for feedstock suppliers. Although bioethanol producers use supply contracts to minimize supplier power as much as possible, suppliers could potentially exploit their position in the supply chain by storing (a share of their) feedstock and/or selling it to other industries. Approximately 300.000 corn producers, of various sizes, form the U.S. supply base for food, feed and fuel (NCGA, 2008). The total number of farmers which supply corn for bioethanol production is unfortunately unknown.
Brazil Brazilian production is currently fully dependent on sugarcane supply. The power relation between supply and demand is more balanced due to the nature of the input and the production process. Sugarcane requires to be processed within a few hours after harvesting, after which it loses its value through natural fermentation (UNICA, 2008). This creates a situation in which neither the supplier nor the buyer can store feedstock for strategic purposes. In addition, most Brazilian ethanol producers are also sugar producers. The supplier has very limited options in selling its products to other processing industries, as food (sugar) and fuel are generally produced at the same facility. The perishable nature of sugarcane requires the supplier to market its product in the direct vicinity of its production location, which further limits its options in terms of different buyers. Combined with the cooperative organization of most bioethanol producers, the power structure is much more balanced than perhaps seen in the U.S.. The combined sugar/ethanol facility enables the producer to vary its production, depending on prevailing sugar and ethanol prices, which improves its production flexibility. Most sugarcane is produced on large estates, each utilizes on average 30.000 hectares. Approximately three quarters of the total Brazilian sugarcane production is produced on the estates of the 330 sugar / bioethanol plants. The other quarter is produced by approximately 60.000 independent farmers (Meeusen et al, 2007). Sugarcane production is therefore relatively highly concentrated.
European Union The EU supply side is characterized by multiple feedstock types (e.g. wheat, sugar beet, maize). All feedstock types currently supplied for ethanol production are also used for the production of food and feed. Suppliers therefore have multiple options in the marketing of their product. The amount of suppliers likely outnumbers the amount of producing firms (both fuel, food and feed). Although, bioethanol producers may not be able to change feedstock type in the short run, the availability of multiple feedstock types works to their advantage. In case a supplier should pressure its feedstock
EU Bioethanol Firm Strategy 66 MSc. Thesis - David Borgman buyer for a prolonged period, the bioethanol producer has the ability to change its feedstock. However, this requires plant adaptation costs. The use of cereal crops also has the advantage of storage. This applies for both suppliers as well as bioethanol producers. Storage of feedstock can be used for strategic purposes, such as price manipulation. However, storage also brings additional costs. With varying feedstock prices, depending on multiple factors (e.g. demand, quality, other feedstock types), storing large amounts of feedstock may bring significant risks for both the supplier as well as the bioethanol producer. As with the other two markets, cooperative structures and other long term supply agreements are likely to be in place with the majority of producers. Feedstock is likely to be sourced from the surrounding area, in order to reduce transportation costs. This also limits the possibilities of suppliers, as it may not be economically viable to transport feedstock to a wide range of potential buyers.
Feedstock differences Some important differences between the different types of feedstock used have already been discussed, such as storage issues and transportation costs. Figure 4.8 provides an overview of the energy balance of the most dominant types of feedstock used for bioethanol production.
Figure 4.8: Energy balance of ethanol based on different feedstock types (Source: UNICA, 2008)
Sugarcane based ethanol has a substantially better energy balance than the other three dominant feedstock types (wheat, sugar beet, corn). The ratio’s represent the amount of energy contained per unit of fossil fuel input.Sugarcane based ethanol has the highest ratio at 9.3. It outperforms the other three ethanol types by a large margin. This favorable conditions of sugarcane based ethanol is further amplified by table 4.9.
EU Bioethanol Firm Strategy 67 MSc. Thesis - David Borgman Table 4.9: Typical Yields by Region and Crop (litres per ha. of cropland) U.S. Brazil EU Ethanol from: Corn 3100 Wheat 2500 Sugar beet 5500 Sugarcane 6500
Source: adapted from IEA, 2004
The production yield, litres of bioethanol per hectare of cropland, differs per feedstock type (table 4.9). Sugarcane based bioethanol has the highest yield per hectare of cropland, it yield 6500 liters per hectare of sugarcane. Corn and Wheat have far lower yields, at 3100 and 2500 liters respectively. Sugar beet is the EU’s best performing crop in terms of bioethanol yield. Sugarcane is also the favored crop, of those currently used on a large scale, in terms of greenhouse gas reduction (figure 4.9)
Figure 4.9: Range of Estimated Greenhouse Gas Reductions from Biofuels (Source: IEA, 2004)
Figure 4.9 depicts the ‘well-to-wheel’ greenhouse gas savings per type of biofuel in comparison to the use of regular gasoline (based on a CO2 life-cycle assessment). In focusing on the previously discussed feedstock types, sugarcane based bioethanol outperforms both sugar beet as well as grains by a large margin. Corn is not depicted in this overview, but considering the relatively poor energy balance of figure 4.8, greenhouse gas savings are likely to be low as well. In terms of production costs, energy balance, yield per hectare, and greenhouse gas reductions, sugarcane based bioethanol has clear advantages in comparison to feedstock types currently used in the U.S. and EU.
Switching costs and Substitute inputs Switching costs can occur for both feedstock suppliers as well as bioethanol producers. Feedstock suppliers (farmers) incur costs in case the farmer switches from producing one type of feedstock (e.g.
EU Bioethanol Firm Strategy 68 MSc. Thesis - David Borgman corn) to producing a different type (e.g. wheat). There may be a multitude of switching cost factors, such as; it may require different machinery, it has additional raw material costs, and it may lack experience in producing the new crop, potentially resulting in lower initial yields. Bioethanol producers face switching costs in case they substitute their current feedstock for a different type. This would result in factors such as; plant adaptation costs, additional knowledge and experience, lower production efficiency at start up, and so on. Decisions for both the supplier and the bioethanol producer to switch to the production / use of a different crop would likely be based on its final costs and benefits. Non-cooperative bioethanol organizations have a flexibility advantage compared to cooperative bioethanol producers. Individual bioethanol producers can choose their supplier and its corresponding feedstock on the basis of price and availability. Cooperative firms have a large supplier base, who produce on the basis of (long-term) contracts and firm ownership. Such an organization cannot simply change suppliers on the basis of price and availability. However, cooperative firms do have the added advantage that they can decide to change feedstock production collectively. With large scale cooperatives such a decision process is likely to be complex, and does perhaps not outweigh the flexibility of non-cooperative firms. The costs for a bioethanol producer to switch to a supplier with an identical feedstock does not add significant bargaining power for the supplier. However, for a producer to switch to a different type of feedstock will prove more costly. The supplier should therefore be wary of its direct competitors, those that produce the same feedstock. Furthermore they should keep a close eye on the prices of substitute feedstocks which are within an economically feasible area surrounding the plant. The added benefit of the suppliers position is that it could always switch to supplying other industries (e.g. food and feed). The bioethanol industry is not necessarily its most attractive option. On the basis of switching costs and substitute inputs, the bargaining power of the supplier is generally strong. However, this will vary region by region, and could shift easily if other feedstock options are (regionally) competitive.
Threat of forward integration The threat of forward integration relative to the threat of backward integration by firms in the industry is an important determinant for supplier bargaining power. For the bioethanol industry there is certainly a threat of forward integration by farmers. However, for farmers to become a large scale player in the industry they would require a large resource base of their own or they would need to cooperate through the set up of a cooperative bioethanol organization. This is certainly a realistic option, but the question is whether this would yield more profits for the farmer compared to the situation where it is a regular supplier. The large investment may put farmers off, as they fully bear the risks for success and failure, and it compromises its supply flexibility. Integrated firms can be seen in all of the three markets today, especially within Brazil and the EU (e.g. Copersucar, Tereos, Cristal Union, Santelisa Vale). The U.S. market shows a decreasing trend. Table 4.10 provides an overview of the farmer owned production facilities for the U.S..
EU Bioethanol Firm Strategy 69 MSc. Thesis - David Borgman Table 4.10: Overview of farmer owned capacity and capacity under construction for the U.S. 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 Total U.S. plants 50 54 56 61 68 72 81 95 110 134
Farmer Owned Plants 14 18 21 25 28 33 40 46 46 49 293,3 340,3 473 645,6 796,6 1041,1 1388,6 1677,1 1677,1 1948,6 Farmer Owned Capacity MG/Y
% of Total Cap Farmer 17% 19% 25% 28% 29% 34% 38% 39% 39% 28%
Farmer Owned UC 5 3 3 10 8 12 10 4 4 13 Farmer Owned UC capacity MG/Y 77 60 60 335 318 447 450 187 187 771
% of Total UC Capacity 100% 66% 71% 86% 66% 75% 60% 11% 11% 12%
UC = Underconstruction MG/Y = Million Gallons per Year Source: RFA website Table 4.10 provides indicative data for the development of forward integration for the U.S. bioethanol market. Currently 28% of the industries capacity is farmer owned. This figure has dropped from approximately 39% for the past 3 years (2005-2007). In addition, up to 2005, the vast majority of new plants under construction was farmer owned (60-100%), in terms of capacity added. However, from 2006 onwards this figure has dropped to around 11%, a year in which the number of plants under construction dropped to 4. This figure rebounded in 2008 to 13 plants, but this only represents 12% of the total capacity under construction. These figures indicate that non-farmer owned capacity is not only higher than farmer owned, but is also increasing more rapidly in recent years. It is unclear if these figures hold for the global industry, as unfortunately these statistics are not available for the other two discussed markets. Based on the figures for the U.S. market, one could argue that the threat of forward integration is certainly there, but is becoming less of an issue in the current situation. Non-farmer owned U.S. firms and capacity increases more rapidly for the time being.
Location and Feedstock Production The location of suppliers is an important factor for bioethanol producers as it influences factors such as transportation costs, feedstock availability, growth opportunities, and so on. In general, bioethanol producers are located in the vicinity of suppliers or at important logistical hubs, such as harbors. Each market has its own distinct features, which will be discussed subsequently.
U.S. The U.S. bioethanol producers map (figure 4.6) is also a clear indicator of the location of supply. An important aspect of the Mid-West location is that it is located in a central area of the U.S., the Corn and Grain Belt. This influences the ability of the U.S. to disperse its bioethanol throughout the country in an economically viable manner. The densely concentrated area results in substantial transportation costs for the delivery of bioethanol to the east and west coast. Approximately 140 million hectares in the U.S. is used for the production of crops (U.S.DA, 2002). Of that area, approximately 38 million hectares is planted with corn. With this area of crop production,
EU Bioethanol Firm Strategy 70 MSc. Thesis - David Borgman approximately 461 million m3 of corn was produced in 2007 (NCGA, 2008). This represents an average production of 12,14 m3 of corn per hectare. According to the National Corn Growers Association (NCGA), approximately 112 million m3 of corn was used in bioethanol production. Considering the average production per hectare, the volume used for bioethanol represents about 9,22 million hectares of cropland. This represents around 24,26% of the land used for corn production, and 6,58% of total U.S. cropland (Calculations based on NCGA data).
Brazil Brazilian sugarcane production is located in two key areas, the South-Central region and at the North- Eastern coast. The coastal locations, in the vicinity of sea harbors, offer excellent export opportunities for both sugar and bioethanol. Figure 4.10 gives an overview of the sugarcane production area’s.
Figure 4.10: Sugarcane production area’s Brazil (Source: Unica, 2008)
According to UNICA (2008), around 487 million tons was produced during the 2007/2008 harvest season. This production was reached through the use of 7,8 million hectares of land, which represents 2,3% of the total Brazilian arable land (UNICA, 2008). About half of the sugarcane production is allocated to bioethanol production, the other half is used for the production of sugar. Under this assumption approximately 3,9 million hectares of land would be used for the production bioethanol.
EU Feedstock production within the EU is spread throughout the region. Cereal production is predominantly located in France, Germany, Spain and Poland. Sugar Beet production is especially strong in Northern France, Germany and Poland (Eurostat, 2008). Table 4.11 gives an overview of the amount of feedstock used per type.
EU Bioethanol Firm Strategy 71 MSc. Thesis - David Borgman Table 4.11: Feedstock use per type in million tons for bioethanol production 2006-2010 2006 2007 e 2008 e 2009 f 2010 f Wheat 1530 1460 2040 2180 3000 Barley & Rye 570 330 590 640 690 Corn 250 230 990 1440 2000 Sugar beet 270 880 2160 2670 3260 Potatoes 300 120 300 350 400
Production in million tons e = expected - f= forecasted Source: USDA, 2008
Wheat was the dominant feedstock used in 2006 and 2007. However sugar beet is expected to be the main feedstock for the year 2008. In addition, corn use will also be on the rise with a forecasted use of 2 billion tons in 2010. According to the European Commission (DG Agriculture and Rural development), approximately 113,8 million hectares of arable land is available within the EU-27. In 2006, approximately 1 million hectares was used for feedstock for the production of bioethanol (EC Agri/Rural, 2007). This represented less than 1% of the arable land. The EU produced approximately 3,4 million m3 of bioethanol in 2006. Assuming this was based fully on EU feedstock this represents 3,4 m3 of bioethanol per hectare. Further assuming that this production rate remains equal for the year 2008, in which a production of 4,52 million m3 is expected, the EU requires approximately 1,33 million hectares to meet the expected production.
Comparison – U.S., Brazil, EU A quick comparison of the production per hectare results in the following table (4.12).
Table 4.12: Average bioethanol production per hectare of cropland used U.S. Brazil EU Bioethanol Production (08) 33.7 mln m3 26.1 mln m3 4.52 mln m3 Amount of Hectares* 9.22 mln 3.9 mln 1.33 mln Average bioethanol prod. per Ha. 3.66 m3 6.69 m3 3.40 m3
* = based on 2006, 2007 data Based on; F.O. Lichts, USDA, UNICA, NCGA and EC data
Table 4.11 is an indicator of the added value feedstock producers supply per hectare of feedstock produced per region. It is important to note that the figures are based on a mix of different production years, ranging from 2006 – 2008. It therefore may not represent actual figures, and should therefore not be regarded as very accurate. However, it does give an indication of the differences per region. Brazilian suppliers clearly give a higher added value per hectare of sugarcane produced in comparison to U.S. and EU feedstock producers. Combined with table 4.8, where the bioethanol yields per hectare were depicted per feedstock, this provides convincing data.
EU Bioethanol Firm Strategy 72 MSc. Thesis - David Borgman It is important to note that, considering the relatively high yield of EU sugar beets (table 4.8), the average bioethanol production per hectare for the EU is expected to increase, as the use of sugar beets is expected to surpass that of wheat in the coming years (table 4.11).
Importance of volume to supplier In a business with relatively low margins per unit, such as agriculture, achieving economies of scale in production is important. Thus the importance of producing in high volumes is likely to be high for the feedstock suppliers. As transportation costs are relatively high for agricultural commodities, the yield per hectare is an important factor as well. Achieving large volume on a small amount of hectares can reduce transportation distances, and thus also costs.
Conclusions – Bargaining Power of Suppliers All in all the bargaining position of feedstock suppliers can be considered strong. The bioethanol producer is dependent on feedstock supply, as it is its most important input required for production. Although the number of suppliers is relatively high, globally and per region, the bioethanol producer can effectively only deal with suppliers in its vicinity, as transportation costs may inhibit sourcing from greater distances. In addition bioethanol producers also need to compete with the food and feed industry, which improves the options for feedstock producers. The bargaining power of suppliers is further enhanced by the relatively high switching costs for switching to the use of different feedstock types for bioethanol producers. There is also a realistic threat of forward integration by farmers. In the U.S. market however, a turning point in forward integration can be observed, which favors non-cooperative firms. Brazilian feedstock supply, sugarcane, has favorable characteristics compared to other feedstock types, such as; lower production costs, higher yields, higher greenhouse gas reductions, and a better energy balance. The Brazilian climate obviously creates favorable growing conditions, which creates a competitive advantage. The EU’s more diverse feedstock base creates a flexibility advantage for EU bioethanol producers, but this is no substitute for the advantages Brazilian producers have with sugarcane use.
4.1.3 Bargaining Power of Buyers
According to Porter (1990) ‘buyers compete with the industry by forcing down prices, bargaining for higher quality or more services, and playing competitors against each other – all at the expense of industry profitability’. Assessing the bargaining power is therefore an important determinant of industry structure. Porter (1990) discusses several factors which determine the bargaining power of buyers. Most of these will be discussed in the following sections. However, before dealing with the structural factors it is important to identify the different buyer groups for bioethanol producers.
EU Bioethanol Firm Strategy 73 MSc. Thesis - David Borgman Different levels of buyers Roughly three buyer groups can be identified which directly or indirectly acquire bioethanol. These groups are: Oil/Fuel and chemical companies, (Commodity) traders, and consumers (vehicle owners). Oil companies blend bioethanol with gasoline and sell this blend through their network of petrol stations. Traders buy bioethanol (and other commodities) with the intent to profit from higher priced sales (to for example oil companies). Consumers buy bioethanol blends from petrol stations for the operation of their vehicles. Oil companies and trade firms can be considered as large volume buyers, while consumers buy in relatively low volumes. This directly affects their bargaining power. The following sections discuss this further.
Buyer concentration and Buyer Volume With three different buyer groups it is difficult to assess buyer concentration on an integrated level. The amount of oil and fuel producing firms is not directly relevant for the assessment of buyer concentration, as most of those firms are (currently) not involved in the blending of bioethanol (Note: most blended bioethanol is in the form of Ethyl Tertiary Butyl Ether (ETBE), not through direct blending (Refuel website). The most important buyers of bioethanol are those firms which blend bioethanol (or ETBE) and gasoline and sell the mixture through their retail outlets (i.e. fuel stations). The fuel retail sector is dominated by a limited number of large scale multinational firms, both in the U.S. and the EU (e.g. Royal Dutch Shell, Chevron, BP, ExxonMobil, Texaco, Total, Esso, etc.). In Brazil, state-owned oil company Petrobras is one of the largest fuel distributors, but multinational firms like Royal Dutch Shell are also active. Where the U.S. and EU retailers mainly sell blends ranging from approximately 2-85% bioethanol, Brazilian fuel station also offer dedicated bioethanol fuel (100%). As the fuel retail market is densely concentrated the bargaining power of buyers is relatively high. There is only a limited range of potential customers for a typical bioethanol producer. In some cases a bioethanol producer sells its entire production to a single fuel distributor (e.g. ENSUS). Such an arrangement makes it fully dependent on a single buyer. But, there are also examples of bioethanol producers which utilize their own retail facilities (e.g. Cropenergies, subsidiary of Südzucker). This puts the bioethanol producer in direct contact with the end-user of bioethanol for transportation purposes, the consumer. Buyer volume for consumers is relatively low, especially with low level blends seen in the U.S. and EU (around 5%). The bargaining power of an individual consumer is also relatively low. Bioethanol use is mandated through blending targets within the EU, similar arrangements and incentive schemes are in place in the U.S., and bioethanol use in Brazil is heavily supported by the government resulting in low bioethanol prices (Ebio, RFA, UNICA). Especially the mandated blending (EU), and low price (Brazil), severely limits the consumer’s options in choosing for anything other than (blended) biofuels. Its bargaining power is compromised.
EU Bioethanol Firm Strategy 74 MSc. Thesis - David Borgman Flex-fuel vehicles can operate on both gasoline, ethanol or any blend of the two (Unica, 2008). Non- flex-fuel cars can only handle bioethanol-gasoline blends up to approximately 5%, due to the corrosive nature of ethanol with conventional engine systems. This limits the level of blending with the current vehicle fleet (Nylund et al, 2008). However, non-flex-fuel vehicles can be converted to the use of bioethanol, which further increases the market potential. In Brazil, flex-fuel car sales have surpassed the sales of regular gasonline vehicles. It is expected that by 2015, 65% of the entire Brazilian light vehicle fleet will consist of flex-fuel cars (Unica, 2008). Brazil’s large flex-fuel vehicle fleet ensures a strong consumer based bioethanol demand. Such figures are not seen in the U.S. and the EU. The total amount of U.S. Flex-Fuel vehicles is likely to reach around 7 million in 2008, which represents approximately 2,4% of the total number of U.S. light-vehicles (USDE, 2008). EU figures are unfortunately not available, but figure 4.11 may serve as an indicator of the current potential for flex-fuel vehicles.
Figure 4.11: E85 Bioethanol fuel station density in Europe (Source: RESTMAC, 2007)
Figure 4.11 provides an overview of the density of E85 fuel stations within the EU. E85, 85% bioethanol and 15% gasoline, is currently the preferred fuel blend for flex-fuel vehicles as it delivers optimal performance (RESTMAC, 2007). Sweden has the highest density of E85 fuel stations, and also has the highest flex-fuel vehicle sales percentage of the EU.Approximately 15% of all new vehicle sales in Sweden were flex-fuel cars in 2006 (RESTMAC, 2007). Although the number of both E85 fuel stations as well as flex-fuel cars is expected to rise throughout Europe, the figures are currently relatively low. In comparison, 90% of all new vehicle sales in Brazil are flex-fuel cars.
EU Bioethanol Firm Strategy 75 MSc. Thesis - David Borgman Switching costs and Substitute products The product which buyers acquire varies per buyer group. Oil companies which blend bioethanol, acquire the product in its most purest form. At this stage bioethanol is in a commodity state, with varying product standards per region (U.S., Brazil, EU). Large volume buyers, such as oil companies, can choose between suppliers. This makes it possible for buyers to acquire the product under favorable conditions, such as a relatively low price, proximity, and so on. The standardized product results in relatively low switching costs. The buyer can switch between suppliers without incurring large costs, such as the use of new facilities or adaptations to the production process. In case the buyer has binding contracts with bioethanol suppliers, it may have to incur switching costs. But for large scale multinational oil companies that may not be a large inhibitor. With large profits, oil companies are perhaps not very price sensitive towards bioethanol purchases. However, there are examples of oil companies who seek to profit from bioethanol production and blending by investing in bioethanol production (e.g. BP, Petrobras). Rather than perceiving bioethanol (or ETBE) blending as a cost factor these firms aim to profit from the market development.
Switching costs for the consumer can occur on several levels. The most significant, in terms of financial costs, occurs when a consumer switches from a conventional powered vehicle to a flex-fuel vehicle (or other type of vehicle). For Brazilian consumers this is in most cases an easy choice, as bioethanol blends and dedicated bioethanol have a lower price than regular gasoline, and are widely available. For most U.S. and EU consumers such a choice is less obvious, as high level blends (e.g. E85) are not universally available. The mandated blending within the EU results in a steady demand for bioethanol, which will not likely alter fuel consumption patterns for most consumers. Currently, the bargaining power of consumers is relatively weak as most light vehicle owners do not have many alternative options within the same price range. (Bio-)Diesel powered vehicles are the most obvious alternative, but other options such as fuel-cell, hydrogen, and electric powered vehicles are still some years away from mass production and economic competitiveness (Nylund et al, 2008).
Buyer information Porter (1990) argues that if the buyer ‘has information about demand, actual market prices, and even supplier costs, this usually yields the buyer greater bargaining leverage than when information is poor’. Information with regard to production and demand levels, and market prices is widely available. Information services such as F.O. Lichts, Ethanol Statistics, industry associations, and various government institutions provide the market with the most important information. Especially large volume buyers, such as oil companies, benefit from this information availability. They can easily compare prices and assess both current and expected market conditions. This further enhances the bargaining position of large volume buyers. Should information be less visible for the general public, large oil companies will generally ensure access through their own business intelligence activities.
EU Bioethanol Firm Strategy 76 MSc. Thesis - David Borgman Consumers also benefit from free information availability, but do not necessarily gain significant bargaining power from it. Although they could relatively easily find pricing information for the entire country, they will mainly focus at the price at the pump in their region as this holds relevance for their situation.
Ability to backward integrate Backward integration by oil companies forms a substantial threat for firms in the industry. Both the U.S. and Brazil are especially keen on reducing their dependence on foreign fossil oil, and the EU has blending mandates in place. Oil companies are slowly but steadily adjusting to declining oil reserves and changing global and domestic policies, which require a transformation of the oil industry (IEA, 2006). Part of the transformation is the exploitation of alternative energy sources, such as bioethanol. This has lead several large multinational oil companies to invest in the bioethanol market. In addition to potentially reducing the costs of mandated blending, bioethanol production also offers growth opportunities for mature firms. Two examples of backward integration are highlighted in the following section. In Brazil, British Petroleum (BP) has recently announced to invest $60 million for a 50% stake in a joint venture with Brazil’s Santelisa Vale (Brazil’s third largest ethanol producer). The joint venture, named Tropical Bioenergia, will build 2 bioethanol facilities with a combined capacity of 1 billion liters. One facility is already under construction. In addition, the joint venture will supply 80% of its required feedstock from leased land, further integrating the operation with feedstock supply (Ethanol Statistics, 2008). This is a clear example of a large scale multinational oil company trying to enter the bioethanol market. Petrobras, the Brazilian state-owned oil company is also active in the Brazilian bioethanol market. It is active in the trade and logistics of bioethanol in Brazil. It has announced to build several pipelines for the transportation of bioethanol. By the end of 2012, these pipelines are expected to be able to transport 4.7 billion liters of bioethanol, from inland sources to key distribution hubs (Zuurbier, 2008). This further reduces bioethanol transportation costs, resulting in favorable marketing conditions. In addition, it is also pursuing bioethanol production in South-East Asia through a joint venture, Brazil- Japan Ethanol. The joint venture is assessing possibilities of bioethanol production in Indonesia and Cambodia (biofuels-news.com, 2007). Backward integration is present and a realistic threat for bioethanol producers. But, it may also offer opportunities for further growth through acquiring capital investment of large oil companies. With relatively limited knowledge of bioethanol production, oil companies are more likely to invest and acquire bioethanol firms than starting up their own facilities without the help of bioethanol producers. The opposite of backward integration can also be observed, underlined by the following example. In Brazil, the sugar and ethanol producer Cosan, has acquired 1500 petrol stations from Exxon Mobil for $826 million. Through this acquisition, Cosan has 9,7% market share in gasohol (gasoline / ethanol blend) distribution in Brazil, making it the fifth largest distributor (Ethanol Statistics, 2008).
EU Bioethanol Firm Strategy 77 MSc. Thesis - David Borgman Considering the relatively large financial resources of large volume oil companies and distributors, the threat of backward integration is most likely larger than that of forward integration by bioethanol producers. The bargaining power of large volume buyers may be considered strong. Backward integration by consumers is highly unlikely and does not pose a threat.
Location of Buyers The level of widespread use of bioethanol for transportation purposes varies per region. This is discussed briefly per market. In the U.S. fuel ethanol is blended in 50% of the total amount of gasoline used, mainly in the form of E10. In the states of California, Minnesota, Missouri, Texas, and along the East-coast from Washington, D.C. to Boston it is blended in the entire gasoline supply (RFA, 2008). In Brazil, bioethanol is used throughout the country, in pure form and gasoline-ethanol blends. In 2007, bioethanol represented 40% of the total light-vehicle fuel sales (Bear Stearns, 2007). At least 33.000 fuel stations in Brazil have a dedicated bioethanol pump (ICONE, 2007). Within the EU, Germany, Sweden, France and Spain are the largest bioethanol consumers. In 2006 these four countries were responsible for approximately 83% of the total EU bioethanol consumption (EurObserv’ER, 2007). Germany, France and Spain are relatively large producers, while Sweden imports large quantities from Brazil to support its production.
Conclusions – Bargaining Power of Buyers The bargaining power of large volume buyers, such as oil companies / fuel distributors can be considered high. Their large scale generally requires the production from multiple bioethanol plants and creates therefore an important dependency of the bioethanol producer with its buyer. In addition, there is a relatively high threat of backward integration, adding further strength to the position of buyers. Abundant information availability, such as price information, favors large volume buyers, futher improving their bargaining position. U.S. and EU consumption levels of E85 fuel is relatively low in comparison to Brazil, as both regions currently rely mainly on low-level blending targets. Low level blending is favorable for the bargaining position of oil companies, as there are only a small number of buyers. High blends (e.g. E85), allows new entrants to enter the fuel distribution market, as bioethanol is the dominant element in the product and is not produced by the oil companies. In general, bioethanol producers should be wary of the strong bargaining position of large volume buyers.
4.1.4 Threat of New Entrants
‘New entrants to an industry bring new capacity, the desire to gain market share, and often substantial resources. Prices can be bid down or incumbents’ costs inflated as a result, reducing profitability’ (Porter, 1990). The threat of entry is therefore an important measure of industry structure and attractiveness. The threat of entry is determined by the presence and relative height of barriers to
EU Bioethanol Firm Strategy 78 MSc. Thesis - David Borgman entry (Porter, 1990). Six barriers to entry are discussed in this paragraph in order to assess the threat of entry by ‘new’ bioethanol producers.
Economies of Scale Economies of scale are achieved in case unit costs of a product declines, ‘as the absolute volume per period increases’ (Porter, 1990). The presence of economies of scale in for example production or distribution of bioethanol can potentially deter entrants to the industry. This may perhaps not apply for the bioethanol industry. As the market has shown strong growth and may be expected to do so for several years to come, potential entrants are attracted to the industry, looking to establish market share despite the presence of economies of scale with the leading firms. Established large scale competitors have taken an early lead in the industry. For an entrant to compete directly on the basis of scale, relatively large investments in the construction or acquisition of multiple plants would be required (likely in the range of several billion’s of Euro’s). Such a large scale entry would be accompanied by very large risks and can be considered unlikely. This especially applies for the U.S. and Brazilian market, where the leading firms have established relatively large scale production capabilities. However, an entry which would directly threaten the leading firms in the industry, in terms of scale, is an option which has been exercised by multiple entrants in recent years. In Europe, where the total number of production facilities and production levels are relatively low compared to the U.S. and Brazil, the presence of economies of scale as a barrier to entry is less of an issue. Large scale entry (relative to current competitors) can be considered more feasible as the scale of the leading firms is still relatively modest. A prime example of such an entry is the UK based firm ENSUS, who are currently construction a single facility which would make it the fourth largest producer in the EU (table 3.4). The mere presence of producers with substantial economies of scale will currently unlikely deter entrants, as the market is expected to grow further in the coming years (see paragraph 3.4). This creates opportunities for the establishment of additional capacity, by both new entrants as well as current competitors. However, there are other barriers to entry which may make entry more difficult.
Capital requirements The capital requirements for entering the bioethanol industry as a producer are not substantial enough to deter entry. Although the construction of a bioethanol plant is in the order of € 50-100 million per 100.000 tons of capacity (Biofuels Corporation, 2008), such a figure is unlikely to deter private-equity firms, oil companies, or other solidly financed firms entering the industry. Private-equity has been behind many of the entrants in recent years, e.g. VeraSun Energy (U.S.), BRENCO (Br) and ENSUS (EU). Capital for production facilities may not be an issue. Feedstock costs on the other hand, might be a more important entry deterrent. The total capital requirement for feedstock acquisition may be relatively low in comparison to the value of the plant, but a high feedstock price may make it infeasible
EU Bioethanol Firm Strategy 79 MSc. Thesis - David Borgman for profitable operations of the plant. This especially applies for the U.S. and EU, where feedstock costs are generally higher than those in Brazil.
Switching costs If the costs for switching for the buyer from a current supplier to a newly entered firm are high, an entry barrier may exist. In a growing market, such as the bioethanol market, buyer switching cost are unlikely to form an issue. Bioethanol has to meet certain (global) standards, ensuring that the product is (almost) identical. An increased consumer demand (and production) requires the initial buyer of bioethanol (e.g. oil company) to acquire more bioethanol from producers. The gasoline-ethanol blender / ethanol distributor is unlikely to rely on a single bioethanol producer for its supply. It will therefore most likely welcome more producers as it may reduce bioethanol prices and it potentially increases supply security for the blender/distributor. With new producers entering the market, the bioethanol buyer is unlikely to incur significant switching costs. In some cases it may even decide to enter the market itself (backward integration), in order to profit from the growing market and secure supply for its mandated blending (e.g. BP with its Brazilian activities). Generally, buyer switching costs do not deter entry in the bioethanol market.
Access to Distribution Channels A barrier to entry may exist if access to (favorable) distribution channels has been secured by competitors in the market, leaving little room for potential entrants to market their product. As bioethanol demand is driven by policy measures, resulting in obligated use and/or low prices (Brazil), bioethanol sales are more or less secured for the producer. With very limited product differentiation (except for differing standards, feedstock used, etc.) bioethanol is, from a buyer perspective, considered a commodity. Price is therefore most likely the main determinant for the level of sales of the bioethanol producer. These factors likely result in open distribution channels, as currently the market consumes the entire supply of bioethanol. In other words, most blenders / fuel distributors deal with multiple bioethanol producers. This trend could continue until bioethanol demand of a particular blender / fuel distributor can be satisfied by a single or very limited amount of bioethanol producers. Considering the notion that fuel distribution in the U.S., Brazil and EU is dominated by a relatively small number of (multinational) firms this would require very large bioethanol producers. And even then, the question remains if either the supplier or the buyer would be willing to be reliant on a single firm for its bioethanol. Vertical integration, backwards or forwards, could make more sense in such a situation. Currently, access to distribution channels is unlikely to be a major inhibitor for a potential entrant, both in the U.S. as well as Brazil and the EU. This status quo will remain as long as (mandated) demand remains strong, and the bargaining power of bioethanol producers is relatively weak in comparison to the limited amount of large scale fuel distributors.
EU Bioethanol Firm Strategy 80 MSc. Thesis - David Borgman Absolute cost advantages ‘Established firms may have cost advantages not replicable by potential entrants no matter what their size and attained economies of scale’ (Porter, 1990). These absolute cost advantages may be the only significant barriers to entry for the bioethanol industry. Several absolute cost advantages are discussed subsequently.
Experience curve As firms gain experience in producing bioethanol their costs may decline over time, as they learn to produce as efficiently as possible. The Brazilian industry is a prime example of such a development. With over 30 years experience in producing bioethanol from sugarcane, Brazil has managed to reach the highest yields and lowest costs of any bioethanol producing nation. Low cost factors, such as land and labor also play a role, but experience is an important factor in lowering costs. Figure 4.12 depicts the development of the Brazilian bioethanol price in 2004 U.S.$ per Gigajoule. As the accumulated production increases, the bioethanol price goes down, while regular gasoline prices have gone up, surpassing Brazilian bioethanol prices.
Figure 4.12: Price development Brazilian bioethanol and regular gasoline in U.S.$ per GJ (2004 prices) (Source: UNICA, 2008)
Such a price development is indicative of the effect of experience through several decades of bioethanol production. Generally, the U.S. and the EU do not have a such track record in large scale production of bioethanol. This is perhaps part of the explanation of why the production costs of U.S. and EU producers is generally higher. So far, in a growing industry, the relative experience of producers has not deterred entrants from engaging in bioethanol production. The production technology is continually improved allowing for both plant improvements as well as the construction of new facilities. A new entrant, capable of constructing a state of the art plant, could potentially outperform competitors with older, more established facilities. The initial lack of experience may lead to short term underperformance, but a newer facility may offer a larger potential in terms of capacity, efficiency, costs, and so on, from which the entrant may profit after it has gained sufficient experience.
EU Bioethanol Firm Strategy 81 MSc. Thesis - David Borgman Favorable access to raw materials One of the most prominent barriers to entry is the favorable access to feedstock current competitors in the market have. Large cooperatives have secured feedstock supply and prevent competition from using these resources. Other producers may have (long term) supply contracts in place, which further limits the favorable access to raw materials for a new entrant. As the market grows, more feedstock is required. This new supply must either come from current feedstock bases, which would displace supply for other purposes (e.g. food and feed) to bioethanol production, or from new sources (e.g. ‘new’ agricultural land, cellulosic sources, etc.). The first option could potentially increase feedstock prices, which is both unfavorable for current competitors as well new entrants, and of course food and feed production. New sources on the other hand could offer new entrants a (favorable) access to raw materials. Brazil, for example, is increasing its sugarcane production by using additional land, currently unused or used for other purposes (e.g. pastures) (UNICA, 2008). The question remains however, if this new agricultural land is capable of reaching equally high yields as with current lands, and if the infrastructure is favorable for successful exploitation. One may assume that the most favorable access to raw materials is mostly in the hands of established competitors. A new entrant may have difficulty in accessing favorable sources, unless it is able to introduce new types of feedstock such as dedicated energy crops (e.g. switchgrass, miscanthus) or other advanced sources (e.g. wood (waste)).
Favorable locations Directly related to the favorable access to feedstock, the location of bioethanol production may also deter entrants. Figures 4.6, 4.7 and 4.8 depict the locations of bioethanol producers in the U.S., Brazil and the EU. Especially the U.S. and Brazil show strong concentrations of producers in the direct vicinity of (favorable) supply and distribution (e.g. ports, railways, pipelines). As the market grows it will become increasingly more difficult, for a new entrant, to find a favorable location. In Europe, where the concentration of producers in a particular location is lower, this (currently) may be less of an issue.
Proprietary product technology Although the process of fermentation of sugar crops for the production of bioethanol is in the public domain, proprietary product technology does have an influence on the entry possibilities of new firms. The use of specialized enzymes, which break down plant sugars, is often patented (IATP, 2007). Virtually all large scale bioethanol producers work closely together with enzyme producers in order to develop patented enzymes (IATP, 2007). Patents are licensed out to other firms, which may offer potential entrants with opportunities to make use of state of the art enzyme technology. Technology for the production of advanced bioethanol is still in development. According the (U.S.) Institute for Agriculture and Trade Policy (2007) patenting of advanced biofuel technologies will have an important influence on the development of a global biofuels market. Firms investing in, and patenting, these upcoming technologies may gain an important strategic asset which can prevent other firms from producing advanced biofuels (efficiently). Acquiring a license for a particular
EU Bioethanol Firm Strategy 82 MSc. Thesis - David Borgman technology, or developing a technology of their own, may prove to be costly for potential entrants. This could deter entry if the firm is not willing to invest in production technology.
Government policy Government support for the bioethanol industry is present in all three discussed regions. Subsidies, mandated use, tax exemptions, import and export tariffs, are just a few examples of measures that have been implemented. There are no direct measures which prevent entry into the market. Sustainability criteria are being developed in all three regions. Such a measure will prevent environmentally unsustainable production, and would therefore also prevent entry of an unsustainable producer. But supporting measures, such as subsidies, welcomes entrants to the market. Especially firms that are willing to invest in advanced biofuels are being supported (IATP, 2007). In the U.S. a cap has been placed on corn-based bioethanol production from 2012 onwards. A maximum of about 56 million m3 of bioethanol may be based on corn by that time (RFA, 2008). This could prevent potential entrants from entering the market in the short term, as a maximum size has been set. Instead new U.S. entrants would perhaps be better of in focusing on advanced biofuel production as this is strongly promoted, especially beyond 2012. A more elaborate discussion of policy measures in the U.S., Brazil and the EU is provided in section 4.2.
Conclusion - Threat of entry Considering the limited presence of entry barriers in the bioethanol industry, the threat of entry is relatively high. Current producers should be wary of strong financially backed entrants, such as oil companies and private-equity firms entering the industry. In addition, the commercialization of advanced biofuels should be followed closely, as patenting of advanced technologies could make-or- break the competitive advantage of a producer in the near future. Firms who miss out on this development could suffer competitively as soon as this technology is introduced on a large scale. New entrants, which introduce a new successful production technology, could become the frontrunners of the industry. The experience incumbent firms have gained, from which they derive an advantage, could become irrelevant as soon as a new and more efficient technology (or feedstock) is introduced. In the short term, incumbent firms should continue to secure favorable resources and locations in order to raise the limited entry barriers currently present. The growth phase of the bioethanol industry is an important determinant of the relative lack of major entry barriers. The perspective of growth attracts firms to the industry. As soon as the industry becomes more established / mature, dominant (vertically integrated) competitors will likely be present and entry barriers will be substantially higher than they are in the present market situation.
EU Bioethanol Firm Strategy 83 MSc. Thesis - David Borgman 4.1.5 Threat of Substitutes
‘All firms in an industry are competing, in a broad sense, with industries producing substitute products’ (Porter, 1990). Bioethanol also competes with the use of alternative product options. These substitute products, which have a similar end-use, limit the price and profitability of bioethanol depending on their price performance and availability. For the purpose of this discussion, advanced forms of bioethanol are included as bioethanol. They are not regarded as substitutes because the bioethanol industry is working on this solution, which is mostly not the case for the substitutes listed below. In discussing these substitutes, the focus is on alternative transportation fuels. Several alternative fuel options for the transportation fuel market can be identified: Regular gasoline Diesel Biodiesel (multiple variations) Natural gas Biogas Electricity Hydrogen Each of these options is discussed briefly in the following sections.
Regular gasoline If present trends continue, the use of fossil oil based gasoline is expected to continue for several decades (up to 2050). Its use would increase, despite improvements in fuel efficiency, due to an increase in the number of vehicles (from emerging economies) and the average distance travelled per vehicle (WBCSD, 2004). Governments globally are responding to this trend by stimulating the use of alternative fuels, such as bioethanol, in order to substitute (part of) the use of fossil based transportation fuels. From this perspective, bioethanol is a substitute for gasoline, rather than vice versa. However, even though the odds are shifting (high oil prices, depleting resources, government biofuel support), fossil-oil based transportation fuels remain the dominant fuel used.
Diesel Diesel-fuel is not a direct substitute, as it requires a different type of internal combustion engine. However, diesel-fuel is used for the propulsion of a vehicle, a similar use to bioethanol. In this respect it can be considered a substitute. If present trends continue, the use of fossil-oil based diesel is expected to rise up to 2050 (WBCSD, 2004). However, as noted in the previous section on gasoline, governments are trying to reverse this trend with various measures. At least in the short-term diesel- fuel use in transportation remains an important fuel option.
EU Bioethanol Firm Strategy 84 MSc. Thesis - David Borgman Biodiesel Biodiesel is a renewable fuel, produced mainly from vegetable oils and fats. There are various types of biodiesel, e.g. Straight vegetable oil (SVO), Vegetable oil esters (VOE), Hydrotreated vegetable oils and fats (HVO), and Biomass-to-Liquids (e.g. from biowaste) (Nylund et al, 2008). Biodiesel use and production is especially strong in the EU where it is blended with fossil-oil based diesel. Within the EU, biodiesel production (approx. 5 mln m3 in 2006) is even larger than bioethanol production (3,6 mln m3) in terms of volume (WBCSD, 2007 & F.O. Licht, 2008). Germany, France and The United States are currently the largest producing nations (F.O. Licht, 2008). On a global level however, biodiesel production is substantially lower than bioethanol production, approximately 6,5 mln m3 vs. 77 mln m3 respectively (WBCSD, 2007 & F.O. Licht, 2008). As a substitute product, biodiesel is mainly dominant within the EU. Globally, biodiesel is a distant second to bioethanol.
Natural gas, Biogas and Liquid Petroleum Gas (LPG)
Natural gas is one of the cleanest fossil fuel-based transportation fuels. Its CO2 (an important greenhouse gas) are approximately 25% lower than fossil-oil based gasoline and diesel (Nylund et al, 2007). This makes the use in vehicles favorable compared to gasoline and diesel. Natural gas is predominantly used for (large scale) power generation and for residential purposes (cooking, heating). Within the EU, the use of natural gas for transportation is expected to increase due to a preliminary target of 10% usage in road transport by 2020 (Nylund et al, 2008). Gas can also be derived from biomass resources, resulting in the production of biogas. From an end-use perspective, biogas has similar properties compared to natural gas. Biogas can therefore substitute natural gas in vehicle use. Biogas use in vehicles is very limited in the current vehicle-fuels market. Within the EU, Germany has introduced biogas fuel stations, and Austria also has introduced a plan for 200 biogas/natural gas fuel stations (Nylund et al, 2008). Generally, biogas is not considered as a major substitute of fossil fuels or bioethanol and biodiesel. LPG can be derived from natural gas and crude oil, through the extraction of gas liquids from these sources. Approximately 60% of the LPG originates from natural gas, an additional 40% is derived from crude oil (Worldlpgas, 2008). LPG represented 1% of the total amount of transportation fuels used in 2004 (Nylund et al, 2008). Both natural- / biogas as well as LPG are not direct substitutes of bioethanol as they are used in different engine systems. Natural gas and biogas are part of various alternative fuels, which are aimed at gasoline and diesel substitution. It therefore competes indirectly with the use bioethanol. The storage and engine conversion makes natural gas and LPG use in light- vehicles more complex than low-level bioethanol or biodiesel blending, from a consumer perspective.
Electricity An entirely different form of energy, electricity, is also used for the propulsion of vehicles. Electricity is gradually being introduced through various types of engines and systems (Nylund et al, 2008). Hybrid- vehicles are the predominant application of electricity as a transportation fuel. Hybrid-electric vehicles
EU Bioethanol Firm Strategy 85 MSc. Thesis - David Borgman combine an internal combustion engine with an electric motor. The electric motor converts energy from the internal combustion engine and (in some cases) the vehicle’s brakes into electricity which is stored in a battery pack. The electricity of the batteries is used to power the vehicle at low speeds (e.g. urban environments) (Nylund et al, 2008). There are various forms of hybrid technologies. While most depend on the internal combustion engine to generate power, plug-in hybrid vehicles are being developed which can receive their electricity from external sources (e.g. electricity-socket at consumer’s home) (Nylund et al, 2008). This has the potential to substitute conventional fuels at a higher rate than ‘conventional’ hybrid vehicles. In addition to the application of electricity in hybrid vehicles, electric vehicles have been around for decades, but have not been a commercial success so far. The main inhibitors for success are; insufficient performance, range and relatively high prices (Nylund et al, 2008). However, electricity usage in transportation does have a great potential for green house gas and pollution reduction in the long term. Especially if the electricity is generated through renewable sources (e.g. solar, wind, etc.). The short term viability is however low, this will be discussed further in paragraph 3.4.
Hydrogen Hydrogen is seen as one of the energy carriers of the future by some researchers. It is the most abundant element in the world, and it can be processed from various sources. Should hydrogen be generated through the use of renewable sources, it has the potential to create a carbon neutral energy regime (Nylund et al, 2008). Currently, hydrogen is mainly generated through the use of fossil sources (e.g. natural gas, oil and coal). According to Nylund et al (2008), generation through renewable processes (e.g. biological, electrolytic, photolytic, etc.) are in development, but are currently not ‘economically feasible or sustainable’. Hydrogen can not be applied with conventional internal combustion technologies. New engine systems, such as fuel cell technology, are required. Fuel cells can convert hydrogen into electricity, which propels the vehicle. The availability of hydrogen powered (fuel cell) vehicles is very limited, with numbers ranging in the several hundreds. The technology is still in development, and large scale commercialization is still several years away (Nylund et al, 2008). The future prospects will be discussed further in paragraph 3.4.
EU Bioethanol Firm Strategy 86 MSc. Thesis - David Borgman Relative price performance of substitutes To further assess the threat of substitute products, the relative price performance is taken into account. Fossil fuel sources (e.g. oil, natural gas) have generally outperformed alternative sources for many decades, due to their relatively low cost. However, in recent years the price of oil has risen substantially to levels at which alternative sources (e.g. bioethanol, biodiesel) have become more competitive and economically viable. With mandated blending within the EU, petroleum based gasoline and diesel are being substituted, largely independent of price. In Brazil, where bioethanol fuel is also strongly supported by the government, bioethanol prices are lower than gasonline and diesel prices (Unica, 2008). Figure 4.13 depicts the U.S. per gasoline equivalent gallon prices in U.S.$ for gasoline, natural gas, propane and E85 (bioethanol).
Figure 4.13: Comparison price per gasoline equivalent gallon in U.S.$ (Sept. 2005 – Jul. 2008) for gasoline, natural gas, propane, ethanol (E85) in the United States (Source: USDE, 2008)
Natural gas has relatively the lowest price in comparison to ethanol, propane and gasoline. The bioethanol price, represented through E85 (85% bioethanol, 15% gasoline) follows the regular gasoline price closely, but has remained lower since September 2005. In Brazil this price is likely to be even lower (in comparison to gasoline), as dedicated bioethanol (E100) is strongly subsidized by the government (UNICA, 2008). On the diesel front (figure 4.14), regular diesel prices marginally outperforms pure biodiesel (B99/B100). All biodiesel variants, follow the regular diesel price trend very closely. Natural gas outperforms all diesel variants by a substantial margin.
EU Bioethanol Firm Strategy 87 MSc. Thesis - David Borgman Figure 4.14: Comparison price per diesel equivalent gallon in U.S.$ (Sept. 2005 – Jul. 2008) for diesel, natural gas, biodiesel
(B2, B5, B20, B99, B100) in the United States (Source: USDE, 2008)
Prices may differ between the EU, Brazil, and the U.S. prices (figure 4.13, 4.14). Generally, one may assume that with relatively high fossil oil prices (around U.S.$100 per barrel) the price competitiveness of bioethanol and biodiesel is relatively strong. With supportive measures in place, such as subsidies, this position is secured. Prices for currently less commercially viable alternatives, electricity and hydrogen, are not depicted. Although the per gallon gasoline equivalent of electricity may be price competitive (e.g. generation of electricity may be cheaper than gasoline / diesel in relative terms), the production of efficient engine systems and energy-infrastructure is currently a major (price) inhibitor. Costs of hydrogen production are approximately €50 per GJ. In comparison, prices for current generation biofuels range between €10-20 per GJ (Nylund et al, 2008).
Switching costs The major advantage of low level biofuel (bioethanol and biodiesel) blends, in comparison to gaseous fuels, hydrogen and electricity, is their compatibility with conventional internal combustion engine (ICE) systems and the petroleum energy infrastructure. Natural gas, hydrogen and electricity, all require adaptations to current systems or entirely new engine systems. This makes the switch for the consumer and the fuel distributing industry relatively costly. Higher percentages of bioethanol / biodiesel (e.g. E85, B100) also results in relatively high switching costs for the consumer, as it requires Flex-Fuel-vehicles. Especially in the EU and U.S., a paradox inhibits the development of higher
EU Bioethanol Firm Strategy 88 MSc. Thesis - David Borgman bioethanol blends and flex-fuel-vehicle use. Apart from Sweden, the concentration of E85 fuel stations (fig. 4.9) within the EU remains low as there are relatively low numbers of flex-fuel-vehicles. The use of flex-fuel-vehicle remains equally low as there are low number of E85 fuel stations. This holds the market locked in place. Such a paradox is also in place for hydrogen and electric powered vehicles, as both the number of vehicles as well as the infrastructure to supply them is insignificant. Switching, therefore involves more than just financial costs. ‘Costs’ are also incurred through a lack of mobility due to an under developed energy infrastructure and a lack of flex-fuel / hydrogen / electric vehicles. As long as availability inhibits mobility mainstream consumers are unlikely to switch from conventional fueled cars to alternatives.
Conclusions – Threat of substitutes The threat of substitute products, inhibiting bioethanol market development, is relatively low in the short term. In all three regions, bioethanol (and biodiesel) use is supported through various measures with the aim to replace major fossil substitutes – gasoline and diesel. As long as these measures remain in place (which are subject to change – paragraphs 4.2, 4.3), fossil alternatives pose a relatively low threat. Natural gas is considered to be the cleanest fossil fuel for use in internal combustion engines. Its price competitiveness is high in comparison to bioethanol and biodiesel, but the requirement of adaptations of conventional gasoline systems forms an inhibitor for consumers. In the long term (several decades) electricity and hydrogen may pose a relatively large threat for the use of bioethanol as transportation fuel. The potentially favorable environmental characteristics (zero GHG emissions), could make it the fuels of the future.
EU Bioethanol Firm Strategy 89 MSc. Thesis - David Borgman 4.1.6 Conclusions Five Forces Model – Bioethanol industry
This paragraph will briefly recap the most important conclusions of each of the Five Forces. The industry attractiveness, discussed through the force industry competitors, varies per industry. From an global perspective, the attractiveness of the Brazilian industry can be considered high due to low production costs, but it has the highest number of domestic competitors, making it less attractive. The U.S industry scores average on most fronts, but has managed to become the largest global player which may indicate increased domestic competition. The EU industry is lagging on several fronts, most importantly high production costs. The high concentration ratio may indicate that there is still ample room for competition, provided it can improve its cost base. The bargaining power of suppliers can be considered strong. Feedstock costs are the dominant cost factor in the production process, and the bioethanol producer is fully dependent for producing ethanol. In addition, the producer has to compete with other industries (e.g. food and feed) and faces high switching costs. Brazilian sugarcane, is the feedstock of choice in terms of costs, energy balance and Greenhouse gas savings. The bargaining power of buyers can also be considered to be high. Large volume buyers such as oil companies are the dominant player on the demand side. Their large scale and demand result in a powerful position as the number of buyers is low, and the volume per buyer is high. The threat of entry is relatively high, considering the limited presence of entry barriers. Especially the threat of new technology, such as cellulosic ethanol, can result in a disruption of the competitive environment in the future. Being among the firms which harness advanced technologies can become a crucial factor. In the short term, the prospects for growth will continue to attract firms to the industry. The threat of substitutes is relatively low in the short term. As long as mandated blending and market support measures remain in place there will be a market for bioethanol production. An increasing oil price will aid this development. In the long term developments such electrification of transport and fuel cell technology may pose a serious threat for the industry.
Considering the combined impact of the five forces, one may conclude that bioethanol producers are in a tough and dynamic competitive environment. Threat of entry, the bargaining power of suppliers and buyers are all relatively high, putting the bioethanol producer in a tough position. Such a power balance may result in vertical integration, indicating that feedstock production, bioethanol production and blending could become integrated in a single firm. However, such a development is difficult to predict. Especially the EU and, to a lesser extent, U.S. industries are faced with various competitive disadvantages in comparison to the Brazilian industry. Low production costs are an important factor for success in the industry, a factor in which the Brazilian industry excels.
EU Bioethanol Firm Strategy 90 MSc. Thesis - David Borgman 4.2 Societal environmental influences
Several societal environmental factors have an influence on the structure of the bioethanol market. In this third paragraph relevant influences are discussed on the basis of PEST factors (Wheelen and Hunger, 2005). For each PEST factor an introductory comparison table provides an overview of factors, based on those put forward by Wheelen et al (2005) (Appendix IV). Each table is followed by a brief discussion of general (global) factors and highlights of the most important factors in the table per country.
4.2.1 Political-Legal factors
In discussing political and legal factors which influence the bioethanol industry, the focus will predominantly lay on factors with regard to energy (renewable / biofuels), trade, cooperation and (foreign) investment, due to the scope of this research.
Table 4.13: Political-Legal factors affecting the bioethanol market United States Brazil European Union Government - Energy independence and - Strong renewable energy - Fuel Qaulity Directive II (2003) security act 2007 orientation (hydro-electric / - Biofuels Directive (2003) (Renewable) Energy - Energy policy act 2005 biofuels) - Pending: Renewable Energy Policy - National Agro-energy plan Directive (2008?) (2005) - Bioethanol development program since 1975 Special incentives - Mandatory Renewable - Mandatory blending of - Mandatory blending of biofuels Fuels Standard (RFS) in biofuels (20-25%) (5,75% - 2010, 10% - 2020) various states - Some subsidies for ethanol - Tax reductions and - Subsidies for renewable production exemptions for biofuel use (not energy initiatives - Tax credits for ethanol all EU members) - Various tax credits for consumption - Subsidies (production) bioethanol production / use Tax laws Tax allocation to renewable - Lower tax rate for ethanol - Tax allocation to renewable energy research & powered vehicles energy research & development development - Tax allocation to to - Tax reductions and renewable energy research & exemptions for biofuel use (not development (Empraba) all EU members) Environmental Support for RFS, provided - Land use allocation - EC Environmental law that measures do not cause (protection of vulnerable - Various national environmental protection laws major environmental or areas) policies economic damage - Protection of vulnerable - Environmental criteria in areas (e.g. Amazon Biofuels directive and rainforest) Renewable Energy Directive - Recognition of Kyoto - Recognition of Kyoto protocol Protocol Antitrust regulations Several anti-trust acts in - Competition and Antitrust European Commission for effect, preventing authority (CADE) Competition, legal entity dealing uncompetitive behaviour (e.g. - Vertical integration with antitrust and
EU Bioethanol Firm Strategy 91 MSc. Thesis - David Borgman price fixing, cartel forming) sugar/ethanol industry (un)competitive matters discouraged, stimulation of bargaining power of suppliers Foreign trade - OECD member - Bioethanol import duty of - Various bioethanol import - Various Free trade 20% (ad valorem) duties per m3 and % regulations agreements - Bioethanol export - Focus on EU energy - Relatively low import tariffs stimulated, as long as independence – closed market, (2,5%), but secondary tariff domestic consumption is but differences per country (e.g. (tax credit) of 14,27 cents p/l secured by domestic supply UK, NL, Sweden very open) Attitudes toward Domestic biofuels industry - Bioethanol industry open to - Domestic biofuels industry protected through tariffs, and foreign domestic investment protected through tariffs, tax foreign companies / subsidies (tax credits). Strong (FDI), national agro-energy measurers, subsidies. Protectionist push for domestic energy plan suggests FDI for - Focus on domestic energy sentiment security development of technology security and economic and infrastructure development Stability of - Long term focus on energy - Long history with renewable - Renewable energy directive security and development of energy supporting policies subject to debate, perhaps government renewable sources. - Sugar / bioethanol industry lower blending percentages for (policies) - Economic crisis (2008 credit important asset, further biofuels (2010, 2020) crunch) affects market development likely, policy - Underlying motivations stable: development environment stable GHG reductions, energy security, etc. Sources: OECD (2007), Ebio (2008), UNICA (2008), RFA (2008), ACE (2007), Empraba (2006), European Commission website
General factors Various factors in the (global) political environment affect, directly or indirectly, the bioethanol industry. Three of these factors are discussed briefly: Global integration – Globalization Transition from Uni-polarity to Multi-polarity War on terror Globalization, the increased interdependence and connectivity of global markets and businesses, has an impact on the bioethanol market. National bioethanol markets throughout the world are subject to increased global competition. The U.S. and EU markets are prime examples of this development, as these two regions are directly affected by efficient and low cost Brazilian production of bioethanol. A typical competitor needs therefore to look beyond its own national borders. A transition from a uni- polar world (‘governed’ by the U.S.) to a multi-polar world, in which multiple nations affect the balance of power, is beginning to emerge (German Development Institute, 2006). The emerging nations, China and India, will increasingly have a more powerful role in the global power balance. This development directly effects global policies, increases competition for resources (including biofuels and related raw materials) and results in a less dominant role of the United States in the global scene. The third and final global factor, the war on terror, is an important determinant of political stability and energy independence. Initiated by the United States following the attacks of September 11th 2001, the war on terror has affected oil prices and reduced the energy security of energy dependent nations. Especially in the United States this has resulted in policies with the aim to reduce foreign oil
EU Bioethanol Firm Strategy 92 MSc. Thesis - David Borgman dependence from instable regimes. In addition, it has lead to multiple legislative acts aimed at increasing domestic security in countries world wide, which may affect the privacy and the sense of security of private citizens (Atos Origin LookOut+, 2008).
United States This section briefly discusses the U.S. biofuels policy and highlights elements of table 4.12. In 2005, the U.S. government implemented the Energy Policy Act, which included the Renewable Fuels Standard (RFS). The Renewables Fuel Standard was the first legislative act which mandated the use/blending of biofuels (mainly bioethanol). In 2007, the RFS was further expanded with the Energy Independence and Security Act, which increased the mandated levels of biofuels up to the year 2022 (RFA, 2008). This aggressive renewable energy policy aims to improve domestic energy security and independence. It could be considered an exponent of the ‘war on terror’, in order to reduce imports from instable nations/regions. The following table (4.14) provides an overview of the mandated biofuel levels.
Table 4.14: Overview of mandated biofuels levels in billion gallons – Renewable Fuels Standard
Source: RFA (2008) The U.S. path towards 2022 involves a strong focus on advanced biofuels (especially cellulosic biofuel). By 2022 the majority of biofuels should be based on cellulosic sources, by 2015 a cap of 15 bln gallons has been placed on the production of corn-based ethanol. This level is more than double the 2007 U.S. ethanol production, but it is important barrier for investment in corn-based production plants. With over 70 plants currently under construction, it is uncertain if there is much, if any, room left for construction of new plants (beyond the 70 currently under construction). This will further support the development of advanced bioethanol. The focus towards advanced sources is supported by tax credits and subsidies ($500 mln per year, 2008-2015) (Energy Independence and Security Act, 2007). The focus on energy independence and domestic security has spurred biofuel development in the U.S.. To support its internal market development, the U.S. has several import barriers to prevent the
EU Bioethanol Firm Strategy 93 MSc. Thesis - David Borgman flooding of its market by low cost ethanol from Brazil. This protectionist sentiment is criticized by low- cost producers (especially Brazil), who claim that global bioethanol market development is impeded. On a more macro-political level, the recent credit-crunch and housing market crisis has created highly uncertain market conditions on a global scale. Investments and credit availability is uncertain, and this may have an impact on the bioethanol market development in the United States (Reuters, 2008).
Brazil The political-legal environment in Brazil has focused on the development of domestically produced energy over the last 30 years (e.g. Proalcool program, National agro-energy program). Brazil has become a fully energy independent country, with a (almost) self-sustaining bioethanol industry. With ever increasing oil prices the cost-competitiveness of the bioethanol industry becomes more favorable. The bioethanol industry is in many ways a success-story, but the political-legislative environment for innovation and market development is considered to be weak (Brazil Institute, 2008). The high tax rates and relatively weak patent protection system are unfavorable for investment in new technologies. In addition, the high tax rates may deter foreign investors. Other than the 20-25% blending mandate, Brazil has no specific volume mandates for the coming years. However, with tax incentives in place for bioethanol use and production, the market continues to develop rapidly. Brazil focuses on maintaining its energy independence, whilst increasing bioethanol exports and improving the sustainable use of energy. Brazil welcomes foreign investment for further development of the economy and the agricultural / energy sectors specifically (Empraba, 2006).
European Union EU policy has been the main driver for the development of the biofuels market within Europe. Several policies have set consumption targets over the past 5 years, most notably; the Biofuels Directive (2003). These policies mandate the blending of 5,75% biofuels by 2010, and 10% by 2020, in each of the EU member countries (both bioethanol and biodiesel). However, a more comprehensive policy is currently being discussed in several EU committees – the Renewable Energy Directive. This policy is a directive aimed at the utilization of all forms of renewable energy, including biofuels. Due to sustainability concerns (e.g. limited GHG reductions), the food vs. fuel debate and other issues, the European Parliament has agreed to adjust the biofuel targets. Several EU committees (Environment, Industry) have proposed to downwardly adjust the blending targets from 10% in 2020 to 8%- 6% in 2020. From a legal perspective the 10% target would still be maintained, but 40% of the target should be provided by electric-based renewables (Kanter (2008), ICTSD (2008)). The proposal is still being discussed. EU policy is also aimed at domestic market protection through the use of import duties. However this may also be up for discussion, as ‘more sustainable produced’ bioethanol from Brazil could be more favorable for meeting the sustainability criteria for the production of biofuels proposed in the Renewable Energy Directive (ICTSD, 2008). All in all, the political-legal environment in the EU has been the most important driver for the development of the biofuels market so far. However, the European biofuel producer has to cope with an uncertain policy environment as blending targets may be reduced and biofuel imports could pose a greater threat in the near future.
EU Bioethanol Firm Strategy 94 MSc. Thesis - David Borgman 4.2.2 Economic factors
Table 4.15: Economic factors affecting the bioethanol market United States Brazil European Union Economic development - 2,5% average yearly GDP growth 2000-2007 - approx. 3% average yearly GDP growth 2000-2007 - approx. 2,35% average yearly GDP growth 2000-2007 - 2008 minimized growth expected due to credit - 2008: 4,75% real GDP growth expected - 2008: minimized growth expected in EU-27 area (GDP growth) crunch, housing market collapse - Sugar/bioethanol industry important contributor to (regional differences): < 2% economic development - 2007: Agriculture rep. 5,5% of GDP, industry - 28,7% Per capita income 2007: U.S.$ 26.804 per capita, amongst highest - 2007: U.S.$ 7.605 per capita - 2007 – EU-27: at approx. 64% of U.S. GDP (= $17.154) globally - 2005: 31% of population below poverty line - Strong regional differences ranging from approx. 25% - 178% of U.S. GDP in 2007 (Bulgaria, Luxembourg) Inflation level 2,77% average yearly inflation 2000-2007 - 7,33% average yearly inflation 2000-2007 - 2,11% average yearly inflation 2000-2007 for EU - approx. 4,8% projected for 2008 - New Eastern-European members show generally higher inflation >5% - Higher inflation expected for 2008, in range of 3,5-4% - Economic / Monetary policy of EU aimed at minimizing inflation Currency convertibility - U.S. $ most widely used currency globally (e.g. oil - Brazilian Real can be converted freely into U.S.$ and - Euro is currently used by 15 of 27 EU member states price and other commodities) Euro €, no major inhibitors (e.g. lack of hard foreign - Considered to be strong and easy to convert currency - U.S. $ has lost substantial value compared to currency of Brazilian gov.) - U.S.$ depreciation / € Euro appreciation unfavourable Euro and other currencies in recent years - Exchange rates approx: for export position of EU, but favourable for imports - Economic crisis in U.S., may result in further 1 U.S.$ = 1,41 Real devaluation of U.S. $ 1 EU€ = 2,23 Real Unemployment levels - Approximately 5 - 6% between 2006-2008 - 2000-2007 average: 9,2% - 2000-2007 average: 8,5% in EU-27, 2007: 7,1% - Employment in agricultural and related sectors on 2007: 8,7% unemployment - National differences ranging from 3,2% - 11,1% the rise (compared to 2007) - Approx. 20% of labor force active in agriculture (Netherlands, Slovakia) Wage levels in industry - U.S. wage levels amongst highest globally On average 3,5 – 5,3 x Minimum wage (farmers and - EU wage levels differ generally between West (high) - Ethanol industry added $ 16.5 billion to GDP in workers sugarcane / bioethanol industry) and East (lower), Western EU wage levels are amongst 2007 highest globally
EU Bioethanol Firm Strategy 95 MSc. Thesis - David Borgman Energy (in)dependence - High dependence on foreign energy supply - Net oil exporter, self-sufficient due to (off-shore) oil - EU-27 for 54% dependent on foreign energy in 2006, (especially oil) reserves (2006) high dependence on foreign oil, coal and gas supply (e.g. - Approx. 60% of crude oil is imported (2006) - Ethanol production and use further enhances self- from Russia and Middle East) - 2007 ethanol production ‘replaces’ approx. 5% of sufficiency, ethanol represents approx. 25% of - National differences: e.g. Denmark net energy exporter, total crude oil imports transportation fuel use Malta and Cyprus for 100% dependent - Energy policy aimed at improving independence - Hydro-power approx. 15% share in total energy - (Renewable) Energy policy also aimed at improving consumption, important for electricity production energy independence Energy price level High (and increasing) oil prices result in relatively Relative high energy independence and high use of - High (and increasing) oil prices result in relatively high high energy prices, affecting all sectors of economy renewable sources result in relatively low energy prices energy prices, affecting all sectors of economy (including (including food prices) compared to U.S. and EU, further support by government food prices) policies - Average price for Gasoline and Diesel has nearly doubled from 1991-2006 (at constant 1995 prices) Regulations on foreign - Foreign Investment and National Security act Encourages foreign investment, as long as it leads to EU lacks a fully united foreign policy, therefore national 2007 sustainable economic growth differences with respect to foreign ownership of assets ownership of assets - Foreign investment is encouraged, as long as it exist – generally EU economies are open to foreign does not affect national security ownership Investment Climate - Recent developments (credit crunch / housing - Strong growth prospects (emerging economy), relative - Especially Western European states affected by global crisis) have deteriorated the attractive investment high energy independence, favourable for investment economic downturn (U.S. credit crunch), affects climate climate investment climate negatively - Foreign firms may capitalize on relatively weak - Tax system, high tax rates, inflation, low capital - Eastern European states (‘New’ EU members) have U.S economy, by investment availability, major inhibitors for business development large potential for economic growth Membership in - Multiple bilateral trade agreements (approx. 17) - Mercosur (multilateral free trade agreement in South- - EU is in essence an economic/trade association, free - Several regional (free) trade agreements (6) America) trade and movement between member countries (regional) economic - Membership in World Trade Organization (WTO) - Multiple bilateral (free) trade agreements (e.g. Mexico), - Membership in WTO and trade associations - OECD membership and Multiple bilateral investment treaties - Predominantly Western states member of OECD - No free trade agreements with Brazil or EU - Member of WTO - Trade agreements with Latin-America (Mercosur, - No free trade agreements with Brazil or EU including Brazil), and Caribbean - Multiple bilateral trade agreements, largest with U.S. – focused at further economic integration Sources: U.S. Census bureau, U.S. Bureau of Labor Statistics, U.S Treasury Department, U.S Department of Commerce, LECG (2007), Energy Information Administration (2008) Brazilian Embassy to the UK (website), CIA World Factbook, World Bank (Investment climate report), IMF, SICE (Foreign Trade Information System), Eurostat (online statistics database), EU commissions: Trade, Energy, Economic and Monetary Affairs, RFA (2008), Unica (2008), Ebio (2008)
EU Bioethanol Firm Strategy 96 MSc. Thesis - David Borgman Table 4.15 provides an overview of various economic factors which may influence the bioethanol industry. After briefly describing various general factors, a more in depth look per country is provided on the basis of table 4.15.
General Several major economic factors contribute to a volatile and uncertain economic environment for bioethanol producers worldwide. The recent credit crunch and housing market crisis in the United States may have initiated a global economic downturn (Atos Origin LookOut+, 2008). The potential long-term consequences of this economic crisis are unclear at this time. It is, however, likely to effect all sectors of the economy, including the biofuels industry, as firms will have increasingly more difficulty in obtaining credit for their day-to-day operations. It is not unlikely that drastic measures will be taken to alter the current economic system. The economic crisis may also propel inflation, leading to, amongst others, higher oil prices. The volatility of crude oil prices further adds to an uncertain economic environment. As crude oil is practically used in all industries worldwide, an increasing oil price leads to price increases – from consumer goods to services and so on. Even the bioethanol industry is affected by high oil prices, as the production process still requires fossil oil based products (e.g. in transportation, fertilizers, etc.). Emerging economies, such as China, India and several Middle Eastern countries, are also impacting economies on a global scale. The emergence of China and India puts pressure on food and energy production, as their consumption is rising year by year. This development leads to increased competition for (natural) resources / commodities, which drives up prices of food and energy worldwide. The emergence of these economies results in further integration of the world’s economies. The emergent economies require resources from beyond their own national borders, which strengthens the globalization of markets. As production and consumption takes place in different locations, globalization of trade will increase further. With global developments, such as climate change, terrorism, the shifting balance of power (multipolarity), the risk of disruptions in the economic system has increased over the past decade. This results in a highly volatile economic environment (Atos Origin LookOut+, 2008).
United States The U.S. is amongst the most wealthy countries in the world on a per capita basis. Its currency, the U.S.$, can be considered the global currency. It is used as a benchmark for commodity trade (e.g. oil) and is amongst the currency reserves of all major powers globally. Its economic development over the past century is unmatched by any country in the world. However, as noted earlier, the credit crunch and housing crisis may have long-lasting effects on the position of the U.S. as an economic powerhouse. The U.S. economy is strongly dependent on foreign sources for its energy, approximately 60% of its crude oil demand is imported (EIA, 2008). The domestic bioethanol production replaced about 5% of the 2007 gasoline consumption, making a substantial contribution to the U.S. economy and the improvement of its energy security (RFA, 2008). The development of the U.S. economy in these highly volatile and uncertain times poses a risk for U.S. bioethanol producers and (foreign) investors.
EU Bioethanol Firm Strategy 97 MSc. Thesis - David Borgman Brazil Brazil is one of the major emerging economies. It may not show the rapid growth of China and India, but it is definitely a force to be reckoned with. Brazil’s strengths lay in its abundant natural resources, favorable climate, and size. Although Brazil’s income per capita is relatively low (in comparison to developed nations), and the average inflation rate is relatively high, Brazil’s prospects for growth are quite strong. The sugar and bioethanol industry are important contributors to Brazil’s economic development. Recently, Brazil has achieved energy independence by exploiting its oil reserves, bioethanol production and hydro-electric resources (CFR, 2008). Its energy independence is an important economic asset, making Brazil more resilient to volatility in the world’s energy markets. Although Brazil is open to foreign domestic investment (FDI), also for the bioethanol industry, its tax system and relatively high tax rates are regarded as obstacles for FDI and economic development (Brazil Institute, 2008). All in all, Brazil’s economic prospects are strong, and the bioethanol industry has the potential to make an important contribution to the Brazilian economy.
European Union As a union, the EU is amongst the strongest economic blocs in the world. However, there are distinct differences between the Western EU states and the recently joined nations from Eastern Europe. The Eastern EU states have a large growth potential, which is generally accompanied with above EU average inflation and GDP growth. The Western European states on the other hand, show minimized GDP growth and relatively low inflation (Eurostat database). The EU economy has remained relatively stable in recent years, with GDP growth and inflation hovering around 2%. However, the credit crunch also affects the EU economies. It is unclear at this time to what degree the economic crisis in the U.S. will affect the EU. The major drawback of the EU’s economic strength is its limited political unity. There are distinct country-to-country differences, which impedes a fully unified foreign and economic policy. Like the U.S., the European Union is also an energy dependant region. The EU imports approximately 54% of its energy (mainly oil and natural gas) (Eurostat database). This dependence on foreign resources has an impact on the economic stability of the EU, as fossil fuel prices are highly volatile. The Euro, EU’s common currency is currently used in 15 of the 27 member states. This will expand in the coming years as new members will adopt the Euro as soon as their economic situation meets the desired criteria. The Euro is a relatively strong global currency, with a higher value than the U.S.$ and Brazilian Real. This is generally favorable for imports, and consequently less favorable for the export of products and services outside the Euro region. The national economies of the EU are highly intertwined, both amongst EU member states, as well as with major powers such as the U.S, China and Russia. It is therefore also susceptible to global economic developments, such as the developing credit crunch.
EU Bioethanol Firm Strategy 98 MSc. Thesis - David Borgman 4.2.3 Sociocultural factors
The following table (4.16) provides an overview of various socio-cultural factors; basic demographic factors, extended with more energy related factors. After a brief discussion of general (global) socio- cultural developments, a country specific description provides relevant highlights which may influence the bioethanol industry.
Table 4.16: Socio-Cultural factors affecting the bioethanol market United States Brazil European Union Growth of population 0,8 % 0,9% 0,0% 2008: approx. 305 million 2005: 186,4 million 2005 (EU-25): 458,5 million (average yearly % inhabitants inhabitants inhabitants 2004-2030)
Age distribution of < 15: 21,7% (2001) < 15: 28,8% (2001) < 15: 15,9% (EU-25, 2007) 20,3% (2015) 24,1% (2015) > 65: 17% (EU-25, 2007) population (%) > 65: 12,3% (2001) > 65: 5,3% (2001) 28,3% (EU-27, 2015) 14,2% (2015) 7,5% (2015) Urban population 2005: 80,8% 2005: 84,2% N/A, likely higher considering 2015: 83,6% 2015: 88,2% number of inhabitants and land area Highest level of Primary: 13% Primary: 71% Primary: 31% Secondary: 48% Secondary: 22% Secondary: 45% education Tertiary: 39% Tertiary: 8% Tertiary: 24% (% of adult population, (2006) (2004) (Note: EU-19 average, 2006) 25-64 years) Language English Portuguese Dominant languages: English, French, German
Energy consumption 2001: 7,7 tons oil equivalent 2001: 0,7 tons oil equivalent 2005: approx. 2,5 tons oil per capita per capita equivalent per capita (EU-25) (tons oil equivalent)
Greenhouse gas 2003: 24,3 tons of CO2 N/A 2005: 8,7 tons of CO2 equivalent per capita equivalent per capita (EU-27) emissions per capita Environmentalism Sustainability concerns, but Concerns for Amazon Multiple environmental energy security remains a rainforest and Cerrado groups campaigning against dominant factor destruction, and protection of use of biofuels (food vs. fuel, biodiversity, amongst other land use changes, etc.). concerns Consumer concerns with regard to food prices and availability. Sources: Eurostat Statistics Database, Globalis (2008), IEA (2006), OECD Education (2008), UNDP (2007)
General Multiple socio-cultural factors influence the bioethanol industry, directly and indirectly. A brief selection of relevant general factors is discussed in this section. The first socio-cultural factor is the development of individualization. This term describes ‘a process towards a moral, political or social
EU Bioethanol Firm Strategy 99 MSc. Thesis - David Borgman outlook that stresses human independence and the importance of individual self-reliance and liberty’ (Atos Origin Lookout+, 2008). This process has an important impact on society, as individuals may become less connected to the society or community which they live in. Such behaviour may have a wide variety of consequences for the manner in which individuals interact with one another, but also for more practical factors such as transportation. This may have an influence on the increased mobility of people, the second factor to be discussed. Increased mobility refers to the possibilities an individual may have for transportation (public and private means). The general trend of increased mobility moves towards an increase in personal mobility (e.g. car ownership). This may have multiple reasons, such as GDP growth per capita (e.g. emerging economies), population growth, required flexibility, poor public transportation network, and so on (WBCSD, 2004). Both the number of vehicles as well as the distance travelled per individual are projected to increase in the coming decades. This will have major impacts on factors such as energy use and greenhouse gas emissions (WBCSD, 2004). An increase in personal mobility will likely lead to increased congestion, especially in urban areas (WBCSD, 2004). Increased congestion may have a negative economic impact. A fourth socio-cultural factor is the increased information availability. With the emergence of the internet, an enormous amount of information has become available for the individual. This has major consequences for firms, as consumers can relatively easily compare different products and services on the basis of free-to-access information. ‘Knowledge is becoming the new competitive advantage’ (Atos Origin Outlook+, 2008). The internet and increased information availability has also contributed to the emergence of a digitally connected society. Individuals increasingly interact through web-based services, for example through social networking sites. This has enabled individuals to interact instantly with others from all over the world, making the world in relative terms smaller. This not only changes the way individuals interact, but also how firms and consumers do business (Atos Origin Outlook+, 2008).
United States The American society is the prime example of a capitalist consumption society. Table 3.15 underlines this through the energy consumption figures. The energy consumption and GHG emissions per capita are unrivaled by any nation. The energy consumption per capita is more than triple that of the per capita consumption of the EU-27, while both are well developed societies (provided regional differences in the EU). And although there are environmental concerns with regard to climate change, energy security and independence appears to be the dominant factor in both the political arena, as well as in the minds of consumers (who generally demands cheap energy). From a demographic point of view, the U.S. is characterized by a relatively young population, which is relatively highly educated. Over a fifth of the population is under the age of 15, and approximately 40% of the adult population (25-64 years) has completed a tertiary level of education (e.g. college and/or university level). During the period 2000-2030, the U.S. population is expected to grow at a yearly average rate of 0,8% (Globalis (2008), OECD Education (2008)).
EU Bioethanol Firm Strategy 100 MSc. Thesis - David Borgman Brazil A relatively young population is an important characteristic for the Brazilian society. Almost 30% of the population was below the age of 15 in 2001 (Globalis, 2008). In addition, the projected population growth is relatively quite high, a yearly average growth of 0,9% from 2000-2030. The notion that Brazil is a developing nation and emerging economy is underlined by its relatively low educated population and low energy consumption per capita. Less than 29% of the population between 25-64 years of age has completed a secondary or tertiary education. This means that 71% of the population has a primary level of education as their highest completed education (Globalis, 2008). This contributes to relatively large number of low-skilled and low-wage workers, which is favorable for low cost production compared to developed nations such as the U.S. and the EU. The low level of energy consumption per capita (0,7 toe in 2001) is an indicator of the vast potential Brazil has for increased energy usage. As the nation develops, both economically as well as technologically, its energy usage will likely go up. This may have an important impact on Brazil’s ability in remaining an energy independent nation, which it only recently achieved (2006) (CFR, 2008).
European Union The socio-cultural environment of the European Union is difficult to assess as a single entity. There are important differences on a country-to-country basis. The focus in this section is therefore mainly on general factors. An important factor for the development of the European socio-cultural environment is its apparent lack of population growth due to a graying age distribution. The average yearly population growth between the year 2000-2030 is projected at 0% (Globalis, 2008). In addition, approximately 28% of the population will be over the age of 65 by the year 2015 (EU-27). This could potentially decrease personal mobility and energy usage in transportation, which could become relevant factors for the bioethanol industry in the long term. Both per capita energy consumption and GHG emissions are substantially lower than in the U.S. (Globalis (2008), Eurostat Database). This may be an indicator of more efficient energy usage. Related to energy usage, are sustainability concerns and environmentalism. In comparison to the U.S., sustainability and climate change have become a more important debate in the political and public arena. After biofuels were hailed as climate saviors at the beginning of this century, they are now strongly criticized as their sustainability (economic, environmental) is questioned (OECD, 2007). This potentially has a negative impact on the development of the EU bioethanol industry. The discussion of lowering the blending targets (from 10 to 6%) is a prime example of the influence that science, media and the general public have on the political EU environment.
EU Bioethanol Firm Strategy 101 MSc. Thesis - David Borgman 4.2.4 Technological factors
Table 4.17 provides an overview of various technological factors which directly or indirectly influence the bioethanol industry. A country specific description of relevant technological factors will round off the PEST factor analysis.
Table 4.17: Technological factors affecting the bioethanol market United States Brazil European Union Total government - 2006: 0,29% of GDP - 2006 total: approx. 1% of - 2006: 0,25% of GDP (EU-27) - 2006 total (incl. private GDP (incl. private sectors), - 2006 total (incl. private spending for R&D sectors): 2,61% of GDP mostly funded by government sectors): 1,84% of GDP
Total industry - 2005: R&D Energy - Specific industry spending - Specific industry spending spending - $ 3,3 bln, of which unknown unknown spending for R&D $693 mln for renewable - Increased attention for the - Policy measures include R&D energy use of cellulosic materials for subsidies / support - 2007: $162 mln government bioethanol production funds for biomass R&D (USDA, DOE) - Policy measures include R&D subsidies / support (includes $ 500 mln yearly 2008-2015 for production advanced biofuels) Focus of - Strong focus on advanced - Strong focus on - Lisbon Strategy: ‘to become biofuels (from cellulosic sustainability improvements – most competitive knowledge technological efforts materials) bioethanol at core of these based economy in the world’ efforts - Focus on various renewable energy sources (e.g. wind, solar, advanced biofuels) - Focus on improving energy efficiency (industry, household, transportation) Patent protection - Elaborate and rigid patent - Institutions, policy and - EU-wide Patent protection protection system legislation for IP protection system – requires patent - Criticised for high costs and considered to be weak (in filing/verification and fees in limited ability for further comparison to U.S. and EU) each of the EU members technological diffusion Energy availability - Energy consumption - Relatively high energy - Energy consumption predominantly based on independence (domestic oil, predominantly based on foreign foreign fossil resources hydroelectric and biofuels), fossil resources (e.g. Russia, - Energy mix 2007: 45% in domestic renewables Middle East) Petroleum – 39,8% - Energy mix 2005: - Energy mix 2006: Natural Gas – 23,6% Petroleum – 38,4% Petroleum – 37% Coal – 22,8% Hydroelectric – 15% Natural Gas – 24% Renewable energy – 6,8% Woodfuels – 13,7% Solid Fuels (mainly coal) – 18% Nuclear electric – 8,4% Sugarcane based – 13,1% Nuclear Energy – 14%
EU Bioethanol Firm Strategy 102 MSc. Thesis - David Borgman Natural Gas – 9,1% Renewable Energy - 7% Coal – 6,4% (Regional differences) Other renewables – 2,9% Nuclear electric – 1,4% Natural resource - Limited oil reserves (mainly - Vast (tropical) forest and - Relatively large agricultural Gulf of Mexico) agricultural resources and forest biomass resources availability - Vast agricultural lands (e.g. (sugarcane, soy) - Limited oil and natural gas Corn / Grain belt) - approx. 1/3 of world’s fresh reserves - Coal, natural gas, uranium, water supplies - Limited supply of metals and and various metals available - Relatively large supplies of ores Iron ore and other metals Transportation - East and West coast - Transportation network - Amongst most advanced in the densely populated, elaborate underdeveloped – considered world – Western Europe network and relatively modern inhibitor for increased ethanol - Major seaport infrastructures transportation network production from remote areas supported by road and rail - Large number of seaports, - Ethanol pipelines under facilities airports and pipelines construction for logistic cost - Energy infrastructure includes - Midwest bioethanol area reduction (Petrobras) cross-border electricity requires further development - Several seaports in direct networks, extensive petroleum for efficient transportation to vicinity of production areas network East and West Skill level of - Amongst most highly skilled - Predominantly low and - Amongst most highly skilled population globally (39% of semi-skilled labor, large low- population globally (24% of workforce workforce has tertiary wage / low-skilled workforce has tertiary education) (agricultural) workforce education), especially in available Western EU countries Sources: Council on Foreign Relations (2006),EIA Energy Review (2008), U.S. Department of Energy, OECD (2006, 2008), Rauser et al (2008), UNICA (2008), RFA (2008), Brazil Institute (2008), IEA2 (2006), CORDIS website
General From an energy perspective, technological development is currently supporting the transition from a fossil fuel regime towards a renewable energy based society. Major technological initiatives are currently focusing on the development of advanced (cellulosic) biofuels, affordable and more efficient wind and solar energy, electric vehicles, carbon capturing, and a host of other renewable initiatives. This is a global phenomenon, affecting both developed as well emerging / underdeveloped nations (IEA1, 2006, 2004). Other major technological (e.g. nanotechnology) will not be discussed further, as it is beyond the scope of this research.
United States The United States is generally regarded as one of the most important countries for technological innovation and development. It has often initiated major innovations, such as the internet (applications), the mobile phone, computer technology, and so on. With its ambitious advanced biofuel strategy, the U.S. is seeking to gain a similar position as a technological innovator. The production targets for advanced bioethanol and supporting subsidies (e.g. $500 mln yearly 2008-2015) underline this development. The U.S.’s current energy mix is strongly oriented on petroleum (39,8% in 2007),
EU Bioethanol Firm Strategy 103 MSc. Thesis - David Borgman most of which is imported (EIA, 2008). Important contributors to the U.S.’s leading technological position is its highly skilled workforce and the (‘until recently’) abundance of financial resources. Patent protection is an important factor for technological commercialization and further innovation and development. The U.S. patenting system is criticized for its high costs and limits for full technological diffusion due its strict regulations (CFR, 2006). The patent protection system could impede the development of a leading technological position in advanced biofuels.
Brazil Technological development in Brazil is confronted with a knowledge gap (developing nation) and a relatively weak patent protection system (Brazil Institute (2006), IADB (2006)). This may impede Brazil from becoming a strong technological force. However, its sugar and ethanol production industry can be considered as one of the core competences of the country. Brazil has continually innovated its ethanol industry, leading to high efficiency rates and low costs (see earlier sections). Brazil’s energy mix currently consists of approximately 45% renewable energy, one of the largest shares in the world (especially for large countries) (IEA2, 2006). As technological innovation progresses this rate is likely to increase even further, provided renewable energy can supply its growing and developing population. The knowledge gap Brazil is faced with is underlined with the low level of highly skilled/educated persons (8% completed tertiary education) (OECD, 2008). Its expenses on research and development as a percentage of GDP is quite low compared to the U.S. and EU (Globalis, 2008). This unfavorable as its absolute GDP level per capita is considerably lower than that of the U.S. and EU-27.
European Union The European Union has the ambition to become the ‘most dynamic competitive knowledge-based economy in the world’, central to its Lisbon Strategy (CORDIS, 2007). It intends to achieve this through ‘the knowledge triangle of research, education and innovation’ (CORDIS, 2007). By further integrating the research efforts of EU-member states and promoting the exchange of knowledge, the EU pursues its ambitious goal (CORDIS, 2007). The EU’s technological position is especially strong in the ICT sector, where it has a leading global position (EARTO, 2008). With the EU’s support for renewable technology it is pursuing a similar position. Europe’s relatively high skilled labor force, knowledge institutions and solid transportation infrastructure are favorable for the pursuit of its leading knowledge-based position. From an energy perspective, the EU is still heavily reliant on fossil fuel resources, a large part of which it imports from beyond its borders (IEA, 2006). Currently, the EU does not have an abundance of natural resources which it can exploit extensively (or the technology) to achieve energy independence.
EU Bioethanol Firm Strategy 104 MSc. Thesis - David Borgman Conclusions – PEST factors The bioethanol industries in the three discussed regions are each influenced by both global and domestic PEST factors. Some of these factors stimulate the bioethanol industry, others impede its development. This section will briefly draw conclusions with regard to the PEST factors and the three bioethanol industries. In all three regions, Political-legal factors have stimulated the development of the bioethanol industry. Blending mandates, tax credits and subsidies are all used (or have been) in each of the three regions. From a global perspective, import/export tariffs impede the development of a truly global bioethanol market. Economic factors such as GDP growth and energy supply also contribute to the growth of the market, but the recent credit crisis may impede development in the short term, especially in the U.S. and the EU. Social-cultural factors, such as increased mobility and the per capita energy usage in the U.S. and EU demand more sustainable energy usage. The public has raised concerns with regard to the sustainability of biofuels, creating an uncertain environment for producers as it influences the political course. On the Technological side of the environment, the development of renewable energy (including advanced biofuels) has become a focal point in all three regions. The EU is especially ambitious in becoming the world’s most competitive knowledge based society. Brazil is lagging behind, as it is relatively underdeveloped in comparison to the U.S. and EU, but it has a head start in renewable energy (both hydro-electric as well as biofuels). All in all, the macro-environment creates various uncertainties for bioethanol producers world-wide. The effects of the credit crunch are difficult to assess, but will especially have an impact on U.S. producers, where volatility in the financial system is highest. EU producers are faced with reduced political support (mandate cutbacks), creating an uncertain market. Brazilian producers on the other hand appear to be least affected by macro-uncertainties, there long history with sugar and ethanol production favors their position from almost all PEST perspectives.
EU Bioethanol Firm Strategy 105 MSc. Thesis - David Borgman 4.3 Future market expectations
This final paragraph of chapter three will feature various expectations with regard to the development direction of the bioethanol market, from both a global and country specific perspective. The Industry Life Cycle theory serves as a theoretical basis for this paragraph (Angwin et al, 2007). As noted in paragraph 4.1, the three bioethanol industries are in the growth stage of the ILC. This paragraph will discuss various expectations with regard to energy consumption, mobility, development of production costs, and the development of the bioethanol market. These factors may serve as indicators for the ILC development of the bioethanol industry. The selection of the particular factors is based on the researcher’s expectations. The discussed expectations are by no means guarantees for market development. Major disruptions, such as the credit crunch, are often unforeseen and could alter the current expectations with regard to future market development.
Energy consumption This section will briefly discuss global energy demand/consumption projections, which are relevant for the potential share of biofuels in the primary energy supply. Table 4.18 provides an overview of the projected primary energy consumption up to the year 2030. The table is provided by the International Energy Agency, and forms a part of their yearly World Energy Outlook.
Table 4.18: Projection - World Primary Energy Consumption in million tons oil equivalent by source
Source: IEA1 (2006)
On the basis of the IEA (2006) projections, the primary energy mix is expected to remain dominated by fossil sources (oil, coal and natural gas). Hydro-electric energy, biomass, and other renewable sources are expected to grow, but will make up less than 15% of the energy consumption in 2030. The world’s energy consumption in 2030 is projected to be approximately 52% higher than 2004 consumption levels (IEA1, 2006). There are however, regional differences with this growth rate as figure 4.15 depicts.
EU Bioethanol Firm Strategy 106 MSc. Thesis - David Borgman Figure 4.15: Projected world primary energy consumption (MTOE) (IEA1, 2006) The level of primary energy consumption in developing countries is projected to surpass the level in developed OECD countries. The economic development in China and India is one of the main reasons for this projection. China and India combined represent approximately one third of the world’s population (IEA1, 2006). This development will likely increase the competition for energy and other resources. Another perspective with regard to energy consumption projections is provided by ExxonMobil through figure 4.16, one of the largest petroleum companies in the world.
Figure 4.16: Projected development of Primary Energy demand in million barrels per day oil equivalent 1980-2030 (MBDOE), percentages based on 2005-2030 period (ExxonMobil, 2007)
The projections with regard to primary energy consumption by ExxonMobil (2007) are slightly different than those of the IEA (2006). This may be due to a slightly different time-scale (2004-2030 vs. 2005- 2030). Total primary energy consumption is expected to grow by an average yearly rate of 1,3% from 2005-2030, versus a growth rate of 1,6% projected by the IEA (2006). Natural gas(1,7%), nuclear (2,0%) and renewable energy(1,5%) are projected to grow above average, which would increase the market share of these sources. Biomass for stationary applications and biofuels for transportation are
EU Bioethanol Firm Strategy 107 MSc. Thesis - David Borgman treated separately. Biofuel consumption (multiple types) are projected to grow at an average rate of 7,6% per year from 2005-2030, which is below the average combined Wind, Solar & Biofuels growth rate of 8,7%. Both wind and solar power are projected to extend their shares within renewable energy demand (ExxonMobil, 2007).
Mobility Other relevant factors for the bioethanol industry are the developments within the transportation sector. The number of vehicles and distance travelled per year are relevant for the potential market share of bioethanol in the fuel mix of the transportation sector.
Figure 4.17: Number of passenger-km per year for personal transport activity by mode 2000-2050 (WBCSD, 2004)
Figure 4.17 provides an overview of the projected number of passenger-kilometers per year for personal transportation up to 2050 (WBCSD, 2004). The general trend is clearly upwards, with an average yearly growth of 1,7% from 2000-2050. The emerging economies (China and India) play a major role in this development (WBCSD, 2004). The number of passenger-km’s for light duty vehicles grows at the total average rate. Especially air and passenger-rail kilometer’s are growing above average, increasing their market share in personal transportation.
Figure 4.18: Number of Light Duty Vehicles and Motorized Two-Wheelers per 1000 people for multiple world regions (2000- 2050) (WBCSD, 2004)
EU Bioethanol Firm Strategy 108 MSc. Thesis - David Borgman The increase in the number of passenger-km’s per year corresponds with the total number of vehicles present. Figure 4.18 provides an overview of the projected development of the number of light duty vehicles and motorized two-wheelers per 1000 people for different regions of the world up to 2050. These figures are especially relevant as these types of vehicles may provide an important consumer base for the use of bioethanol as a transportation fuel, at least in the short term. The number of personal vehicles per 1000 people is especially high in the developed (OECD) countries, and they are expected to maintain this position up to 2050. A relatively large growth rate is to be expected in the Eastern European countries and the Former Soviet Union (FSU). Eastern Europe is projected to have the same number of LDV’s and motorized two wheelers as OECD Europe. The growth per 1000 people in China and India may be more modest compared to Eastern Europe and the FSU, but the large amount of inhabitants of these two countries still result in a vast amount of vehicles.
Figure 4.19. Projections for energy demand in the transport sector in million barrels oil equivalent per day (ExxonMobil 2007).
Energy demand in the transportation is especially relevant for the bioethanol industry. Through figure 4.18, ExxonMobil (2007) provides a projection of the energy demand per sector up to 2030 for OECD and Non-OECD countries. Growth in OECD energy demand for transport has started to even out. Energy demand in the light duty vehicles sector is even expected to decline by a yearly average of - 0,5% from 2005 up to 2030. Factors such as higher efficiency and limited population growth (graying of population) may play a role here. Non-OECD countries show a much stronger growth, with a yearly average of 3,1% up to 2030. Energy demand for light duty vehicles is expected to grow above average at 3,4%. The total energy demand for the transportation sector in OECD and Non-OECD countries is expected to be equal by 2030. Further more ExxonMobil (2007) projects that ‘unconventional and biofuels’ will make up 6% of the transportation fuel supply by 2030.
EU Bioethanol Firm Strategy 109 MSc. Thesis - David Borgman Bioethanol market development Various projections with regard to the growth of the biofuels and bioethanol market are discussed in this section. These projections should be regarded as mere indications for potential growth. Disruptive factors such as the credit crisis, electrification of transport, feedstock availability, and so on, could alter the projections considerably. It is also important to note, that the public (and scientific) debate (especially in the EU) was less critical with regard to biofuels during the time that most of the projections were established. The first table (4.19) projects the world biofuel consumption under two IEA (2006) scenario’s, in million tons oil equivalent. Under both scenario’s consumption is projected to rise rapidly. From 2004 levels, world biofuel consumption is projected to increase nearly 6 fold under the Reference scenario, and nearly 10 fold for the Alternative Policy Scenario (APS). The U.S. and EU are projected to be the largest consumers by 2030, Brazil will be the third largest consumer followed by China as a distant fourth.
Table 4.19: Current (2004) and projected world biofuel consumption per region 2010, 2015, 2030 for the Reference Scenario (RS) and Alternative Policy Scenario in MTOE (IEA1, 2006)
It is important to stress that the scenario’s do not account for the consumption of second generation biofuels, as these are currently not commercially viable. Should this development occur within the projected timeframe, consumption is projected to grow even more rapidly (IEA1, 2006) Biofuels are projected to meet 4% of the world’s road transport demand by 2030 under the Reference Scenario, and 7% under the APS (- due to lower energy demand, but larger demand for biofuels) (IEA1, 2006). Thus, ExxonMobil’s (2007) projection of 6% falls between both IEA scenario’s. Furthermore, the IEA (2006) projects that bioethanol will have the largest share in the biofuels mix,
EU Bioethanol Firm Strategy 110 MSc. Thesis - David Borgman due to lower production costs vs. biodiesel. By 2030, biodiesel is projected to make up 15% of the U.S. and Brazilian biofuels supply, and one third of the EU biofuel mix (IEA1, 2006). A more short term projection is provided in figure 4.20 (F.O Licht, 2006 in IFP, 2007). The projection depicts global biofuels production in million tons, and serves as a clear indicator of the rapid (short term) growth in production. Production of bioethanol is projected to more than double by 2015 to over 80 million tons, up from less than 30 million tons in 2005.
Figure 4.20. Projection of global biofuels production in million tons (not corrected for energy content) (F.O. Licht, Christoph Berg, presentation at World Biofuels 2006, Seville – IFP, 2007)
In 2004 the IEA also provided a production projection for fuel ethanol up to the year 2020, depicted in figure 4.21. The IEA projection shows a similar development compared to figure 4.20.
Figure 4.21: Fuel Ethanol Production – projections up to 2020 (IEA, 2004)
EU Bioethanol Firm Strategy 111 MSc. Thesis - David Borgman On a gasoline-equivalent basis the 2020 total of 120 bln litres, represents approximately 80 billions litres, which would represent approximately 6% of the world’s motor gasoline use and 3% of total road transport (IEA, 2004). The projection shows that the 2020 production level within the EU is to more than double the 2004 Brazilian and U.S. production levels, at almost 30 bln litres.This would require quite a rapid development considering the production level of 3,6 bln litres in 2007 (F.O. Licht, 2008). Such a level can be questioned, especially considering the recently proposed mandate adjustments in the Renewable Energy Directive. Biofuel policies are an important factor for the potential production and consumption, and have an influence on the projections discussed. The final production projection is provided by Unica (2008), specifically for the Brazilian sugar and bioethanol industry, in table 4.20.
Table 4.20: Projected Brazilian Sugarcane, Sugar, Bioethanol and Bioelectricity production 2007-2021 (Unica, 2008)
Sugarcane production is projected to more than double between the 07/08 and 20/21 harvest seasons. The cultivated area is expected to increase less than double, which would indicate efficiency gains – i.e. higher sugarcane yields per hectare. Both sugar and ethanol production are to grow rapidly as well. Bioethanol production is projected to increase nearly 3 fold, from 22 bln liters to approximately 65 bln liters. Nearly 50 bln liters of the 2020/21 production is projected to be used for the internal market, while over 15 bln liters is projected to be exported. The 2020/21 projected production level is considerably higher than the U.S. and EU production projection of figure 3.20, where the U.S. is projected to produce slightly more than 40 bln liters. The efficiency of the Brazilian sugarcane/ethanol industry is further enhanced through the production of bioelectricity. The production of bioelectricity is projected to supply 15% of Brazil’s energy by 2015, and is kept stable at that level up to 2020.
Production costs An important factor for the (global) competitiveness of the bioethanol industries (U.S., Br, EU), is the development of production costs for ethanol based on different feedstock types. Figure 4.21 provides an overview of production costs ranges per liter in U.S.$ (2005) for bioethanol and biodiesel based on various feedstock types for 2005 en 2030.
EU Bioethanol Firm Strategy 112 MSc. Thesis - David Borgman Figure 4.22: Price or production costs in U.S.$ per liter ethanol / biodiesel alternative, compared to regular pre-tax gasoline or diesel, for the IEA region (Source: WBCSD, 2007)
As noted in earlier sections, sugarcane based ethanol is currently the most efficient option, especially from an economic point of view. Figure 4.22 shows that sugarcane will remain a preferred option, from an economic point of view, up to 2030. Corn (maize), sugar beet and wheat based ethanol are projected to improve their production costs, but are unlikely to directly compete with sugarcane based ethanol. The production costs of ethanol from lingo-cellulosic sources (wood, waste, etc.) is expected to improve dramatically by 2030, and could in the most favorable of conditions compete with sugarcane based ethanol (WBCSD, 2007).
Conclusions The market expectations show a rapid development of both production and consumption, due to both mandates and economic development (increased mobility). With this rapid development the question arises if the required feedstock is available for the projected production levels. Such a discussion is beyond the scope of this research, as there is no general consensus. However, as production grows rapidly, the sustainability of feedstock use will likely be pressured further. Such a development could form an important threat for the long term sustainable growth of the industry. Most of the projections provided in this paragraph show a quite linear market growth. The question remains, if such a development is likely, considering potential disruptive factors (e.g. credit crunch, electrification of transport). Growth is certainly to be expected for the foreseeable future, the length of the growth period is however difficult to predict. With regard to future feedstock options, no projections have been provided, as it is still unclear when the process of advanced biofuel production will become commercially viable, and can compete with current processes.It is certainly a development which incumbent EU producers should follow closely, especially considering the efforts and advanced biofuel mandates in the U.S..
EU Bioethanol Firm Strategy 113 MSc. Thesis - David Borgman EU Bioethanol Firm Strategy 114 MSc. Thesis - David Borgman 5 External and Internal Factor Analysis
This fourth chapter revolves around the analysis and comparison of external and internal factors which are relevant for the three discussed bioethanol industries. The chapter mainly revolves around the following research question: How does the European competitive position in the current global bioethanol market compare to the competitive position of Brazil and The United States? The external (5.1) and internal (5.2) factors are analyzed on the basis of Wheelen and Hunger’s (2005) Factor Analysis Summary tables, as discussed in the literature study. The factor analysis is finalized through a industry matrix (5.3), which compares the relative performance of the three industries on the basis of key success factors (Wheelen and Huner, 2005).
5.1 EFAS
EFAS, or External Factor Analysis Summary table, provides an overview of the most important opportunities and threats confronting the industry. The EFAS table is specifically formulated for the EU bioethanol industry, with a focus on large scale producers. The opportunities and threats which face the large scale producers are important ingredients for the formulation of strategic options in chapter 6. The opportunities and threats are selected on the basis of the analysis of the basic conditions and industry structure of chapter 4. The EFAS table for the EU industry is depicted in table 5.1, followed by a brief explanation. For each selected factor a short reference to the appropriate paragraph of chapter 4 is provided between brackets.
Table 5.1: EFAS table EU bioethanol industry – Large scale Producers External factors Weight Rating Weighted Comments Score Opportunities
Rapid market development 0.10 3.5 0.35 Large capacity and prod. increase (2008)
Governmental support for 0.10 3.5 0.35 Firms capitalize support measures for further growth renewable energy
Advanced biofuels 0.15 2.0 0.30 Relative weak development in this area
Foreign Direct Investment 0.15 2.0 0.30 Only few firms invest in favorable areas (e.g. Brazil)
Flex-fuel vehicle technology 0.05 2.0 0.10 No visible cooperation with car manufacturers
Threats
Brazilian bioethanol imports 0.10 2.0 0.20 Firms rely on import tariffs for protection
Dwindling government support 0.05 2.5 0.125 Downward adjustment of blending mandates
Electrification of transport 0.05 1.0 0.05 Long term development, potentially disruptive
EU Bioethanol Firm Strategy 115 MSc. Thesis - David Borgman Feedstock prices, availability 0.15 3.0 0.45 Multiple feedstock types used – risk spreading and competition Relatively high prices – government support required
Sustainability concerns 0.10 2.5 0.25 Critical public debate – EU industry not convincing Total scores 1.00 2.475 Note: weighted total score range from 1.0 (poor) to 5.0 (outstanding), 3.0 is an average score
The large scale EU producers are faced by various opportunities and threats that have consequences for their development. On the opportunities side of the industry, five major factors have been identified (table 5.1). The rapid market development on a global scale, for both production and demand, create opportunities for large scale EU producers to further expand their activities and strengthen their market shares within the EU and on the global scene. The relative small number of production facilities, and low capacity within the EU offer opportunities for further domestic growth. Combined with the rising energy demand, globally and within the EU, bioethanol has strong growth prospects (see paragraphs 4.1.1, 4.3). Government (EU) support for renewable energy is an important driver for this development. EU producers capitalize on the provided support measurers, such as subsidies, tax incentives, import protection and blending mandates. These are vital factors for the growth of the industry (see paragraph 4.2.1). Although currently not a commercially viable option, the development of advanced biofuels such as cellulosic ethanol, are an important opportunity for the EU industry to improve its price- competitiveness, efficiency, and its image with regard to sustainability and food competition on a global level. Apart from Abengoa Bioenergy, large scale EU producers are not actively involved in the development of advanced processes to convert cellulosic materials into ethanol. The relative low rating (2.0) in table 5.1 is indicative of this relatively weak response (see paragraph 4.1.2, 4.3). Foreign Direct Investment in countries with favourable climate conditions for feedstock growth and land availability, such as Brazil, may offer EU producers an opportunity to offset their relatively weak global competitiveness. Only two major EU producers have pursued this opportunity this far, Abengoa Bioenergy and Tereos (see paragraph 4.1.1, 4.1.2, 4.3). The final major opportunity is the emergence of flex-fuel vehicles. The presence of these vehicles in the market is an important driver for bioethanol demand. Unfortunately, within the EU the number of flex-fuel vehicles is limited, apart from Sweden. Large scale EU producers should therefore be more engaged in stimulating the use of flex-fuel vehicles, by for example offering higher ethanol blends (e.g. E85) at service stations. Without either, flex-fuel vehicles and higher blends, the market is condemned to low level mandated blends in which large petroleum companies ‘call the shots’ (see paragraph 4.1.3, 4.1.5, 4.3).
On the threats side of the industry, an additional five factors have been identified which large scale EU producers are faced with (table 5.1). Brazilian bioethanol imports are a major threat for the EU bioethanol industry. Brazilian sugarcane-based has a lower cost base and is more energy efficient, making it highly competitive. EU producers currently rely on import tariffs for the protection of their
EU Bioethanol Firm Strategy 116 MSc. Thesis - David Borgman domestic industries. Without this protection, they would be easily outcompeted on the basis of price. These tariffs are subject to debates within the WTO, where Brazil has proposed to classify bioethanol as an environmental good, which would suspend the current import tariffs. This would have a significant impact on the competitive position of the EU and U.S. industries. This could potentially result in the market exit of many EU and U.S. firms, provided they are not supported by other measures (e.g. subsidies) or are able to produce for costs that are on par with the costs of exported Brazilian ethanol. A change in the classification of bioethanol under WTO regulations is not unlikely considering the public/political debate with regard to efficiency and GHG emission of EU and U.S. cereal-based bioethanol. Within the EU only a few large scale firms have an active stance, and do not simply rely on domestic market protection, by being active in Brazil and other low production cost markets (see paragraph 4.1.1, 4.1.2). Although government support for renewable energy is an import driver and opportunity for EU producers, support for biofuels is dwindling. Adjustments of to the pending Renewable Energy Directive have been proposed, and will likely result in the downward adjustment of biofuel mandates for 2020. Although it is unclear if the present mandate levels are even feasible, a downward adjustment may influence market development negatively. It is therefore an important development EU producers should be wary of (see paragraph 4.2.1). Electrification of transportation is a potentially disruptive development which could replace the internal combustion engine in light vehicles on the long term. It is unlikely that the emergence of electric vehicles will have a major impact on the bioethanol industry in the short term. For the long term (e.g. 10-20 years) however, it may pose a serious threat for the use of bioethanol and other liquid fuels in light-duty vehicles. This development should therefore be followed closely, as it may become an essential technology in the transportation sector (see paragraph 4.1.5, 4.2.4). In the short term high feedstock prices and competition for feedstock are more pressing issues for the industry. The increased competition for resources, due to the emergence of China, India and other developing economies, contributes to price increases for commodities such as cereal crops. This further increases bioethanol production costs, threatening the competitiveness of the EU bioethanol industry. The EU industry utilizes multiple feedstock types, which spreads the risks of price spikes for particular commodities, but this may not be enough to offset the fundamental development – increased competition for resources (see paragraph 4.2). The final major threat for the EU industry are the sustainability concerns raised in the political, public and scientific arena. Justified or unjustified, the criticism towards the use of biofuels attracts negative attention towards the industry, and may impede the development of bioethanol demand (e.g. mandate adjustments). The winners of tomorrow are likely those companies that produce bioethanol in the most environmentally and economically sustainable manner possible. These companies could set an example for the industry and influence the political and public debate positively (see paragraph 4.2.3).
Other threats to the industry, not listed in table 4.1, are the credit crunch and the threat of new entrants. Both have an influence on the current large scale EU producers. A weighted score of 3 indicates average performance, i.e. an average response to the opportunities and threats facing the
EU Bioethanol Firm Strategy 117 MSc. Thesis - David Borgman industry. A score of 2.475 for the EU industry is therefore an indication of below average performance. The figure should be regarded as a mere verification of the relatively weak competitive position of the EU industry in comparison to the U.S. and Brazilian industries.
5.2 IFAS
The IFAS, or Internal Factor Analysis Summary table, provides an overview of the most important strengths and weaknesses of a particular competitor. Three separate IFAS tables have been formulated for each bioethanol industry (U.S., Brazil, EU). The purpose of these tables is to assess the competitive advantages each industry might have. The tables provide input for the identification of potential areas for the EU industry to gain a competitive advantage compared to the U.S. and Brazil. Each table is followed by a brief explanation of the selected strength and weaknesses. Undoubtedly, more strengths and weaknesses can be identified, but the selected factors are especially relevant for the purpose of this research. With each factor a reference is provided to relevant paragraphs of chapter 4.
Table 5.2: IFAS table – U.S Bioethanol Industry Internal factors Weight Rating Weighted Comments Score Strengths Economies of Scale in 0.15 4.0 0.600 Largest production facilities and firms in the world production
Strong and ambitious 0.15 4.0 0.600 Domestic market support and protection key for governmental support market development
Advanced biofuels program 0.10 4.0 0.400 On the frontier of advanced biofuel development
Relative large capital 0.05 2.5 0.125 Private equity and IPO offer vast capital resources, availability for investment but risky
Weaknesses
Dependence on single 0.15 3.5 0.525 Dependence brings risks, but transition towards feedstock type advanced biofuels
Concentrated production area 0.10 2.5 0.250 Concentration enlarges risks (e.g. climate), increases
transportation costs for nationwide use
Relatively high production costs 0.20 2.0 0.400 Costs and energy efficiency of corn-based ethanol and low energy efficiency not competitive with Brazilian production
Strong competition with 0.10 2.5 0.250 Relatively large share of corn supply used for domestic food/feed supply bioethanol production, but working on transition Total scores 1.00 3.15 Note: weighted total score range from 1.0 (poor) to 5.0 (outstanding), 3.0 is an average score
EU Bioethanol Firm Strategy 118 MSc. Thesis - David Borgman The U.S bioethanol industry scores slightly above average, in leveraging its strengths and dealing with its weaknesses. The U.S. industry has the largest global bioethanol producers, and the largest overall production level. It therefore achieves Economies of Scale in production, which reduce per unit costs and contributes to the strength of its position in the global market (see paragraph 4.1.1). Another strength of the U.S. industry is its strong and ambitious governmental support. The blending goals and supporting measures, such as subsidies, tax credits and import tariffs, create a favourable environment for strong market development (see paragraph 4.2.1). An important element of the governmental support is the push for Advanced biofuels. The U.S industry is a frontrunner for the development of cellulosic bioethanol, which does not directly compete with food production and is expected to achieve higher energy efficiency and lower GHG emissions. These are important aspects for the improvement of the competitive position of the U.S bioethanol industry (see paragraphs 4.2.1, 4.3). Capital availability is an important requirement for rapid firm and industry growth. Although the U.S economy is currently faced with a major economic crisis (credit crunch), the availability of capital investment has historically been relatively high. Within the U.S bioethanol industry, private equity and public offering on the stock exchange are important drivers for fast firm growth (e.g. VeraSun). However, it remains to be seen what the impact of the current economic crisis will be on the bioethanol industry (see paragraph 4.2.2) There are also important weaknesses that impact the development of the U.S industry. Its dependence on a single feedstock type generate risks. The impact of a poor corn harvest or high prices can be substantial for the development of the industry. But with its advanced biofuels program, the industry is transitioning towards a more diversified feedstock supply (see paragraphs 4.1.1, 4.1.2). Related to the single feedstock type use, is the relatively dense concentration of production in a single region – the corn belt. Climate change (e.g. droughts, extreme weather) could impact bioethanol production significantly. In addition, the central location of the production area generates relatively high transportation costs for East and West coast distribution (see paragraph 4.1.1, 4.1.2). The relative inefficiency and low energy concentration of corn-based ethanol production makes it uncompetitive with sugar-cane based ethanol from Brazil. The industry requires significant market protection (import tariffs) for strong domestic development (see paragraph 4.1.2). A final important feedstock issue is the competition with food/feed supply. A substantial share of the yearly corn production is consumed by the bioethanol industry. With the production mandates this share is expected to increase up to 2015, after which a cap has been placed on corn-based ethanol production. The competition with food resources is unfavourable for feedstock prices and the food supply (see paragraphs 4.1.2, 4.2.1).
EU Bioethanol Firm Strategy 119 MSc. Thesis - David Borgman Table 5.3: IFAS table – Brazilian Bioethanol Industry Internal factors Weight Rating Weighted Comments Score Strengths Extensive experience in 0.10 4.0 0.400 Over 30 years of experience – knowledge advantage production and distribution
High energy efficiency and low 0.25 5.0 1.250 Efficiency and costs currently unrivaled, foundation costs for competitive advantage
Strong domestic demand and 0.15 4.0 0.600 Domestic market well developed (e.g. flex-fuel, export position service station network), only large scale exporter
Large resource base and 0.20 4.0 0.800 Land availability and feedstock growth conditions at favorable climate conditions core of competitive advantage
Weaknesses
Dependence on single 0.10 3.5 0.350 Dependence brings risks, but sugar option adds feedstock type flexibility
Poor transportation 0.10 4.0 0.400 Transportation from remote favorable areas difficult, infrastructure (remote areas) but pipeline construction underway
Relatively poor investment 0.05 2.0 0.100 Tax rates, capital availability inhibitor for environment development
Competition with domestic food 0.05 2.0 0.100 Growing ethanol industry induces land use changes supply and natural environment and potentially reduces domestic food production Total scores 1.00 4.00 Note: weighted total score range from 1.0 (poor) to 5.0 (outstanding), 3.0 is an average score
The Brazilian bioethanol industry has an above average score (4.0) in leveraging its strengths and dealing with its weaknesses. Its extensive experience in production and distribution is an important competitive advantage which contributes to the strength of its global competitive position. Over 30 years of bioethanol-for-transportation experience has contributed to the relative efficient and competitive production of today. The industry can further leverage the knowledge gained for further improvements (see paragraph 4.1.1). The high energy efficiency and low production costs of sugarcane-based bioethanol is the industry’s most important competitive advantage in the current global market. It has made the production of bioethanol competitive with domestic gasoline supply and has set the benchmark for competitors worldwide (see paragraphs 4.1.1, 4.1.2). Another important strength is the relatively strong domestic demand and export position. At current blending levels and demand, the Brazilian industry produces sufficient bioethanol to generate a surplus suitable for export. Export generates external income which further propels the Brazilian ethanol industry and economy (see paragraph 4.1.1, 4.3).
EU Bioethanol Firm Strategy 120 MSc. Thesis - David Borgman Brazil’s land availability and favourable climate conditions are an important factor which provides a strong foundation for the industry. This natural strength can be exploited further, but sustainability issues will make this more difficult as production progresses (see paragraph 4.1.2). Important weaknesses put a cap on the Brazilian success story. The dependence on sugarcane as the main resource brings risks, as for example a poor harvest could impact ethanol production. However, the dual purpose characteristic of sugarcane - production of sugar and/or ethanol - does offer some flexibility for the producer in end use (see paragraph 4.1.1, 4.1.2). An important inhibitor for extensive utilization of Brazil’s vast land resources is its poor transportation infrastructure. This makes it difficult to access remote areas and to transport bioethanol cost effectively. The Brazilian industry is however dealing with these issues, by for example the construction of multiple bioethanol pipelines to seaports. This will likely significantly reduce costs and will further improve its export capabilities (see paragraph 4.2.2). The investment environment is another important factor which creates a relatively weak investment conditions for the industry. High tax rates and limited capital resources are the main inhibitors in this case (see paragraph 4.2.2). The bioethanol industry is also faced with a strong competition with domestic food supply and the destruction of natural environments. These are important inhibitors for extensive growth, as the required land use changes of increased sugarcane harvesting potentially cause unwanted reductions of domestic food production and destroys important CO2 sinks (e.g. Amazon rainforest). A general consensus with regard to this topic has not been reached (see paragraph 4.2.3).
Table 5.4: IFAS table – EU Bioethanol Industry (Large Scale producers) Internal factors Weight Rating Weighted Comments Score Strengths
Diversified feedstock base 0.10 3.0 0.300 Multiple feedstock types lowers risks – but all
compete with food supply
Transportation infrastructure 0.15 3.5 0.525 Western Europe – well developed seaport, rail and
road infrastructure
Governmental support 0.15 2.5 0.375 Industry relies on government support
Small number of domestic 0.10 3.5 0.350 Offers large scale producers ample room for competitors development
Weaknesses
Small production capacity (EU 0.10 3.0 0.300 Current and potential capacity relatively low in total) comparison to U.S. and Brazil
Relatively high production costs 0.25 2.0 0.500 Production costs and energy efficiency make and low energy efficiency industry uncompetitive – without government support
Limited land availability – 0.05 2.0 0.100 Land availability relatively low in comparison to U.S..
EU Bioethanol Firm Strategy 121 MSc. Thesis - David Borgman dependent on imports Br – EU likely dependent on imports
Competition with food supply 0.10 2.0 0.200 Current feedstock use competes with food supply Total scores 1.00 2.650 Note: weighted total score range from 1.0 (poor) to 5.0 (outstanding), 3.0 is an average score
The EU bioethanol industry, specifically focused at large scale producers, scores below average (2.65) in exploiting its strengths and improving its weaknesses. A diversified feedstock base is one of the strengths of the industry. It lowers the risks of bad harvests of a single feedstock type. However, all crops used compete directly with the food supply. This considered unfavourable as it may increase food prices, and does not contribute to a positive image for the industry (see paragraph 4.1.2, 4.2.3). The transportation infrastructure for fuels and feedstock, especially in Western Europe, is an important strength for the industry. It can contribute to a reduction of transportation costs and makes the accessibility of feedstock relatively easy (see paragraph 4.2.4). Governmental support is one of the main driving forces behind the industry, and an important strength for the domestic development of supply and demand. However, many EU firms are fully reliant on this market protection, making it also somewhat of a weakness. Proactive firms (e.g. Abengoa Bioenergy, Tereos) venture beyond the EU borders, which makes them less vulnerable for the unfavourable European feedstock and production conditions. These firms are less reliant on government support and are the likely winners, should blending mandates and import tariffs be reduced (see paragraphs 4.1.1, 4.2.1). A perhaps more subtle strength is the relatively small number of domestic competitors. A reasonably concentrated industry, with a relatively stable domestic competitive environment, allows large scale producers to grow more easily. The intensity of competition is currently relatively low, which likely offers large scale players preferential access to resources. This also may deter entrants to the EU industry. However, the relatively low number of competitors in comparison to the U.S and Brazilian industries is also an indicator of its weaknesses (see paragraph 4.1.1). The relatively small production capacity of the EU industry limits the ability to achieve economies of scale, as is possible in the U.S. and Brazil. Combined with the limited land availability, the EU industry is unlikely able to provide the entire domestic demand. Which makes the market and industry reliant on imports from areas such as Brazil. For the EU to achieve its blending targets imports are likely required. This means that market access (in terms of imports), needs to be relatively open. This directly threatens the existence of EU producers (see paragraphs 4.1.1, 4.2.1, 4.2.4). Those firms which are not prepared, through for example efficiency, size and/or foreign activities will likely suffer. An important factor in this discussion is the relatively high costs and low energy efficiency of EU domestic bioethanol production. It is not competitive with Brazilian imports, which is an essential weakness and makes the industry uncompetitive on the global market. In addition, as noted earlier, the industry competes with food supply, contributing to higher prices and weakening its image of sustainability. This requires a transition towards non-food crops and cellulosic processes. However, in comparison to the aggressive and ambitious U.S strategy (e.g. $500 million per year 2008-2015) for
EU Bioethanol Firm Strategy 122 MSc. Thesis - David Borgman the development of advanced biofuels, both the governmental as well as EU producing-firms efforts are appearing to lag behind in this area (see paragraphs 4.1.1, 4.1.2, 4.2.1, 4.2.3).
5.3 Industry Matrix
The final element which contributes to the assessment of the EU industry’s competitive position in the bioethanol industry and the selection of relevant strategic factors for the formulation of strategic options for large scale EU producers is the Industry matrix. For the formulation of the industry matrix 10 key success factors (KSF’s) were selected that appear to be determinants for the success in the industry. For each success factor a weight is allocated, which determines its relative importance in comparison to other factors. Each industry is provided with a rating for the success factors, which is an indicator for the relative performance of that particular industry. The final weighted score determines the relative performance of the three industries. As is also the case with the EFAS and IFAS tables, undoubtedly more and perhaps other KSF’s are relevant for the industry matrix. The selection of the key success factors is based on the findings of chapter 4. With each factor a reference is provided to the appropriate paragraph. The experts and stakeholders interviewed for the validation of the formulated strategic options, will be asked for their view on what KSF’s are for the industry. This serves as a validation for the selected KSF’s of the researcher. The actual total scores of the industry matrix (table 5.5) are less relevant than the relative difference between the three scores. Unlike the EFAS and IFAS tables, the industry matrix reflects the current state of the industry, not necessarily the ability of a competitor to improve its position.
Table 5.5: Industry matrix - U.S., Brazil, EU bioethanol industries
United States Brazil European Union Weighted Weighted Weighted Key success factors Weight Rating score Rating score Rating score
High energy balance of end product 0.10 2.0 0.200 4.5 0.450 2.1 0.210
Low production and feedstock costs 0.20 2.0 0.400 4.75 0.950 2.0 0.400
Large feedstock base 0.15 3.5 0.525 4.5 0.675 2.0 0.300 Sustainable feedstock supply and bioethanol production 0.05 2.0 0.100 3.0 0.150 2.0 0.100
Governmental support / incentives 0.10 4.5 0.450 4.0 0.400 3.5 0.350
Stable policy environment 0.10 4.0 0.400 3.0 0.300 3.5 0.350
Stable and strong economic environment 0.05 3.0 0.150 2.5 0.125 3.5 0.175
Societal support 0.10 3.5 0.350 4.5 0.450 3.0 0.300
Transportation infrastructure 0.10 3.0 0.300 2.5 0.250 4.0 0.400
No competition with food/feed supply 0.05 1.0 0.050 1.0 0.050 1.0 0.050 Total scores 1.00 2.925 3.800 2.635 Note: weighted total score range from 1.0 (poor) to 5.0 (outstanding), 3.0 is an average score
EU Bioethanol Firm Strategy 123 MSc. Thesis - David Borgman As perhaps expected, the Brazilian industry scores highest in comparison to the other two industries, with a score of 3.800. It is followed by the United States with a score of 2.925, and the EU, with a score of 2.635. The High energy balance, low production and feedstock costs, and large feedstock base put the Brazilian industry clearly ahead of the other two (see paragraphs 4.1.1, 4.1.2). In addition, societal support is an important factor for the creation of domestic demand. With its high share of flex-fuel vehicle sales, Brazil scores high on this factor as well (see paragraphs 4.1.3, 4.2.3). The U.S industry has a lead with Governmental support / incentives and a Stable Policy environment. The Energy Security and Independence Act, with a long term focus, is an important element for the U.S lead with these factors (see paragraph 4.2.1). The EU industry is lagging behind with almost all key success factors. Its transportation infrastructure, and relatively stable and strong economic environment are the only major success factors where it has a lead (see paragraph 4.2.2, 4.2.4). All three industries score relatively low on the factors Sustainable feedstock supply and bioethanol production, and No competition with food/feed supply. These factors are likely to be important for enduring success of the industries in the future. Without sustainable management of the utilized resources, the industries will more or less resemble a fossil fuel industry, where the resources are finite. The development of advanced biofuels which do not compete with food supply, and which can be harvested sustainably, appears to be the key success factor for sustainable market development (especially for the U.S. and EU) (see paragraph 4.1.1, 4.1.2, 4.2.3, 4.3).
A shift to more energy efficient and sustainable advanced biofuels could have a large impact on the weighted score, and thus competitive position of any of the three industries. A transition from cereal- based ethanol to advanced bioethanol could have an impact an multiple key success factors. It, would improve the High energy balance of end product, may lower production and feedstock costs, enlarge the feedstock base, improve sustainable feedstock supply and bioethanol production, could likely count on increased societal support, and it would positively impact the competition with food/feed supply. Should the EU industry achieve such a transition in the short term, and score for example a rating of 4.0 on the previously mentioned factors, its weighted total score would increase substantially to 3.875. This could increase its competitiveness dramatically from the currently low score of 2.635. The U.S. industry, which is propelled by ambitious advanced biofuel targets, a rating of 4.0, would improve its weighted score to 3.9. However, these scores are merely indicative of a potential change, and require the provision that the other ratings remain identical and no major (external) disruptions to energy supply and demand would occur. A change to other factors, such as increased governmental support, or the improvement of the economic environment could also have a substantial impact on the position of a particular bioethanol industry. On the basis of current conditions and expectations, a transition to advanced biofuel production has the potential to improve the competitive position of the EU industry and its producers substantially. However, this results in limited short term improvements (due to commercial viability).Being active in the most favourable industry (Brazil) could prove to be more advantageous for an individual large scale EU producer in the short term.
EU Bioethanol Firm Strategy 124 MSc. Thesis - David Borgman 6 Conduct
In this sixth chapter the results of analysis of the basic conditions and industry structure is translated into concrete strategic options for large scale EU bioethanol producers. The aim of these strategic options is to gain a competitive advantage over competing U.S and Brazilian producers within the coming two decades. The chapter revolves around the following two research questions: - With regard to which strategic aspects, based on the theoretical framework and market analysis can large scale European producers gain a competitive advantage over Brazilian and U.S. producers? - By the means of which strategic options can large scale European producers achieve this competitive advantage? The first step towards the formulation of strategic options has been taken in chapter five, by selecting relevant external and internal factors for the three discussed industries. This selection will be specified further in paragraph 6.1. On the basis of this specification and the strategies discussed in chapter 3 (3.3), several strategic options are formulated in paragraph 6.2.
6.1 SFAS
The EU SFAS matrix, or Strategic Factor Analysis Summary matrix, is the culmination element of the analysis of the Basic conditions and Industry Structure (chapter 3), the selection of external and internal factors, and the assessment of the competitive position (chapter 4). The SFAS matrix for the EU industry (large scale EU producers) is presented in table 6.1. A discussion of the selected strategic factors and the weighted total score forms the basis for the formulation of suitable strategic options. Table 6.1: SFAS matrix – Large Scale EU producers W R e a i t g
i Weighted n h g t Strategic Factors Score Comments
(O) Advanced biofuels 0.15 2.0 0.30 Relative weak development in this area
(O) Foreign Direct Investment 0.15 2.0 0.30 Only few firms invest in favorable areas
(T) Brazilian bioethanol imports 0.10 2.0 0.20 Firms rely on import tariffs for protection (T) Feedstock prices, availability and 0.10 3.0 0.30 Diverse feedstock supply – increased competition for competition food crops
(T) Sustainability concerns 0.10 2.5 0.25 Critical public/political debate – industry unconvincing
(S) Transportation infrastructure 0.10 3.5 0.35 Western Europe – well developed seaport, rail and road infrastructure
(S) Governmental support 0.10 2.5 0.25 Industry relies on government support
(W) Relatively high production costs and 0.20 2.0 0.40 Make industry uncompetitive low energy efficiency Total scores 1.00 2.35
EU Bioethanol Firm Strategy 125 MSc. Thesis - David Borgman The selection of the strategic factors presented in table 6.1 is based on the highest weighted factors of the EU EFAS and IFAS tables of chapter 5. The opportunities, threats, strengths and weaknesses, are core factors for determining the strategic course of action for a typical large scale EU producer. As with the EFAS and IFAS tables, the weighted total score ranges from 1.0 (poor) to 5.0 (outstanding), and 3.0 being an average score. The original weights of the EFAS and IFAS tables have been adjusted, in order to reach a total weight of 1.00. The factors Feedstock prices, availability and competition, Transportation infrastructure and Governmental support have been downwardly adjusted by 0.05 points as the influence of a large scale EU producer on these factors is relatively limited in comparison to the factors, which score 0.15 or higher. The factor Relatively high production costs and low energy efficiency has been downwardly adjusted by 0.05 points in order to make the relative difference between the factors more balanced. It remains the highest weighted factor as costs and energy efficiency are the leading determinants for success in the industry.
The weighted total score of 2.35, represents the relative weakness of the EU industry’s potential for achieving a competitive advantage. However, this does not necessarily stop individual large scale EU producers from becoming competitive players in the world market, as long as their activities are based on more efficient production and a more competitive cost position. Relatively high production costs and low energy efficiency of the end-product are the fundamental inhibitor for the competitiveness of EU-based ethanol. In order for an EU firm to generate a competitive advantage with foreign industries (outside EU), its total costs (‘at the pump’) need to be at least on par with- and preferably lower than imported bioethanol. As long as food-based feedstock is used this will likely remain an issue, as feedstock prices, availability and competition, are an important strategic issue. Prices for cereal-crops have gone up in recent years, and are likely to remain high as emergent economies like China and India pursue a standard of living similar to those in developed nations. This will put pressure on demand for food and land availability worldwide. Consequently this has contributed to Sustainability concerns for biofuels and has reduced the public support (especially in the EU). Without dealing with sustainability issues, such as well-to-wheel GHG emissions, the food- feed-fuel debate, land use changes and energy efficiency, the industry (especially in the EU) will be increasingly pressured by the public and politics. Without their support, bioethanol could eventually be pushed from the renewable energy agenda and the EU bioethanol-fuel industry could cease to exist. The development and use of Advanced biofuels, as concluded in paragraph 5.3, are a vital opportunity for EU-based production to become competitive with low-cost competitor Brazil. Compared to the U.S industry, the EU appears to currently perform relatively weak in the development of this major opportunity. However, a transition towards advanced biofuels is unlikely to be realized within a few years, as there are still cost competitiveness issues, which make it uncompetitive with conventional bioethanol and fossil fuels. An important factor for the development of advanced bioethanol is Governmental support. Historically this has been an important factor contributing to the strength of the industry. But with recent proposals for downward adjustments of blending mandates, large scale EU producers may be wise to develop a more independent position. Foreign direct investment may contribute to developing an independent position. Instead of worrying about the potential impact that
EU Bioethanol Firm Strategy 126 MSc. Thesis - David Borgman Brazilian imports may have on their position, EU firms could become exporting firms from Brazil. By setting up production facilities, and/or investing, in favorable production regions like Brazil, they could improve their competitive position through a reduction of production costs and an improved energy balance. Alternatively, a first-rate EU transportation infrastructure may help in reducing costs, but should only be considered as a minor strategic asset for the current state of the industry. The EU industry may be in a weak competitive position, but this does not mean that ‘all is lost’ for large scale EU producers. Paragraph 6.2. will discuss the options large scale EU producers have to make the most of these strategic factors.
6.2 Strategic Options
After a comprehensive analysis of the key strategic factors, relevant for large scale EU bioethanol producers, the translation can now be made into strategic options. The options presented in this paragraph should support the improvement of the EU industry’s scores on the industry matrix. To gain an industry wide competitive advantage with EU-based production is perhaps slightly unrealistic, considering the relatively weak position the EU industry currently has. The EU industry is in a position in which it offers an ‘increased price for a standard product’ (Bowman, 1988) (near commodity state). According to Bowman’s Strategic Clock (1988) this is an infeasible strategy which is destined to fail, as was discussed in chapter 3. In the short term, it is unrealistic to expect the industry to improve its position substantially enough, in order to gain a sustainable competitive advantage. However, the goal of this research is to support large scale EU producers in gaining a competitive advantage over U.S. and Brazilian producers. Individual large scale EU producers are not necessarily inhibited by the weak and uncertain position of the EU industry.
By applying the findings with regard to strategy of chapter 2 to the bioethanol industry, a more profound insight into suitable strategies can be gained. In this respect, achieving low costs is a core element of any strategy in this industry. Overall cost leadership (Porter, 1998), is not necessarily a prerequisite for success, but being on par with the lowest total costs (‘at the pump’) in the bioethanol industry certainly improves the opportunities of the company to be competitive. Achieving low costs is a key aspect that should be a core element of any strategy in the bioethanol industry. The strategic options are formulated on the basis of the theoretical discussion of chapter 3, and the empirical study of chapters 4 and 5. The formulation of the strategic options, based on the Theoretical Framework, consists of four steps: 1. Selection of factor(s) from SFAS matrix 2. Selection of theory-based strateg(y)(ies) from Theoretical Framework 3. Description of strategic options by researcher 4. Rating and adjustment of strategic options on basis of Expert/Stakeholder interviews (Chapter 7)
EU Bioethanol Firm Strategy 127 MSc. Thesis - David Borgman The following strategic options address the strategic factors and weaknesses which large scale EU producers are faced with, and are intended to contribute to the development of a competitive advantage and their ultimate success in the industry.
Strategic Alliance: ‘Strength in Numbers’ The formulation of the first strategic option is based on a combination of the following strategic factors: Relatively high production costs and low energy efficiency, Feedstock prices, availability and competition, and to a lesser extent; Advanced biofuels and Brazilian bioethanol imports. Dealing with these factors is fundamental for achieving a more competitive cost base. Combined with the selection of the strategy; Strategic Alliance, this results in the formulation of the following strategic option, with two distinct approaches.
If a firm is in a relatively weak position, teaming-up with other firms to combine and leverage resources may result in an improved competitive position. By engaging in a strategic alliance large scale EU producers may be able to achieve improved economies of scale and scope, especially in production and feedstock availability. Barney’s (2002) discussion of the strategic alliance may be useful for this strategy. The typical large scale producer is likely already engaged in various ‘non-equity alliances’ (Barney, 2002), such as supply agreements. This strategic option specifically aims to secure an ‘equity-based alliance’ or ‘joint venture’ with another (or multiple) party, which leads to a mutually beneficial partnership. The researcher proposes two distinctly different strategic alliances. The first approach would be to engage in a strategic alliance with a (large) petroleum company. Companies like Royal Dutch Shell and BP are working on the development of advanced biofuels, and are also subject to blending mandates. In addition, these are generally strongly capitalized firms, offering a large investment potential for the improvement of current processes (e.g. production, blending) and the development of advanced biofuels. The large scale EU producer offers knowledge and experience, and industry specific assets the petroleum firm may would like to utilize. In the short term, it could also offer the petroleum firm blending benefits. As the firm requires bioethanol for mandated blending, a strategic alliance with a bioethanol producer could offer cost benefits (e.g. long term fixed bioethanol price). The second approach would be to engage in a strategic alliance with (large) foreign competitors from Brazil and/or the U.S. Brazilian firms could improve their export position through a strategic alliance with an EU firm, and could improve its financial position through strong EU backing. The EU producer can benefit from the favorable cost conditions the foreign market offers. Both firms can benefit from combined capital resources, market access and access to feedstock, which can contribute to improved economies of scale and scope.
Global Strategy: ‘Take the fight to the ‘enemy’ ‘ The second strategic option is the most aggressive of the four. It revolves around the global strategy approach of Prahalad and Doz (1987), and the strategic factor foreign direct investment. Instead of
EU Bioethanol Firm Strategy 128 MSc. Thesis - David Borgman just being active in the relatively unfavorable EU environment, it may make sense to ‘take the fight to the enemy’. By establishing production facilities, or taking a majority share in established facilities in favorable industries (e.g. Brazilian market), the large scale EU producer may significantly improve its competitive position. The goal of this strategy would be ‘to gain access to low-cost factors of production’ (Prahalad and Doz, 1987). The favorable climate and labor-cost conditions, create favorable conditions for feedstock and bioethanol production in developing countries, such as Brazil and various African nations. Both Abengoa Bioenergy and Tereos have established activities in Brazil. Sekab, the innovative (advanced biofuel) Swedish producer is constructing a large production facility in Tanzania (Sekab, 2008). These firms have already identified the opportunity FDI offers. Instead of having to rely on EU import protection, this strategy enables firms to export and supply the EU market.
Innovation: ‘Competitive advanced bioethanol’ The third strategic option revolves around the development of advanced, cellulosic based, bioethanol. The strategic factors advanced biofuel, relatively high production costs and low energy efficiency, and to a certain extent governmental support, and the theory-based strategy; Innovation (Whittington, 2001), are important ingredients for this strategic option. Innovation (Whittington, 2001) is an important contributor for the improvement of efficiency, enlarging and diversifying the feedstock base, and the reduction of costs. Advanced biofuel production processes are a prime example of an innovation bioethanol producers can develop in order to achieve a competitive advantage. Innovating the production process, by developing a production process which uses low cost feedstock options (e.g. bagasse, wood waste, straw) which do not compete with food production, can significantly improve the cost competitiveness, increase the available feedstock volume, improve environmental sustainability, improve the energy balance, and contribute to improved societal support for the use of bioethanol. However, such a strategy requires (vast) capital resources for research and development. In addition to its own capital resources and potential additional private investments, the firm could seek EU governmental support (i.e. R&D subsidies), and seek cooperation with knowledge institutes (e.g. technological universities, research institutes). The option could also be combined with the first strategic option: Strategic alliance. The U.S governmental support for advanced biofuel development, in terms of financial incentives, is relatively strong in comparison to EU support. By engaging in a strategic alliance with an U.S. producer or production technology developer, the EU producer may exploit the strong U.S support for advanced biofuel development. This would enable the firm to achieve a strong competitive position through advanced bioethanol production.
Being amongst the first movers in achieving commercially viable advanced ethanol, is crucial for exploiting the gained knowledge advantage (e.g. through patents). Being one of the first firms in the (global) industry to produce cost competitive advanced bioethanol, may result in preferential access to financial resources (e.g. government, investors), feedstock sources (e.g. exclusive supply), and further knowledge development (e.g. attracts best in the business). This improves the potential for the development of a sustainable competitive advantage.
EU Bioethanol Firm Strategy 129 MSc. Thesis - David Borgman Transition towards Exit: ‘Get out of this industry’ With the fourth and final strategic option the large scale EU producer considers the weak position of the EU industry as a constant and long term factor. The retrenchment strategies discussed by Wheelen and Hunger (2005) form the theoretical basis for this strategy. This strategic perpective is combined with the overall relatively poor competitive position, specifically considering the strategic factors; Relatively high production costs and low energy efficiency , Brazilian bioethanol imports, and Feedstock prices, availability and competition. It is not aimed at gaining a competitive advantage in the bioethanol industry, but it could create new opportunities in different markets. It could make sense for a firm to exit the industry in search for more a profitable environment, in which the prospects for EU-based growth are more favorable. This strategy may be especially suitable for diversified firms and private-equity backed companies. The researcher proposes two different types of transition towards more favorable market conditions; an evolutionary approach, and a radical approach. The evolutionary approach may be suitable for a sugar and ethanol producer for example. The producer may focus on, or transition towards sugar production, by adapting its bioethanol facilities for the production of sugar. It may pursue this transition over a longer period of time in order to spread costs and maintain a degree of flexibility. Another option may be the transition towards production of products with a high added value. For example; biochemical production (e.g. bioplastics), pharmaceuticals, biomass-to-hydrogen, or bioelectricity may offer opportunities for an exit and entry into another industry. A diversified firm may possess the required core competences and capital resources to facilitate such a transition. Bioelectricity production could potentially capitalize on the development of increased electrification of transport. If the electricity required for the electric vehicle is produced from renewable sources this could generate additional political (i.e. subsidies) and societal (i.e. demand) support. A more radical approach would be to directly divest all bioethanol activities and use the capital to invest in alternative activities. This may be a suitable option for private equity backed firms, whose core competence is investment. As the market is still growing rapidly, both within the EU and globally, other competitors are likely to be interested in a fully operational bioethanol facility. This could result in minimal losses on the initial investment. The private equity backed firm could than pursue a host of other activities.
The presented options have a generic nature and are generally not tailor made for specific large scale EU producers. Further adaptations for a specific firm are therefore required. It may serve as an inspiration for the development of more specific and elaborate options. In addition, each option should not be treated in isolation. A combination or synthesis of options could prove to be more suitable for a specific firm.
EU Bioethanol Firm Strategy 130 MSc. Thesis - David Borgman 7 Performance
This chapter revolves around the assessment of the expected performance of the strategic options. The following two research questions are central to this chapter: - To what extent do market experts and stakeholders of the bioethanol market validate the suitability of the formulated strategic options in gaining a competitive advantage? - To what extent do the proposed strategies require adaptation to improve their potential suitability for large scale European bioethanol producers? Paragraph 7.1 discusses the method used for the interviews with market experts and stakeholders for the measurement of the expected performance and validity of the strategic options. The results of the assessment are presented and analyzed in paragraph 7.2.
7.1 Measurement of Expected Performance
Performance is the fourth and final element of the Industrial Organization Paradigm (Burgess, 1989) and the Theoretical Framework (3.5). Where the paradigm model is aimed at the analysis of industry performance, the application in this research requires a different approach. The formulated options of the previous chapter can not be studied empirically as they are not (necessarily) implemented in their proposed form. To assess the suitability of the options for achieving a competitive advantage, the expected perceived performance is measured. This measurement underlines the explorative nature of this research. The expected perceived performance measure should be interpreted as the measurement of the suitability of the strategic options for large scale EU bioethanol producers in gaining a competitive advantage over Brazilian and U.S competitors. The expected performance is measured by discussing several questions and statements for each of the proposed strategic options with market experts and stakeholders. These questions and statements are based on the key success factors of the industry matrix (5.3), and the SFAS table (6.1). The process of statement and open question formulation is discussed below. An overview of the interview questions and statements is provided in appendix VI.
Statement formulation The key success factors which are particularly applicable on firm level form the basis for 4 statements per strategic option. Each statement is assessed through a 5-point Likert-scale. The Likert-scale offers a quantifiable set of results, on the basis of which the suitability of the strategic options can be clearly visualized. In addition, the statements offer a structured assessment for the suitability of the strategic options, which would be more difficult if solely open questions were used. The statements are based on the following key success factors: high energy balance of end product, low production and feedstock costs, large feedstock base, sustainable feedstock supply and bioethanol production, and no competition with food/feed supply. To these KSF’s, the factor innovation is added. Although it is not explicitly listed as a key success factor, it can be considered as a
EU Bioethanol Firm Strategy 131 MSc. Thesis - David Borgman prerequisite for improving the EU competitiveness on several of the key success factors listed in paragraph 5.3 (especially those mentioned above). These key success factors are especially applicable on firm level, and competitive performance on these factors will likely contribute to the development of a competitive advantage. Assessing the strategic options with regard to these factors is therefore an important determinant of their potential suitability in gaining a competitive advantage. To the four statements, a fifth statement is added which serves as a final verdict for the strategic option. It assesses whether the interviewee validates the strategic option as a suitable strategy for achieving a (economic) sustainable competitive advantage in comparison to Brazilian and U.S. competitors. The key success factors; Governmental support / incentives, Stable and strong economic environment, Stable policy environment, Societal support, and Transportation infrastructure, are not included in the statements. A bioethanol producer has less (direct) influence on these key success factors, and they are therefore less applicable to the strategic options. Testing the proposed strategic options on these factors is therefore less suitable and relevant. However, in order to account for the influence of government support / policy, which combined, is the highest weighted and rated key success factor of those left out of the statements, an open question which addresses the EU support is included.
Open question formulation In total five open questions have been formulated in order to validate the findings of the researcher and to clarify the perspective of the interviewee. The first two open questions address the classification of the EU competitive position, and the EU’s potential in achieving a competitive advantage. With these two questions the conclusion by the researcher that the EU industry is in a relatively weak position is validated. With the third question the interviewee is asked to list the key success factors in the industry. This serves as a validation and ensures that the selection of the key success factors by the researcher (5.3) is not taken for granted. The fourth question addresses the aforementioned influence of EU government support. A fifth open question seeks to gain an insight into a timeframe for the commercial viability of advanced bioethanol. From the empirical study of chapter 4 it has not become clear when advanced bioethanol will be produced on a large scale commercial basis. This fifth question seeks to gain an insight from market experts and stakeholders. The set of open questions may alter the perspective provided by the researcher, or result in valuable additions, such as additional key success factors / strategic factors. After the statements, a final question will assess whether, according to the interviewee, adaptations or additions to the strategic options are required. Apart from the statements, the interview has an open and in-depth character, to allow for a high degree of market expert / stakeholder input. Additional and follow-up questions, developed during the interview, are not ruled out, which is in line with the explorative nature of this research.
EU Bioethanol Firm Strategy 132 MSc. Thesis - David Borgman 7.2 Results of Interviews
This paragraph will discuss the results of the interviews with market experts and stakeholders. A total of eight experts/stakeholders with different perspectives and positions in the industry have been interviewed. The interviewees have been selected on basis of the expectations of the researcher with regard to suitable sources of information (i.e. interviewees), and the network of the first scientific advisor. The researcher expected that these eight interviewees have a profound insight with regard to the (EU) bioethanol industry and appropriate strategic options. Table 7.1 provides an overview of the interviewees and their position in the industry.
Table 7.1: Overview of interviewees Position in industry Name Organization and Job description Industry association Rob Vierhout Ebio – European Bioethanol Association, Secretary General
Bioethanol production Mark Woldberg Royal Nedalco (Bioethanol producer EU), Business Development manager Rob Groeliker Abengoa Bioenergy (Bioethanol producer Global), Managing Director Abengoa Bioenergy Netherlands
Agri-trader / Biofuel producer Christian Heeren Cargill – Manager European Bioethanol activities
Research (institute) Herman den Uil Energie Centrum Nederland - Biomass, Coal and Environmental research, Researcher Peter Zuurbier Wageningen University – Management studies, Associate professor, North-South Centre (Account manager Latin America)
Rob Bakker Wageningen University - Agrotechnology & Food Sciences Group, DLO Researcher
Governmental Organization John Neeft Senternovem (Department of Economic affairs NL), Program advisor
The results of the interviews are divided into two sections; Results of open questions (7.2.1) and Results of strategic option validation (7.2.2). At the end of each topic (e.g. open question) a conclusion is provided, which serves as a basis for the final conclusions in chapter 9. The results per interview are provided in a separate appendix, which is confidential and only available on request.
7.2.1 Results of open questions
This section discusses the results of the five open questions which preceded the statements utilized for the validation of strategic options. It is divided in five sub sections for each of the questions: EU competitive position, EU potential, Key Success Factors industry, EU Government policy, and Advanced bioethanol. In order to improve the readability of the results, they are, where possible, summarized for groups of respondents and generally not specified per interviewee.
EU Bioethanol Firm Strategy 133 MSc. Thesis - David Borgman EU competitive position With regard to the question: How would you qualify the competitive position of the EU industry in comparison to the Brazilian and U.S industries?, the following results were obtained.
All respondents indicate that the EU industry is currently in a relatively poor competitive position compared to the Brazilian and U.S industries. The relatively poor competitive position was especially striking when compared to the Brazilian industry. Comparisons to the U.S industry also indicated that the EU was in a relatively poor competitive position, however to a lesser extent then in comparison to the Brazilian industry. As much as six respondents indicate that the EU industry is currently not cost competitive with Brazilian ethanol. In addition, three respondents state that the EU can not compete with the energy balance of Brazilian bioethanol. Two of those three respondents also indicate that the current Greenhouse gas reductions realized by EU-based bioethanol are not competitive with the GHG reductions of Brazilian bioethanol. Furthermore two respondents’ state that the EU can not compete with the vast land resources Brazil has available for bioethanol production. One respondent states that the EU industry does not have a natural hedge in which EU feedstock prices are fully reflected in the bioethanol price. Instead the final (export) Brazilian bioethanol price determines the EU bioethanol price. As a result the high prices for wheat, used as feedstock, are not reflected in the price of EU bioethanol, making it difficult for EU producers to produce competitively. With regard to sustainability, two respondents state that the EU position can be considered relatively strong considering Brazilian land use changes and relatively poor labour conditions. However as one respondent also stresses, the sugarcane industry (bioethanol feedstock) also creates job opportunities in a relatively poor country with a high unemployment rate.
With regard to the U.S industry generally less elaborate responses were provided. Specifically for this question, two respondents indicate that the U.S. industry is heavily subsidized. Various other respondents verify this view, but at a later stage in the interview. In addition, one of those two respondents also indicates that the U.S. industry generally achieves larger economies of scale, resulting in lower production costs. One respondent indicates that the U.S. market is better protected from cheap imports through relatively high import tariffs, and that they do realize a natural hedge of feedstock prices reflected in the final product price. Another respondent states that U.S. produces generally use cheaper energy resources (coal) to power the production process. According to this respondent this could be positive for the EU industry in the long run as it is already being forced to work more energy and cost efficiently. As fossil energy resources will continue to become more expensive, the EU bioethanol industry is already well into a transition path, while the U.S. is lagging behind. One respondent indicates that the growth limits for first generation bioethanol can already be seen in the U.S., as the industry is nearing the limits of corn production and its allocation to bioethanol production.
EU Bioethanol Firm Strategy 134 MSc. Thesis - David Borgman Finally, another respondent states that the EU industry can compete with the U.S industry, should the U.S export, which is currently not the case. According to this respondent the central location or U.S production limits exports and results in relatively high transportation costs. On a more general note, one respondent states that the production of feed, Dried Distillers Grain and Solubles (DDGS), is an important by-product which contributes to the competitiveness of EU producers. According to the respondent, this factor has insufficiently been covered in the market analysis. Another respondent states that the EU industry exists at the mercy of the European Union, indicating that government support ensures the survival of the EU industry. This respondent indicates that the EU competitive position is very poor. The following quotes are indicative of the results obtained for this question.
‘[The EU position is] not very good, I would even go as far as stating that it is bad’. John Neeft - Senternovem
‘The competitive position of the EU is not favorable’. Rob Bakker – WUR
‘EU Industry cannot compete under normal circumstances with Brazilian ethanol’. Rob Groeliker – Abengoa Bioenergy
‘The Brazilian market price determines the market price in Europe’. Mark Woldberg – Royal Nedalco
Note: the results have been translated from Dutch to English.
Conclusion – EU competitive position With regard to the EU competitive position the following conclusions can be drawn on the basis of the interviews. In comparison to the Brazilian industry, the EU industry is not competitive. In terms of production costs, the market price, energy balance of final product, realized GHG reductions and the available land resources the EU industry can generally not compete with the Brazilian industry. In terms of sustainability, two respondents find the position of the EU industry relatively strong in comparison to the Brazilian industry. Compared to the U.S industry, the competitiveness of the EU industry is also relatively poor, but to a lesser extent than in comparison to the Brazilian industry. High subsidies, larger economies of scale, better market protection (higher tariffs), and cheaper energy resources used in the production process, are important factors which contribute to the relative strength of the U.S industry, in comparison to the EU industry. However, as there are generally no bioethanol exports from the U.S to the EU, competition is currently less of a pressing issue compared to the Brazilian-EU competition.
The answers provided by the respondents confirm the competitive assessment of chapter 5, specifically paragraphs 5.2 and 5.3. The strong competitive position of Brazil, trailed by the U.S, and the relatively poor position of the EU, as was concluded upon in chapter 5, has been generally verified by the respondents. Factors listed in chapter 5 in the EFAS and IFAS tables and the Industry matrix
EU Bioethanol Firm Strategy 135 MSc. Thesis - David Borgman were to a large extent also mentioned by the respondents. Especially, production costs, energy balance, land resources, high subsidies / market protection (i.e. governmental support), were returning factors.
EU potential With regard to the question: Has the EU industry the potential to achieve a competitive advantage with EU-based bioethanol production, in comparison to the Brazilian and U.S. industry?, the following results were obtained. The potential of the EU industry to achieve a competitive advantage on the basis of current feedstock types and production processes is considered by four respondents to be low or even impossible. Two of those four respondents indicate that the potential with the current first generation process is low. One of the four respondents does not see the potential to compete on the basis of costs, perhaps only on the basis of sustainability. The use of import duties is listed as the only measure which can ensure long term EU competitiveness by one of the respondents. Another respondent states that the EU potential fully depends on the pending Renewable Energy Directive, and the support measures included. According to this respondent there is no potential for the EU industry without government support. As much as five respondents list innovation, and in some case more specifically cellulosic ethanol or biorefinery as the required development to potentially realize an EU competitive advantage. With the biorefinery concept all elements of the biomass feedstock are used for producing high-end products (e.g. bioplastics) and bioethanol (as a by-product). However, as one respondent notes, the biorefinery concept has been initiated in the U.S, which is currently the frontrunner in developing cellulosic bioethanol. Sustainability was a topic which was linked with a potential EU competitive advantage by four respondents. Two respondents indicated that the competitive position of the Brazilian industry may get worse when sustainability criteria would be implemented, which could affect Brazilian import into the EU. However, it is unclear if and when these criteria will be implemented globally.One respondent notes that it is not realistic that Europe is going to set certain criteria by itself as it is unclear what it will do for its competitive position. The following quotes are indicative of the results obtained for this question.
‘If you consider primary agricultural feedstock; wheat, sugar beet, corn, it is not a viable strategy to compete with Brazilian ethanol for the medium or long term’. Mark Woldberg – Royal Nedalco
‘Based on first generation technology the perspective is very limited, other than heavily supported by the government. But there are certainly also positive points, through smart solutions.’ Peter Zuurbier – WUR, North-South Centre
‘If you are able to achieve a biorefinery stage, in which residues are used for bioethanol production, achieving a competitive advantage is certainly possible’. Herman den Uil - ECN Note: the results have been translated from Dutch to English.
EU Bioethanol Firm Strategy 136 MSc. Thesis - David Borgman Conclusion – EU potential From the results it is clear that achieving an EU competitive advantage based on current processes is very difficult, if not impossible, certainly without government support. Innovation, and in particular the development of cellulosic bioethanol and high-end products through biorefinery, is listed as an important factor for establishing an EU competitive advantage. The development of cellulosic ethanol verifies the advanced bioethanol opportunity which was identified in chapter 5. The biorefinery concept, and the development of high-end products, was not explicitly listed in chapter 5. It therefore serves as a valuable addition to the listed opportunities of chapter 5. In addition, the recognition of sustainability criteria as a source of a competitive advantage also adds value to the discussed factors of chapter 5. Sustainability as such, was discussed in chapter 5, but not explicitly in terms of criteria adding to the potential of the EU industry to realize a competitive advantage. A final factor mentioned by two respondents, import tariffs/support measures, was also recognized in chapter 5 as an important factor. However, the term governmental support was used as a more comprehensive term. All in all, the EU potential has been recognized in a similar fashion as was concluded upon in chapter 5, however with valuable additions.
Key Success Factors industry With regard to the question: What are, in your opinion, the key success factors for achieving a sustainable competitive advantage in the bioethanol industry?, the following results were obtained. Various key success factors were listed by the respondents. Table 7.2 provides a categorized overview of those KSF’s.
Table 7.2: Categorized overview of key success factors for a sustainable competitive advantage in the bioethanol industry – results of interviews KSF category KSF’s listed by respondents Costs Low feedstock costs Access to the cheapest feedstock Economically attractive to produce bioethanol – the cost price Low costs, producing efficiently
Technology Technological development of second generation technology Development of cellulosic ethanol Technological progress Optimization of production techniques Flexibility in digesting various raw materials Ability to switch production between different products/commodities
Government Market protection (x2) Stable policy environment
Sustainability Producing sustainable Improving the GHG balance of the entire chain, avoid competition with food supply
Other Unique product Location
EU Bioethanol Firm Strategy 137 MSc. Thesis - David Borgman From table 7.2 it becomes apparent that there is especially an emphasis on technological factors and costs. Six key success factors related to technology were mentioned, versus four with regard to costs. In addition three factors related to government (support) were listed by the respondents. The factors listed under the category technology have implications for the categories; costs and sustainability. The development of cellulosic bioethanol (i.e. 2nd generation or advanced bioethanol) is generally aimed at reducing costs and improving the sustainability of the product (i.e. non-food materials, high energy balance). The latter two factors can be considered as underlining key success factors. The following quotes are indicative of results obtained for this question.
‘[It] is important to avoid competition with food supply, which pleads for the use of the biorefinery concept – which uses the residues of food production.’ Herman den Uil - ECN
‘[The] EU industry needs to make steps forward towards cellulosic ethanol, that is inevitable.’ Mark Woldberg – Royal Nedalco
‘If you can source your raw material cheaply, then I think you really have a competitive advantage’. Rob Vierhout – Ebio
‘[The] cost price is the most important. Secondly, proving that it can be done sustainable’. John Neeft - Senternovem
Note the results have been translated from Dutch to English.
Conclusion – Key Success Factors industry The key success factors obtained through the interviews are to a large extent similar to those listed in paragraph 5.3 (table 5.5). The factors; High energy balance of end product, Low production and feedstock costs, Sustainable feedstock supply and bioethanol production, Governmental support / incentives, Stable policy environment, and No competition with food/feed supply, of table 5.5, were also mentioned by the respondents (directly or indirectly). However, there is clear focus on technology with the KSF’s listed by the respondents. This is not explicitly listed as a KSF in table 5.5, but it was recognized as an underlining factor by mentioning that advanced bioethanol improves the scores on various KSF’s in table 5.5. The respondents have made this more explicit. The highest weighted KSF of table 5.5; Low production and feedstock costs, has also been recognized by several of the respondents. But the more dominant focus on technology by the respondents, perhaps does not directly underline the allocation of the highest weight to the Low production and feedstock costs factor in table 5.5. However, as mentioned earlier, technological development (i.e. cellulosic / advanced bioethanol) is considered a prerequisite for achieving low production and feedstock costs for the long term. Four factors of table 5.5; Large feedstock base, Stable and strong economic environment, Societal support, and Transportation infrastructure, were not mentioned by any of the respondents. Although these factors were not amongst the highest weighted factors of table 5.5, the fact that they
EU Bioethanol Firm Strategy 138 MSc. Thesis - David Borgman were not mentioned indicates that these factors are perhaps not considered to be ‘key’ in achieving a competitive advantage in the bioethanol industry. All in all, the selection of key success factors by the researcher is validated to a large degree by the respondents. Using these factors for the formulation of strategic options and the statements can be considered valid to a large extent.
EU Government Policy With regard to the question: Is the current EU governmental support suitable for the development of a competitive EU bioethanol industry?, the following results were obtained.
Generally the respondents are quite negative with regard to the EU governmental support and its suitability for developing a competitive bioethanol industry. In addition, several of the respondents stress that there are important differences with regard to implemented measures amongst the member states. This leads to a lack of transparency and uniformity in support, according to one respondent. Seven respondents state that the current EU governmental support is not suitable. One of those six respondents states that there is hardly any support available. Three respondents state that the EU is not doing enough to develop the industry, one of which states that there are too few incentives. Another respondent indicates that the current support is inadequate. The lack of a level playing field for biomass applications within the EU is, according to one respondent, indicative for the inadequate EU support. One respondent states that mandate targets only achieve their goal if they are enforced, with appropriate sanctions for petroleum firms which do not blend the required levels. One respondent provided a more macro perspective and stated that the EU energy matrix is not transformed quickly enough, which could negatively impact the EU’s energy security and increase dependence on foreign energy suppliers. But as another respondent stresses, EU policy is generally not aimed at developing a competitive bioethanol industry, as GHG savings are considered more important. With regard to market protection, the same respondent states that it can not be taken too far due to international agreements (WTO) and the lack of long term sustainability for such a system. According to another respondent, competing without market protection will be very difficult. On a more positive note, one respondent states that the structure of targets and mandates is positive for the development of the industry. One respondent provided a short list of required EU support measures in order to develop a competitive industry: - ‘Long term vision and supportive legislation where sustainable biofuels can obtain a place. Let the market do their work. - Develop European sustainability criteria (and audit these) for biofuels all over the world (Like Cramer criteria). - Level playing field in EU27 (today is a difficult jigsaw)
EU Bioethanol Firm Strategy 139 MSc. Thesis - David Borgman - Carbon Economy: If we take the GHG-problem serious we must make the full economy subject to GHG emission trade, incl. petrochemical industry’. One other respondent was also in favor of a carbon economy in which all bio-based products are assessed on the basis of GHG emissions. Several respondents mentioned the U.S. governmental support measures, such as large subsidies for cellulosic ethanol development and high import tariffs, which contribute to the competitive development of the U.S. industry. One respondent stated that the U.S. approach is much more on chain level, while the EU approach is more fragmented. By using a more integrated approach the U.S. industry manages to provide a clear vision and support for the development of the industry, according to this respondent. The following quotes are indicative of results obtained for this question.
‘The question is, where does the EU government want to go with the ethanol industry? That question needs to be answered’. Mark Woldberg – Royal Nedalco
‘I think the EU governments are not doing enough to make the industry more competitive. If you look at the U.S, where they are throwing big money to the industry to develop technology. I think that is the main issue to become more competitive’. Rob Vierhout - Ebio
‘In the U.S. the conditions are currently more favorable for developing technology than in Europe. That is important, because we could end up in a situation where we are trailing the U.S.’. John Neeft - Senternovem
‘The EU is not working hard enough in transitioning its energy matrix to more sustainable and independent sources. It is not being very smart at the moment, especially if you look at the U.S.’ Peter Zuurbier – WUR, North-South Centre Note: the results have been translated from Dutch to English.
Conclusion – EU Government Policy Based on the interview results it is clear that the EU governmental support is currently not suitable for developing a competitive EU bioethanol industry. The differences in measures between member states do not contribute to a level playing field within the EU. In addition, the lack of uniformity and fragmentation of measures may put the EU further behind the U.S (and Brazilian) industry where strong and united support on various levels contributed to the development of the industry. In addition, the development of cellulosic ethanol is heavily subsidized in the U.S, potentially resulting in a trailing EU industry with regard to this important technological development. From the market analysis of chapter 4, and the selection of factors of chapter 5, a similar perspective has been provided by the researcher. In these chapters it was concluded that EU support is certainly there, but lacks the power seen in the U.S. The respondents verify these results to a large extent. All in all, the current support does not contribute enough to an improvement of the competitiveness of the EU industry.
EU Bioethanol Firm Strategy 140 MSc. Thesis - David Borgman Advanced bioethanol In order to provide a perspective with regard to the commercial development of advanced (i.e. cellulosic) bioethanol, the respondents were asked the following question: In your opinion, in how many years will large scale advanced bioethanol production become cost competitive (commercially viable)?. The following results were obtained, which are relevant for the long term future perspective of the industry and strategy development.
Five respondents provided an indication of the expected commercial viability of advanced bioethanol production. The timeframe provided by the respondents varies from approximately 2011 to 2023. The most ambitious indication was provided by one respondent who states that around 2011 / 2012 cellulosic ethanol will be commercially produced in the U.S. An important reason for this, according to the respondent, are the mandates set in the U.S for cellulosic ethanol from 2010 onwards, and the large subsidies available for research and development of the product. Another respondent compares the commercial viability with the Brent oil price and states the following: - ‘At Brent oil price of $ 300-400, within 3 years - At Brent oil price below: more then 10 years at a large commercial scale’ Two respondents expect that it will be competitive with first generation bioethanol, within 5 to 10 years (i.e. 2013 – 2018). One of those respondents states that it will, however, depend on how the development of technology is stimulated through government policy. Two respondents have a more conservative view on the large scale production of advanced bioethanol. One of those respondents states that it will probably be commercially viable around 2020. The second of the two respondents bases its indication on U.S expectations, and states that it will be competitive with first generation bioethanol in 10 to 15 years time (i.e. 2018 – 2023). That respondent also states that by 2020 not more then a few percent of second generation biofuels will represent the biofuel market. After that, the respondent expects, depending on the cost price and the commercialization of technology, ‘it could really take off considerably’. Two respondents could not provide an indication of the commercial viability of large scale advanced bioethanol production. Several respondents indicate that the development of a separate market for advanced bioethanol may be required in order to ensure that it is developed. Without some sort of support measures it will be difficult for any firm to develop advanced bioethanol on a competitive level, as it can not directly compete, in terms of costs, with currently available products. The following quotes are indicative of results obtained for this question.
[On U.S situation]. ‘I think 2011, 2012 is certainly a solid number.’ Mark Woldberg – Royal Nedalco
‘If you look at the market share that can be achieved for 2nd generation biofuels, and you look at the current initiatives up to 2020, and at 2020 it is increased five fold, if you compare that with 1st generation, you are still only at 1-2%’. John Neeft – Senternovem
EU Bioethanol Firm Strategy 141 MSc. Thesis - David Borgman ‘In comparison to first generation bioethanol this will certainly succeed within 5-10 years. But if you compare its competitiveness with the current fossil transportation fuels, it is very difficult to say.’ Herman den UIl - ECN Note the results have been translated from Dutch to English.
Conclusion – Advanced Bioethanol The timeframe provided for the commercial viability of advanced bioethanol production on a large scale varies from 3 – 15 years. This is important for the perspective of the EU industry and producers for obtaining a competitive advantage, as it was also indicated as a key success factor. However, as several respondents have stated, the development of advanced bioethanol is especially strong in the U.S industry. Thus, the EU industry and its firm may have a challenge in acquiring the competences for producing advanced bioethanol on a large and competitive scale. The timeframe, with a spread of approximately 12 years, does not provide a particularly positive perspective for an improvement of the competitiveness of EU-based production in the short term.
7.2.2 Results of Strategic option validation
This paragraph discusses the results of the strategic option validation. The statement scores are discussed per strategic option. Furthermore, additional information provided by the interviewees, such as suggested adaptations, is discussed with each option. The final open question, which asks for suggestions for improvement of the options, is therefore integrated in the description of each of the options. The section; Additional options, discusses strategic options which were suggested by the respondents. The section; Other remarks, describes any responses which are deemed relevant, but could not be included in other sections. A short conclusion is provided with each section.
It is important to note that some respondents found it difficult to rate some of the statements for particular strategic options. For the fourth strategic option, transition towards exit, answering the statements proved to be particularly difficult, as some of the statements could not be applied. This strategic option has therefore been put subject to an open discussion for its validation, in each of the interviews. The results of the statements should merely be regarded as a quantitative aid for the validation of the strategic options. Generally, the open answers provided by the respondents with the discussion of each option proved to be particularly valuable for validation. This further underlines the explorative nature of this research, which seeks to formulate suitable strategic options which are supported by market experts and stakeholders. For each strategic option the most important open answers provided by the respondents are discussed. This discussion forms the basis for the improvement of the strategic options.
Strategic Alliance The first strategic option received varied responses with regard to the statements and in discussing the option. Table 7.3 provides an overview of the statement scores for this first strategic option.
EU Bioethanol Firm Strategy 142 MSc. Thesis - David Borgman Table 7.3: Strategic Alliance: Statement scores for N number of respondents
Option 1: Strategic Alliance Fully disagree Fully agree 1 2 3 4 5 N The option improves the firm’s efficiency and cost-base to a competitive level 1 2 1 3 7
The option improves the firm’s access to sufficient feedstock 1 1 1 1 3 7
The option improves the environmental sustainability of feedstock supply and 2 1 3 6 bioethanol production
The option improves the innovativeness of the firm and its competitive position 3.5 1.5 5 (e.g. advanced biofuel, efficiency, added value products)
The option enables a large scale EU producer to achieve a sustainable 2 1.5 2.5 1 7 competitive advantage in comparison to (large scale) Brazilian and U.S producers.
The statement scores for the first strategic option show a relatively wide spread, however generally with an emphasis towards agreement. The first statement of table 7.3 received varying responses. Four out of seven respondents agree or fully agree with an improvement of the firm’s efficiency and cost-base through this option. Two respondents are neutral, and one respondent disagrees. The second statement shows the widest spread of responses for this option. Four out of seven respondents agree or fully agree with an improvement of the firm’s access to sufficient feedstock through this option. One respondent is neutral, and two respondents disagree or fully disagree with the second statement. The third statement has received the most negative score of the five statements for this option. Three respondents out of six, disagree or fully disagree with an improvement of the sustainability of feedstock supply and bioethanol production through a Strategic Alliance. An additional three respondents are neutral with regard to the third statement. The fourth statement is scored highest of all of the five statements, however it also received the least number of responses – five out of eight. Those five respondents agree or fully agree with an improvement of the innovativeness of the firm and its competitive position through the strategic option. One respondent awarded both a score of four and five, hence the half (.5) scores. With regard to the final statement the respondents offer a varied view. Three out of seven respondents agree or fully agree with the option enabling a large scale EU producer to achieve a sustainable competitive advantage in comparison to Brazilian and U.S. producers. One respondent awarded both a neutral score (3) and agreed (4) with the statement, which explains the half (.5) scores. One respondent was neutral, and two respondents disagreed with the suitability of this option for achieving a sustainable competitive advantage in comparison to Brazilian and U.S. producers.
EU Bioethanol Firm Strategy 143 MSc. Thesis - David Borgman Discussion of option In discussing the option with each of the respondents the following relevant points arose: In referring to a strategic alliance with an oil company, one of the respondents states that ‘if a firm would be able to engage in such a strategic alliance, it would certainly offer opportunities’. However, the respondent questions if it will succeed, and states that ‘you can only engage in a strategic alliance if you have something to offer’. The respondent is uncertain if an EU firm would have something to offer in order to create the required win-win situation. A second respondent more or less verifies this view and states: ‘the problem with large oil companies is that they want to ensure that the competition among biofuel producers is as high as possible’. The respondent therefore does not see the option ‘happen very quickly’, but also states that it offers opportunities if the firm is able to realize such an alliance. In addition the respondent states that a strategic alliance with a Brazilian firm is a good option. A third respondent states that ‘to work together with a large petroleum firm to gain access to technology does not have added value at the moment’. According to this respondent, ‘bioethanol is not their core business, and they are not frontrunners for the access to technology’. However, there are a number of firms which ‘engage in strategic supply contracts with firms like Shell and BP, to ensure that a share of the firm’s ethanol production is sold. A fourth respondent also underlines the difficulty of a strategic alliance with a large petrochemical organization. According to this respondent ‘these firms have large stakes and will fully influence the direction and strategy of the firm’. The respondent states that there are some examples, for example with DuPont and BP, but there the setting is one of technology partners, in which each party has a certain role. This particular respondent does validate the second part of the strategic option, in which a strategic alliance is realized with firms from Brazil and the U.S. The respondent states ‘if you can make use of research funds [in the U.S] for example, I think that is a good option’. One respondent states that working together with technology partners is ‘a very wise strategy’. The respondent states that ‘you will have to look at the U.S. for partners, because there, there are many firms that work on both first and second generation processes’. There are also ‘very large opportunities within the EU to work together on the process’, according to one respondent. According to this respondent there are opportunities on multiple levels, both in acquiring knowledge as well as supplying knowledge. The respondent states; ‘for example, if the EU industry manages to develop high-end technology, it offer opportunities for strategic alliances’.
Two respondents do validate the suitability of strategic option with an oil company. One of those two respondents states that it is already happening. ‘It is the buyer of your product, so if you could build a strategic alliance with that particular sector, that would be good’. The second of the two respondents states that a ‘strategic alliance can work well both ways, up and down stream. Up stream with feedstock suppliers is certainly a good option to ensure feedstock and reduce costs if feedstock is difficult to obtain. Down stream, if you are a producer which is in a market with relatively few oil companies, a down stream strategic alliance with an oil company could ensure a solid demand for your product’. In addition the second of the two respondents validates the second approach of the option, and states the following; ‘on a horizontal level, if you have a customer which requires large
EU Bioethanol Firm Strategy 144 MSc. Thesis - David Borgman volumes which your company can not supply, engaging in a strategic alliance with other producer could also make sense’.
Conclusion – Strategic Alliance The strategic option is partially validated. The statement scores indicate that a minor majority of the respondents agrees with the suitability of this strategic option in realizing a competitive advantage in comparison to Brazilian and U.S producers. In the discussions of the option is became apparent that a strategic alliance with an petroleum firm can only be partially validated. Four respondents explicitly question it as a suitable or realistic option. Two respondents explicitly do see opportunities in this approach. An additional two respondents do not mention this approach as suitable or unsuitable. The second approach of the option, in which the EU producer engages in an alliance with a Brazilian or U.S producer, is also partially validated as suitable. Several respondents place this approach in a technological context in which a strategic alliance is established with a technology partner, preferably from the U.S. That could improve the EU firm’s competitive position as it gains access to the development of cellulosic ethanol and the related large subsidies available in the U.S. Overall, a strategic alliance is validated as a suitable strategic option by the majority of respondents. However, the context is somewhat different than initially proposed by the researcher. A strategic alliance with a (U.S) technology partner or U.S/Brazilian producer developing cellulosic ethanol, emerges as the preferred approach and is supported by the majority of respondents. It is an adaptation of the initially proposed approach of a strategic alliance with Brazilian / U.S producers. The petroleum firm approach may only be valid under the circumstance that the large scale EU producer has something to offer (e.g. technology) and is able create a win-win situation. Otherwise it could be merely result in a strategic supply alliance, which the option was not initially intended for. Most of the respondents indicate that with these adaptations the suitability of the option is improved.
EU Bioethanol Firm Strategy 145 MSc. Thesis - David Borgman Global Strategy With regard to the global strategy option the respondents provide a similar result with regard to the final statement, compared to the strategic alliance option. However, the respondents are more unified in the discussion of the option. Table 7.4 provides an overview of the statement scores for this second strategic option.
Table 7.4: Global Strategy: Statement scores for N number of respondents
Option 2: Global Strategy Fully disagree Fully agree
1 2 3 4 5 N The option improves the firm’s efficiency and cost-base to a competitive level 1 3 3 7
The option improves the firm’s access to sufficient feedstock 1 2 4 7
The option improves the environmental sustainability of feedstock supply and 1 4 2 7 bioethanol production
The option improves the innovativeness of the firm and its competitive position 2 1 1 3 7 (e.g. advanced biofuel, efficiency, added value products)
The option enables a large scale EU producer to achieve a sustainable 1 3 2 1 7 competitive advantage in comparison to (large scale) Brazilian and U.S producers.
The global strategy option receives relatively high scores for the first two statements. Six out of seven respondents agree or fully agree with an improvement of the firm’s efficiency and cost-base to a competitive level through the implementation of this option. One respondent awards a neutral score for the first statement. An additional six out of seven respondents agree or fully agree with an improvement of the firm’s access to sufficient feedstock through the option. One respondent disagrees with this statement. With regard to an improvement of the sustainability of feedstock supply and bioethanol production the scores are more neutral. Four out of seven respondents award a neutral score to this option. Two respondents agree, and a single respondent disagrees with an improvement of sustainability. With regard to the fourth statement the scores are relatively widely spread. Three out of seven respondents agree with an improvement of the innovativeness and the competitive position of the firm through the implementation of this strategic option. One respondent is neutral, and three respondents disagree or fully disagree with the suitability of this option for improving the and the competitive position of the firm. The fifth and final statement indicates that the suitability of the option is partially validated. Three out of seven respondents agree of fully agree with the option enabling a large scale EU producer to achieve a sustainable competitive advantage in comparison to Brazilian and U.S. producers. Three respondents are neutral with regard to this statement, and one respondent disagrees.
EU Bioethanol Firm Strategy 146 MSc. Thesis - David Borgman Discussion of option In discussing the option with each of the respondents the following responses hold particular relevance: One respondent states that there are certainly firms that pursue this option, ‘I think it is a good option. If you are going to invest in ethanol, why do it in Europe?’ The respondent refers to the relatively poor EU circumstances in which a firm can produce. A second respondent states that ‘nothing stops [the firm] for going to Brazil and produce there, but it does not change [the] cost position here in Europe’. According to this respondent, access to the cheapest feedstock is very important. A third respondent states that ‘it is no longer local, various firms are becoming global players. So it is already happening’. According to this respondent there is a clear trend of firms who are locating themselves closer to the feedstock source. Another respondent confirms the previous responses, and states ‘that [it] is a way to hedge against a bad developing European market. I think that is a real strategy pursued by some, so I think that is a possibility’. The respondent furthermore states; ‘if the conditions are not right, companies have the perception that there is no future for their business. [In that case] they can either go on holidays permanently, or they can say that it is better to invest somewhere else, where there is a bigger return on investment. It is as simple as that – it is global’. One respondent sees both up and down stream opportunities for this strategic option. ‘[Up stream], an EU firm invests in Brazil to reduce its feedstock costs. And downstream, the EU firm does not sell its ethanol in the EU, but goes to for example China to sell its bioethanol, where demand maybe much larger’. One of the respondents is somewhat more critical of the option than the others. The respondent states that it ‘is an interesting option’, [but] ‘you need to realize that if you go abroad to Brazil or African countries you are competing with Brazilian expertise with regard to sugarcane. So the question remains if you are fast enough in adapting the technology and are able to compete with the domestic firms in those countries’. The respondent does offer a solution for improvement of the option by stating the following: ‘from a more innovative perspective you could also look at other feedstock types’. The respondent explains that for example tropical sugar beet, which currently is (generally) not used for ethanol production, could ensure that the firm does not have to compete with the Brazilian sugarcane expertise.
Conclusion – Global Strategy The strategic option is partially validated for its suitability in achieving a sustainable competitive advantage in comparison to Brazilian and U.S producers. The statement scores indicate that a minor majority of the experts finds the option suitable for achieving a competitive advantage. In the open discussion the option is validated more explicitly. The majority of the respondents find the option a suitable strategy for achieving a competitive advantage. Several of the respondents refer to the fact that it is being practiced by several EU firms (e.g. Abengoa Bioenergy and Tereos). It may indeed be a valid option for avoiding the relatively poor EU competitive environment. But, as one respondent has
EU Bioethanol Firm Strategy 147 MSc. Thesis - David Borgman stressed, it is important to realize that the EU firm going abroad will directly have to compete with the local competitors. In addition, it does not necessarily improve the EU cost position of the firm.
Innovation The innovation is the most uniformly validated option. Both with the statement scores and in the discussion of the option, the respondents offer a largely unified view on the suitability of the option. Table 7.5 provides an overview of the statement scores for this third strategic option.
Table 7.5: Innovation: Statement scores for N number of respondents
Option 3: Innovation Fully disagree Fully agree
1 2 3 4 5 N The option improves the firm’s efficiency and cost-base to a competitive level 1.5 0.5 2 2 6
The option improves the firm’s access to sufficient feedstock 1 2 3 6
The option improves the environmental sustainability of feedstock supply and 1 1 3 1 6 bioethanol production
The option improves the innovativeness of the firm and its competitive position 1 2 3 6 (e.g. advanced biofuel, efficiency, added value products)
The option enables a large scale EU producer to achieve a sustainable 1 1 4 1 7 competitive advantage in comparison to (large scale) Brazilian and U.S producers.
The innovation strategy generally received the highest statement scores. However, for the first four statements only six out of eight experts that were interviewed provided scores. For the first statement, four out of six respondents agree or fully agree with an improvement of the firm’s efficiency and cost- base, realized through an innovation option. One respondent awarded both a neutral score (3) and disagreed (2), which explains the half (.5) scores. One respondent disagreed with the first statement. With the second statement, five out of six respondents agree or fully agree with an improvement of the firm’s access to sufficient feedstock through implementation of this option. One respondent disagreed with the second statement. For the third statement four out of six respondents agree or fully agree with an improvement of the sustainability of feedstock supply and bioethanol production through the innovation option. One respondent provided a neutral score, and one respondent disagreed. The fourth statement is the most uniformly and positively score of the five statements. Five out of six respondents agree of fully agree with the statement that the option improves the innovativeness of the firm and its competitive position. One respondent provided a neutral score for this statement. With regard to the fifth and final statement, the scores are generally positive, provided one negative outlier. Five out seven respondents agree or fully agree with the statement that the option enables a large scale EU producer to achieve a sustainable competitive advantage in comparison to Brazilian
EU Bioethanol Firm Strategy 148 MSc. Thesis - David Borgman and U.S producers. One respondent provided a neutral. Another respondent fully disagreed with the suitability of the option for achieving a competitive advantage. According to this respondent the EU industry fully depends on EU government support. This strategic option is particularly reliant on the potential support measures for advanced bioethanol represented in the pending Renewable Energy Directive, according to this respondent. The respondent also states that it will nevertheless be very difficult to compete with Brazilian ethanol, even when the development for advanced bioethanol is heavily supported by the EU.
Discussion of option In discussing the Innovation option it became apparent that generally all respondents favour this strategy for realizing a competitive advantage. One respondent even states that he is ‘convinced it is the only way to limit the competitive disadvantage or to cancel it out’, but several other respondents are somewhat more critical. Another respondent refers to the activities of Abengoa Bioenergy: ‘for instance what Abengoa is doing, trying to build these hybrid plants, I think that is an interesting option. Some really go for the innovation pathway’. Other respondents are more careful in praising the option as a successful path towards a competitive advantage. One of those respondents states that it requires two assumptions: ‘if you assume that Brazil will continue to produce first generation ethanol for a long time, and the U.S. will remain to produce ethanol relatively inefficiently, considering its poor energy balance, then it is certainly possible to achieve a competitive advantage’. One respondent states that ‘[innovation] is certainly an important contributor. But it should not be the final goal. If you fully focus on innovation, you will not earn money in the short run, and will not survive. One of the respondents states that the competitive environment has a large influence on the success of the strategy. The respondent states: ‘the ability to leverage such a strategy into a competitive advantage depends on the competitive environment. If there are a lot of competitors, innovation may become a necessity in order to differentiate your firm from others and to survive in the industry’. One respondent is quite negative with regard to the ability of advanced bioethanol (i.e. second generation / cellulosic ethanol) offering possibilities for an EU competitive advantage. The respondent states: ‘I wonder if even with second generation you are able to compete with Brazilian sugarcane based ethanol on the basis of cost price. The productivity of sugarcane is enormous, and their variable costs are also low. [To] compete is very difficult’. Finally, one respondent describes the pathway required for an innovation strategy. ‘It is certainly possible, but you are very dependent on the innovations you are developing. These kinds of development paths require a lot of time, even 10 years is not very much. So if you really want to achieve something you need to be willing to stay in there for the long haul. The learning curve, lowering your costs, [needs to be] spread out over 10-15 plants, and only than you can start competing. So support from the government is needed to go through such a trajectory. You need to be willing to step into a long term path, which will take 10-20 years’. Based on this respondent’s remark, the innovation is certainly not a quick fix.
EU Bioethanol Firm Strategy 149 MSc. Thesis - David Borgman Conclusion - Innovation Out of the first three strategic options, the innovation option has been most highly rated in the statement scores. Combined with the results of the discussion with each of the respondents, the option is validated for its suitability in achieving a competitive advantage. Compared with the results of the other options and the open questions, it is perhaps the only option which can realize an EU-based competitive advantage. Through the discussions with the respondents it became clear that the option is particularly suitable in combination with other options. Especially an innovation strategy combined with foreign (predominantly U.S) partners (i.e. strategic alliance / global strategy) may be a suitable strategy to gain access to, and develop, innovative production processes (i.e. cellulosic ethanol / biorefinery). However, several of the respondents do remain critical with regard to the option, and stress that it will not be easily realized and that it requires a relatively long pathway and corresponding high investment levels. Thus, as one respondent states: ‘support from the government is need to go through such a trajectory’. It is however clear that the EU industry and its producers require technological progress (i.e. innovation) in order to even consider competing with Brazilian sugarcane- based ethanol.
Transition towards Exit In assessing the suitability of this strategic option, the statements proved mostly to not be applicable as these are mostly aimed at a competitive advantage within the bioethanol industry. Nonetheless, the open discussion of the option with each of the respondents proved to be both valuable and suitable for determining the suitability of the option.
Discussion of option Two respondents explicitly disregarded the exit option as a suitable strategic option for large scale EU producers. One of the two respondents states that it is ‘not realistic, especially because there is quite a large support for agricultural production in Europe, both for food or non-food applications, particularly in Germany and France. Biofuel production, also first generation, will be continually supported’. The respondent indicates that even ‘if it is cost competitive or not, [the] market will continue to exist. So especially, if you are a large scale producer, transitioning to other markets is not realistic’. The second respondent states that ‘for a producer it is not a strategic option. It is an option, but not a strategic one. I have not seen it yet’. A third respondent states the option is not a wrong idea, but it will be difficult to realize. According to the respondent: ‘To go to those high added value products, you need to make huge investments. An exit is a fact if the circumstances are no longer there to produce, but a transition is a difficult story’. The other respondents are more positive with regard to the suitability of the option. One respondent states: ‘yes, that is also possible. It is happening a lot in the biodiesel sector, but not in the ethanol sector, yet. Another respondent states that it ‘is a possible option to secure the survival of the firm’. According to this respondent ‘every firm will make an assessment of the competitive position it can achieve in comparison to other players in the market. And will also assess how big the market will
EU Bioethanol Firm Strategy 150 MSc. Thesis - David Borgman become. So companies need to assess whether the market will be large enough and if they can produce competitively. If not, to should consider doing something else’. One of the respondents states that ‘there are certainly important opportunities in high-end products and applications for EU firms. Biorefinery and co-production is an important development, which is essentially a shift of a firm’s activities’. According to this respondent biorefinery, in which a wide range of (high-end) products is produced, is the direction technological developments are heading to. Bioethanol will ultimately become a by-product among a wide range of high-end products. Another respondent states that ‘at the end of the chain, there are a wide range of options, so it does not necessarily end at bioethanol for transport. But the question remains if your company has the competences to do so’. Thus not all firms have the ability to transition towards other industries. The respondent indicates that ‘a strategic alliance may help with such a transition’. The more radical approach of the option, in which all plants are divested, was not considered realistic by most of the respondents. As one of the respondents put it, ‘it is capital destruction’.
Conclusion – Transition towards exit Based on the discussion of the option, it can only be partially validated. Two respondents explicitly do not see this as a suitable strategic option. A third respondent indicates that it will be very difficult to realize a transition. One of the respondents points to biorefinery as a shift of firm activities, which is not necessarily an exit from bioethanol production. Three other respondents do see opportunities for this option, but indicate that it depends on the situation the firm is in, and the competences the firm has for such a transition. Divesting all of the firm’s bioethanol activities (i.e. plants) is not validated as a suitable option by most of the respondents, especially for large scale producers. This part of the option can therefore be disregarded. Generally, most of the respondents do see opportunities for high- end products, i.e. biorefinery, which was not necessarily discussed at this point in the interview. The option might therefore be more suitable as a diversification option, or as a trajectory of an innovation strategy, in which the firm produces multiple high-end products.
Additional strategic options Each of the respondents was asked if any changes or improvements should be made to the proposed strategic options in order to improve their suitability. Most of these suggestions have been integrated with the discussion of the options in the previous four sections. However, several respondents suggested additional strategic options which would complement the proposed set. Four respondents suggested a Diversification option could be added to the current set. Two of those respondents explicitly listed the option as a diversification option, one of which suggested it as a specification of the innovation option. The other two respondents indicated that biorefinery was an important (strategic) development which enables the firm to diversify its product range, making it less dependent on bioethanol. In essence, achieving a biorefinery stage, can be interpreted as a diversification strategy, as multiple products are produced which cater to different markets. An
EU Bioethanol Firm Strategy 151 MSc. Thesis - David Borgman example of such a strategy would be a firm which produces bioethanol, sugar, and high-end products like for example bioplastics, biopharmaceuticals and bioelectricity. A second additional strategic option which was suggested by one respondent was Forward integration. The respondent states that it was specifically suitable for large scale bioethanol producers. Unfortunately it was not elaborated on further. Forward integration can be interpreted as a bioethanol producer which offers the end product directly to the end-user (e.g. consumer) through its own network of fuel stations. With regard to the topic of integration, one other respondent indicated that ‘integration with other industries is very important’. This respondent particularly referred to integration with (bio-) technology partners and the strong (petro-)chemical industry within Europe, thus not necessarily forward integration. However, two respondents are quite sceptical of integration opportunities with the chemical sector within the EU. As one of those two respondents states: ‘I find it a bit too easy to say that we can become a big [ethanol] player on the basis of the [strong] biochemical industry. I think you need a clear directing hand from the government, and you need to develop knowledge’. These two respondents stress that the strength of the EU chemical sector should not be regarded as a prerequisite for success in the bioethanol industry.
Conclusion – Additional strategic options With the suggestion of a diversification option on the basis of technology (i.e. biorefinery development) a valuable additional strategic option can be added to the proposed set of options. However, treating it as a separate option is perhaps unnecessary, as it can be combined with the innovation option and with the exit option. Innovation, specifically the development of advanced bioethanol (i.e. cellulosic ethanol) can be considered a product of further development of the biorefinery concept, as more of the elements of the raw material (i.e. lignocellulosic) is used for production. However, with solely producing conventional and cellulosic ethanol, the degree of diversification can be considered limited. The transition towards exit strategy suggested the production of high-end products, which, as some of the interviews have indicated, are a product of biorefinery. As long as multiple products are produced, including bioethanol, which is likely considering the nature of biorefinery, this option could also be considered as a diversification strategy. Otherwise, diversified exit could serve as a more appropriate term. On the basis of one respondent it is difficult to include the forward integration option in the set of strategic options. However, it could serve as a suggestion for further discussion and research.
Other remarks In addition to the open questions, the discussion of the strategic options and additional options, the respondents provided various relevant remarks which completed their input. The remarks presented in this section are merely a selection of relevant remarks, and are especially related to the strategic options. Four respondents explicitly state that the proposed short list of strategic options is generally a valid selection. Remarks such as ‘I think you have a good list of options’ underline the valid selection of options. Five respondents state that they do not have other additional strategic options in mind which
EU Bioethanol Firm Strategy 152 MSc. Thesis - David Borgman could improve or complement the list of options. This can also be regarded as an indicator of the generally valid selection of the options, provided the improvements and adaptations suggested in the discussion of each of the options. One of those five respondents states that there are no other options, but the success of the EU industry and its firms ‘depends on what the EU wants, and how they see their dependence with regard to fossil fuels, energy policy’. One respondent states that each firm will make their own assessment, which will work differently for each firm. With that assessment the firm will have to see what option suits them best, according to the respondent. This respondent indicated that it is ‘a good list of options’. One respondent suggested placing the first three strategic options in a triangle. The respondent states: ‘you can classify the reasons to choose for one of those strategies, in that triangle. As a company you can identify which circumstances apply to you and the corresponding strategy, or a combination of the three strategies’. Another respondent also suggests that a combination of the first three strategies is possible. The respondent states: ‘what I see is that probably companies are probably going to combine option 1, 2 and 3. They will hedge against a worse climate in the future by investing also outside of Europe. They will try to get strategic alliances with the end-users, and they will go for the technology option’. Thus, placing the first three strategies in a triangle could make sense from the perspective that options are combined. Elaborating on the strategy triangle is however beyond the scope and timeframe of this research. One respondent is sceptical of the ability of a single firm establishing a sustainable (long term) competitive advantage. The respondent states that ‘it is not realistic that a singe firm or sector will dominate the market’. From that perspective, developing a strategy which enables the firm to realize a sustainable competitive advantage is perhaps unrealistic. Another respondent stated that ‘strategy in Europe is largely depending on coming legislation’. Developments in the political environment add therefore uncertainty to the competitive environment of EU-based bioethanol producers. One respondent underlines the high uncertainty, but offers a positive outlook for the future development of the industry. The respondent states: ‘currently the uncertainty is at a maximum level for an EU producer. But the favorable conditions are coming towards you [(as a company)]. Oil prices will rise. For example, with two harsh winters the prices will be back to the $150 level we have seen earlier this year. Under those conditions, when the need is there for alternatives, firms will innovate and governments will see the need to promote biofuels and other options’. Thus, the EU market conditions will improve for EU based producers, as the need for alternative options increases.
Final conclusions with regard to this chapter are presented in chapter 8: Conclusions and Recommendations, as these conclusions are to a large extent the final conclusions of this research.
EU Bioethanol Firm Strategy 153 MSc. Thesis - David Borgman EU Bioethanol Firm Strategy 154 MSc. Thesis - David Borgman 8 Conclusions, Discussion and Recommendations
In this final chapter, conclusions and recommendations are formulated, and the limitations and constraints of this research are discussed. The chapter provides an answer to the main research question, amongst other aspects: What are suitable competitive strategic options which can support large scale European bioethanol producers in gaining a competitive advantage over their Brazilian and American (U.S.) counterparts on a global scale within two decades? The final conclusions for this research are formulated in paragraph 8.1. Limitations and constraints are discussed in paragraph 8.2. Recommendations with regard to the strategic options and for further research are formulated in paragraph 8.3.
8.1 Conclusions
The final conclusions discussed in this paragraph revolve around four main topics: the competitive position and potential of the EU industry, key success factors, EU government policy, and strategic option validation and adaptation. The fourth topic, concerning the strategic options, provides an answer to the general research question.
Competitive position and potential of EU industry The analysis of the basic conditions and industry structure of chapter 4 identified that the competitive position of the EU bioethanol industry is relatively poor in comparison to the Brazilian and U.S. industries. The EU industry, based on production with EU-based cereal and sugar beet feedstock is relatively unattractive. Chapter 5 identified the opportunities, threats, strengths, weaknesses, and key success factors, on the basis of which a comparison of the competitive positions was realized. From this analysis it was concluded that the Brazilian bioethanol industry is in a relatively strong position, followed by the U.S. industry and trailed by the EU industry. The market experts and stakeholders confirmed this assessment. Especially with regard to production costs, the energy balance of the production process, available land resources, governmental support and market protection, the EU industry can not compete with the Brazilian or U.S. industry. Through the analysis of the basic conditions and industry structure of chapter 4, it has become apparent that achieving an EU competitive advantage on the basis of current processes is very difficult. Based on the analysis of chapter 4, the development of advanced bioethanol (i.e. cellulosic ethanol) was identified as an important opportunity for the EU industry to improve its competitive position in chapter 5. The market experts and stakeholders confirmed this assessment, and elaborated further by identifying the development of high-end products through biorefinery as an important factor for establishing an EU competitive advantage. In addition, the implementation of sustainability criteria and governmental support (i.e. market protection / support measures) were mentioned as important factors for realizing an EU competitive advantage. Furthermore, the market experts and stakeholders provided a timeframe for the commercial viability of advanced bioethanol on
EU Bioethanol Firm Strategy 155 MSc. Thesis - David Borgman a large scale – between 2011 – 2023. It is clear, that based on EU feedstock, the EU only has a potential if it achieves a technological advantage (i.e. through innovation).
Key Success Factors The key success factors listed in chapter 5, on the basis of which the competitive assessment has been made, have been validated to a large degree by the market experts and stakeholders. Six out of the ten listed factors of chapter 5 have been mentioned by the experts and stakeholders. These include; High energy balance of end product, Low production and feedstock costs, Sustainable feedstock supply and bioethanol production, Governmental support / incentives, Stable policy environment, and No competition with food/feed supply. The four other factors were explicitly not mentioned and can thus not be validated as key success factors. The experts and stakeholders particularly favored technological factors, followed closely by cost- based factors. This underlines the need for the development of advanced bioethanol and biorefinery, which contributes to the successful realization of the listed factors.
EU Government policy Based on the analysis of chapter 4 and 5, it can be concluded that the current EU governmental support lacks the strength seen in the U.S. Developing a competitive industry with the current support is therefore difficult. The market experts and stakeholders confirmed this assessment, and generally conclude that the current support is not suitable for the development of a competitive EU bioethanol industry. If the European Union seeks to develop a competitive industry which can contribute to the achievement of its renewable energy goals and an improvement of its energy security, other or perhaps additional measures are required. Otherwise it will likely continue to lag behind the U.S. and Brazilian industries. The question remains however, if the EU has long term potential and ambitions for developing a competitive bioethanol industry.
Strategic option validation and adaptation Four strategic options have been formulated in chapter 6 which are intended to contribute to gaining a competitive advantage for large scale EU bioethanol producers over competing firms from Brazil and the U.S. The options have been partially validated by the market experts and stakeholders, and do require adaptations for the improvement of their suitability, as discussed in chapter 7. Each option, its suitability and required adaptations for improvement is discussed subsequently.
Strategic alliance The strategic alliance option has been partially validated by the market experts and stakeholders. The first approach, in which an alliance with a large petroleum firm is realized, has been partially validated. Half of the consulted market experts and stakeholders questioned its suitability and found it somewhat unrealistic. The second approach of the option, in which the EU producer engages in an alliance with a Brazilian or U.S producer, has also been partially validated as suitable. Overall, a strategic alliance as such, has been validated as a suitable strategic option by the majority of respondents. However,
EU Bioethanol Firm Strategy 156 MSc. Thesis - David Borgman the context and formulation is different than initially proposed by the researcher. A strategic alliance with a (U.S) technology partner or U.S/Brazilian producer (developing cellulosic ethanol), emerges as the preferred approach and is supported by the majority of respondents. The formulation of the option in chapter 6 requires the above mentioned adaptation.
Global Strategy The global strategy option has been partially validated for its suitability in achieving a sustainable competitive advantage in comparison to Brazilian and U.S producers. The majority of the respondents find the option a suitable strategy for achieving a competitive advantage. The fact that it is practiced by several large scale EU producers (e.g. Abengoa Bioenergy and Tereos), is perhaps the best indicator for its suitability. However, it is important to realize that the EU firm will have to compete with the local industry it is entering, and that it does not (necessarily) improve its EU cost position. The formulation of the option in chapter 6 is maintained.
Innovation The innovation option is validated for its suitability in achieving a competitive advantage. It is the most highly rated option, and is particularly suitable in combination with other options. Especially an innovation strategy combined with foreign (predominantly U.S) partners (i.e. strategic alliance / global strategy) may be a suitable strategy to gain access to, and develop, innovative production processes (i.e. cellulosic ethanol / biorefinery). It is important to stress that the option requires a long term perspective and corresponding investment levels, and is therefore not a ‘quick-fix’ for achieving a competitive advantage. This boats well with the goal of this research which has a perspective of two decades for achieving a competitive advantage. The current formulation of the option in chapter 6 can be maintained, with the added mentioning ‘biorefinery’ as a technological trajectory, and the required long term perspective.
Transition towards Exit The transition towards exit option has been partially validated, and can be considered the least suitable option of the four. Several of the consulted market experts and stakeholders do not regard it as a realistic and suitable option. The approach in which all bioethanol activities are divested has not been validated as a suitable option. However, the development of high-end products is regarded as an important opportunity. This development can also be placed with the innovation option, in which biorefinery has been added as a technological trajectory. In addition, it can also be regarded as a diversification option, which has been suggested by several experts and stakeholders. Its initial formulation, formulated in chapter 6, should be disregarded and is therefore not considered as suitable for achieving a competitive advantage.
Additional strategic options The set of strategic options has been generally regarded as suitable by the market experts and stakeholders. One additional strategic option can be considered for the final set of options. Several
EU Bioethanol Firm Strategy 157 MSc. Thesis - David Borgman experts and stakeholders have suggested a diversification option on the basis of technology (i.e. biorefinery development). This option can be considered as a trajectory of the innovation option, in which not only advanced bioethanol is developed, but also high-end products, on the basis of the biorefinery concept. This could serve as a more realistic alternative to the exit option, which would bring the final set of options to three. Thus, the final formulation of the innovation option includes a diversification trajectory, and the exit option is removed from the final set of options.
Final set of Strategic Options The final set of strategic options can be narrowed down to three: Strategic alliance, Global Strategy, and Innovation. Each option requires some degree of adaptations as discussed in the previous sections. The options should not be treated in isolation as there are opportunities in combinations of the three. Particularly the innovation option can be supported by either of the other two options. Considering the relatively poor competitive position of the EU industry, one can question whether a large scale EU bioethanol producer has the potential to gain a competitive advantage. As this research has shown, there are three options which could potentially realize a competitive advantage for an individual company. These form the answer to the general research question. The firm is not necessarily bound by the EU situation and its shortcomings. However, it will be a difficult and likely long term challenge to gain a competitive advantage. Undoubtedly, not all firms will survive. The future will offer the final verdict as to how the industry and its players will develop, and if the formulated options can contribute, in practice, to the achievement of a competitive advantage in the bioethanol industry.
8.2 Discussion
This paragraphs discusses the limitations and constraints which the findings of this research are subject to. This discussion is important to consider whilst interpreting the conclusions and recommendations.
A major factor which influences the validity of this research is the bounded rationality of the researcher and the sources of information used. The biofuels field, specifically the bioethanol market, is developing rapidly and is subject to a vast amount of influencing factors. This makes it a complex field of study. Due to this complexity, not all developments and sources of information can be taken into account within the allotted timeframe of this research, as it is impossible to comprehend the full set of available information. As the bioethanol field is constantly developing, information with regard to the bioethanol industry / market presented in this report, particularly with regard to market size and leading firms, may already be out of date. This is however the nature of this type of research.
The theoretical framework of this research is subject to limitations and constraints. The choice for Porter’s Five Forces model and the analysis of PEST factors limits the breadth and depth of data gathered and the corresponding results of analysis. In order to limit the constraints of these theoretical
EU Bioethanol Firm Strategy 158 MSc. Thesis - David Borgman models, several additions have been made throughout the empirical research. These additions were mainly based on the expectations of the researcher with regard to relevant and valuable factors for the purpose of the research. Factors such as market size, size and location of competitors, and location of feedstock supply, are relevant for a comprehensive perspective on the bioethanol market / industry, but are not necessarily discussed in the Five Forces model. These factors lack support from the theoretical framework. Despite these additions by the researcher, additional factors could have been investigated to further improve the comprehensiveness of the research. Especially, an analysis of more country specific factors within Europe, such as related and supporting industries, and government policies, could have offered valuable additions to the research. The integration of Porter’s Diamond model with the theoretical framework could have realized such an addition. The researcher has considered the addition of this theoretical model. However, due to time constraints, an extension of the scope of the research through the Diamond model, or other additions, could not be realized.
With regard to the consulted market experts and stakeholders there are also limits and constraints. The respondents are mainly based in The Netherlands and Belgium, with the exception of one source which is also located in Brazil. The country of origin of the respondent may have an influence on their perspective provided in the interviews. However, generally all respondents are active in the European (EU) network, for example through cooperative research efforts. Other potential respondents from other EU member states were contacted, but did not choose to cooperate with this research. Consulting market experts and stakeholders from other EU member states and from outside the EU (e.g. Brazil. U.S.), could perhaps alter the perspective on suitable strategic options. In addition, the interests the market expert or stakeholder has in the bioethanol industry may also influence its perspective. A personal interest with regard to success or failure of the industry, may influence the perspective of the market expert or stakeholder. However, further research would be required to verify such a matter. After five interviews it became clear that the market experts had a more or less universal view with regard to the strategic options. At that stage the researcher decided to cease further snowball sampling and limit the total number of interviews to the eight planned at that time. Several respondents named one another as potential candidates for an interview, which may serve as an indicator of a valid selection of interviewees for the purpose of this research. With regard to the interview questions and statements, the respondents found it difficult at times to answer the statements completely. Explanation of the statements was required in order to ensure that the interviewees correctly interpreted its intended meaning. The open answers provided by the interviewees proved to be more appropriate for an in-depth assessment of the suitability of the strategic option. The explorative nature of this research, makes quantification of statements perhaps less suitable. Nonetheless, the statements did provide a basis for an open discussion of the option.
A final limitation of this research is the generic nature of the strategic options. As the strategic options are not tailored to specific large scale EU producers, they will likely require further adaptations in order
EU Bioethanol Firm Strategy 159 MSc. Thesis - David Borgman to improve their suitability when applied within a particular company. The options could therefore serve as a basis or input for further firm specific research.
8.3 Recommendations
This third paragraph provides recommendations for large scale EU producers, EU governmental policy development and for further research.
Recommendations for Large Scale EU Producers The final set of strategic options serve as the main recommendation for large scale EU producers. The formulated strategic options are however generic in nature. It can be therefore difficult to apply the option directly within a large scale EU firm, without further adaptations. Therefore each firm needs to consider its own competitive position and abilities in order to further suit the options in their own strategies. A large scale EU producer could formulate the tables of chapter 5 and 6 specifically for its own situation (EFAS, IFAS, Industry Matrix, SFAS). Combined with the generated results, the options formulated in this research could serve as an input and inspiration for the development of a tailored strategy which enables the firm to achieve a competitive advantage in the bioethanol industry. Each firm will have the best insight with regard to the application of the strategic options within their own strategy. Thus, considering and applying the findings of this report is left over to the firm.
Recommendations for EU Governmental Policy As concluded upon in paragraphs 8.1 and 7.2.1, EU government policy is currently not suited for the development of a competitive bioethanol industry. Several measures could potentially contribute to the development of a competitive industry. However, further research is required to validate the suitability of the following proposed measures; the industry requires a long term and stable policy, on the basis of which EU firms can make long term investment decisions. In addition, uniformity in support measures and import barriers among the member states, and among biobased energy products, is important for the creation of a level playing field. A level playing field can potentially contribute to a higher degree of integration among member states with regard to technology development. Improving the support for technological development is key for the success of the industry and the development of strong EU based competences. Increased research subsidy levels and cooperation among research institutes and member states could potentially contribute to this development.
Recommendations for further research Based on the conclusions and previously mentioned recommendations, the following recommendations for further research have been formulated. The development of a Strategy Triangle was suggested by one of the market experts, in which the three strategic options are placed. On the basis of certain dimensions of the triangle a firm could assess which option (or combination) applies best to their particular situation. The development of such a triangle can be considered for further research.
EU Bioethanol Firm Strategy 160 MSc. Thesis - David Borgman The formulation of suitable strategic options can also be performed from a fully empirical perspective. By investigating the applied strategies of leading and successful firms in the industry, best practice cases of suitable strategies can be identified. On that basis the potential success of the formulated strategic options of this research can perhaps be validated further. The feedback loop of the IO paradigm and the theoretical framework has insufficiently been discussed in this research. Assessing the influence of conduct and performance on the basic conditions and industry structure is perhaps a suitable subject for further research. The strategic options of this research, or those of best practice cases (previous recommendation), could be used as a starting point for conduct and performance. Several recommendations have been made with regard to EU governmental policy. However, further research could identify the most effective and efficient measures which can contribute to the development of a competitive EU industry and the improvement of the EU’s energy independence. An EU wide research could contribute to the development of an EU wide consensus. Such a research should, above all, clarify the ambitions the EU has for a competitive bioethanol industry, if any. The global strategy has been recommended as a suitable strategic option. Further research could specify suitable entry strategies into foreign markets, particularly those of Brazil and the U.S. Investigating the requirements and strategies for foreign investment and ownership could further aid EU producers. Biorefinery and the development of high-end biobased products has been recommended as a technological trajectory for EU producers. However, it is unclear what a suitable diversified product mix is and how the large scale EU producer should facilitate its development. Such a topic could be considered for further research.
EU Bioethanol Firm Strategy 161 MSc. Thesis - David Borgman EU Bioethanol Firm Strategy MSc. Thesis - David Borgman References
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EU Bioethanol Firm Strategy MSc. Thesis - David Borgman List of Figures and Tables
Figures
Figure 2.1: Research Framework Figure 3.1: Visualization of phase 1: Theoretical Framework Figure 3.4: Industrial Organization Paradigm Figure 3.5: Environmental variables: Societal, Task and Internal Environment Figure 3.6: Scanning External Environment Figure 3.7: The Five Forces of industry structure Figure 3.10: Three Generic Strategies Figure 3.11: The strategic clock Figure 3.12 Global integration / local responsiveness grid Figure 3.13: Theoretical Framework Figure 4.1: Basic Conditions and Structure (Theoretical framework) Figure 4.2: Biofuel cost estimates for different regions Figure 4.3: Production cost structure – Brazilian cane based ethanol 1990 Figure 4.4: Final costs Brazilian bioethanol in Port of Rotterdam in 2006 U.S.$ Figure 4.5: Biorefinery locations U.S. Figure 4.6: Sugar and Bioethanol production facilities in Brazil, 2007 Figure 4.7: EU bioethanol production facilities Figure 4.8: Energy balance of ethanol based on different feedstock types Figure 4.9: Range of Estimated Greenhouse Gas Reductions from Biofuels Figure 4.10: Sugarcane production area’s Brazil Figure 4.11: E85 Bioethanol fuel station density in Europe Figure 4.12: Price development Brazilian bioethanol and regular gasoline in U.S.$ per GJ (2004 prices) Figure 4.13: Comparison price per gasoline equivalent gallon in U.S.$ (Sept. 2005 – Jul. 2008) for gasoline, natural gas, propane, ethanol (E85) in the United States Figure 4.14: Comparison price per diesel equivalent gallon in U.S.$ (Sept. 2005 – Jul. 2008) for diesel, natural gas, biodiesel (B2, B5, B20, B99, B100) in the United States Figure 4.15: Projected world primary energy consumption (MTOE) Figure 4.16: Projected development of Primary Energy demand in million barrels per day oil equivalent 1980-2030 (MBDOE), percentages based on 2005-2030 period Figure 4.17: Number of passenger-km per year for personal transport activity by mode 2000-2050 Figure 4.18: Number of Light Duty Vehicles and Motorized Two-Wheelers per 1000 people for multiple world regions (2000-2050) Figure 4.19. Projections for energy demand in the transport sector in mln barrels oil equivalent per day Figure 4.20. Projection of global biofuels production in million tons (not corrected for energy content) Figure 4.21: Fuel Ethanol Production – projections up to 2020 Figure 4.22: Price or production costs in U.S.$ per liter ethanol / biodiesel alternative, compared to regular pre-tax gasoline or diesel, for the IEA region
EU Bioethanol Firm Strategy MSc. Thesis - David Borgman Tables Table 3.3: Variables in the Societal Environment Table 3.4: Variables in the International Societal Environment Table 3.5: External Factor Analysis Summary (EFAS table): Generic example Table 3.6: Industry matrix Table 3.7: Internal Factor Analysis Summary (IFAS Table) Table 3.11: Example of an SFAS Matrix Table 3.10: Corporate Directional Strategies Table 3.11: Long list of generic strategies – input for strategic option formulation Table 4.1a: Market overview – United States, Brazil, European Union Table 4.1b: U.S., Brazil and EU bioethanol production, internal market allocation, export, imports – 2007 Table 4.2: Large Scale U.S. producers and Industry Concentration Table 4.3: Large Scale Brazilian producers and Industry Concentration Table 4.4: Large Scale EU producers and Industry Concentration Table 4.5: Large Scale Producers and Industry Concentration – Global Table 4.6: World, U.S., Brazil and EU production and growth rates Table 4.7: Average yearly and total growth in bioethanol production 1999-2008 – World, U.S., Brazil, EU Table 4.7: Total number of U.S. bioethanol plants in production and under construction (1999-2008) Table 4.8: Brazilian bioethanol export costs to Rotterdam - 2006 Table 4.9: Typical Yields by Region and Crop (litres per ha. of cropland) Table 4.10: Overview of farmer owned capacity and capacity under construction for the U.S. Table 4.11: Feedstock use per type in million tons for bioethanol production 2006-2010 Table 4.12: Average bioethanol production per hectare of cropland used Table 4.13: Political-Legal factors affecting the bioethanol market Table 4.14: Overview of mandated biofuels levels in billion gallons – Renewable Fuels Standard Table 4.15: Economic factors affecting the bioethanol market Table 4.16: Socio-Cultural factors affecting the bioethanol market Table 4.17: Technological factors affecting the bioethanol market Table 4.18: Projection - World Primary Energy Consumption in million tons oil equivalent by source Table 4.19: Current (2004) and projected world biofuel consumption per region 2010, 2015, 2030 for the Reference Scenario (RS) and Alternative Policy Scenario in MTOE Table 4.20: Projected Brazilian Sugarcane, Sugar, Bioethanol and Bioelectricity production 2007-2021 Table 5.1: EFAS table EU bioethanol industry – Large scale Producers Table 5.2: IFAS table – U.S Bioethanol Industry Table 5.3: IFAS table – Brazilian Bioethanol Industry Table 5.4: IFAS table – EU Bioethanol Industry (Large Scale producers) Table 5.5: Industry matrix - U.S., Brazil, EU bioethanol industries Table 6.1: SFAS matrix – Large Scale EU producers Table 7.1: Overview of interviewees Table 7.2: Categorized overview of key success factors for a sustainable competitive advantage in the bioethanol industry – results of interviews Table 7.3: Strategic Alliance: Statement scores for N number of respondents Table 7.4: Global Strategy: Statement scores for N number of respondents Table 7.5: Innovation: Statement scores for N number of respondents
EU Bioethanol Firm Strategy MSc. Thesis - David Borgman Appendices
Appendix I: Research Framework P h a
Strategic Management Industrial Organization s e
Theory Theory 1 :
T
Literature review Literature review h e o r e t i
Assessment c a l
criteria F r a m e - Market analysis - w o r - Competitive position - k - Strategy formulation - P
Biofuel / bioethanol global h a s
market analysis e
2 :
M a r k e t
a
Assessment of European n a l
competitive position y s i s P h
Formulation of strategic a s e
options 3 :
S t r a t e g y
Market expert / Stakeholder f o r
consultation m u l a t i o n
P
Adaptation of h a s
strategic options e
4 :
A d a p t
Conclusion & a t i Recommendations o n
Figure 2.1: Research Framework
EU Bioethanol Firm Strategy MSc. Thesis - David Borgman Appendix II: Description of SFAS Matrix procedure The following paraphrase from Wheelen and Hunger (2005) describe how an SFAS matrix can be created: 1 ‘In Column 1 (Strategic Factors), list the most important EFAS and IFAS items. After each factor, indicate whether it is a Strength (S), a Weakness (W), an Opportunity (O), or a Threat (T). 2 In Column 2 (Weight), assign weights for all the internal and external strategic factors. As with the EFAS and IFAS Tables presented earlier, the weight column must total 1.00. This means that the weights calculated earlier for EFAS and IFAS will probably have to be adjusted. 3 In Column 3 (Rating) assign a rating of how the company’s management is responding to each of the strategic factors. These ratings will probably (but not always) be the same as those listed in the EFAS and IFAS Tables. 4 In Column 4 (Weighted Score) multiply the weight in Column 2 for each factor by its rating in Column 3 to obtain the factor’s rated score. This results in a weighted score for each factor ranging from 5.0 (outstanding to 1.0 (Poor), with 3.0 as average. 5 In Column 5 (Duration), indicate short-term (less than one year), intermediate-term (one to three years), or long-term (three years and beyond). In Column 6 repeat or revise your comments for each strategic factor from the previous EFAS and IFAS tables. The total weighted score for the average firm in an industry is always 3.0.
EU Bioethanol Firm Strategy MSc. Thesis - David Borgman Appendix III: Variables in the Societal Environment
Table 3.3: Variables in the Societal Environment (adapted from Wheelen and Hunger, 2005)
Economic Technological Political – Legal Sociocultural
GDP trends Total government spending for R&D Antitrust regulations Lifestyle changes
Interest rates Total industry spending for R&D Environmental protection laws Career expectations
Money supply Focus of technological efforts Tax laws Consumer activism
Inflation rates Patent protection Special incentives Rate of family formation
Unemployment levels New products Foreign trade regulations Growth of population
Wage/price controls New developments in technology Attitudes toward foreign companies Age distribution of population
transfer from lab to marketplace
Devaluation / revaluation Productivity improvements through Laws on hiring and promotion Regional shifts in population
automation
Energy availability and cost Internet availability Stability of government Life expectancies
Disposable and discretionary Telecommunication infrastructure Outsourcing regulation Birthrates income
Currency markets Pension plans
Health care
Level of education
Table 3.4: Variables in the International Societal Environment (Wheelen and Hunger, 2005)
Economic Technological Political – Legal Sociocultural
Economic development Regulations on technology transfer Form of government Customs, norms, values
Per capita income Energy availability / cost Political ideology Language
Climate Natural resource availability Tax laws Demographics
GDP trends Transportation network Stability of government Life expectancies
Monetary and fiscal policies Skill level of workforce Government attitude toward Social institutions
foreign companies
Unemployment levels Patent-trademark protection Regulations on foreign Status symbols
ownership of assets
Currency convertability Internet availability Strength of opposition groups Religious beliefs
Wage levels Telecommunication infrastructure Trade regulations Attitudes toward foreigners
Nature of competition Protectionist sentiment Human rights
Membership in (regional) economic Foreign policies Environmentalism associations (WTO, EU, NAFTA,
ASEAN)
Outsourcing capability Terrorist activity Health care
Legal system Lifestyle
EU Bioethanol Firm Strategy MSc. Thesis - David Borgman Appendix IV: Industry matrix formulation 1 ‘In Column 1 (key success factors), list the 8 to 10 factors that appear to determine success in the industry 2 In Column 2 (Weight), assign a weight to each factor, from 1.0 (most important) to 0.0 (not important), based on that factor’s probable impact on the overall industry’s current and future success. (All weights must sum to 1.0, regardless of the number of strategic factors.) 3 In Column 3 (Company A Rating), examine a particular company within the industry- for example, Company A. assign a rating to each factor, from 5 (outstanding) to 1 (poor) based on Company A’s current response to that particular factor. Each rating is a judgment regarding how well that company is specifically dealing with each key success factor. 4 In Column 4 (Company A Weighted Score), multiply the weight in Column 2 for each factor by its rating in Column 3 to obtain that factor’s weighted score for Company A. This results in a weighted score for each key success factor, ranging from 5.0 (outstanding) to 1.0 (poor) with 3.0 as the average’. 5-6 [Repeat step 3 and 4 for Company B] 1 ‘Finally, add the weighted scores for all the factors in Columns 4 and 6 to determine the total weighted scores for companies A and B. The total weighted score indicates how well each company is responding to current and expected key success factors in the industry’s environment. Check to ensure that the total weighted score truly reflects the company’s current performance in terms of profitability and market share’ (Wheelen and Hunger, 2005).
EU Bioethanol Firm Strategy MSc. Thesis - David Borgman Appendix V: Formulation of an EFAS table Wheelen et al (2005) provide the following description for the practical use of the EFAS table: 2 ‘In column 1 (External factors), list the 8 to 10 most important opportunities and threats facing the company [(or region / groups of companies)] 3 In column 2 (Weight), assign a weight to each factor, from 1.0 (most important) to 0.0 (not important), based on that factor’s probable impact on a particular company’s [(or region / groups of companies)] current strategic position. The higher the weight, the more important is this factor to the current and future success of the company. (All weights must sum to 1.0, regardless of the number of factors.) 4 In column 3 (Rating), assign a rating to each factor, from 5.0 (outstanding) to 1.0 (poor) based on that particular company’s specific response to that particular factor. Each rating is a judgment regarding how well the company is currently dealing with each specific external factor. 5 In column 4 (Weighted Score), multiply the weight in Column 2 for each factor by its rating in Column 3 to obtain that factor’s weighted score. This results in a weighted score for each factor ranging from 5.0 (outstanding) to 1.0 (poor), with 3.0 as average. 6 In column 5 (Comments), note why a particular factor was selected and how its weight and rating were estimated. 7 Finally, add the weighted scores for all the external factors in Column 4 to determine the total weighted score for that particular company. The total weighted score indicates how well a particular company is responding to current and expected factors in its external environment. The score can be used to compare that firm to other firms in the industry. Check to ensure that the total weighted score truly reflects the company’s current performance in terms of profitability and market share. The total weighted score for an average firm in an industry is always 3.0’ (Wheelen and Hunger, 2005)
Formulation of an IFAS table 1 ‘In column 1 (Internal factors), list the 8 to 10 most important strengths and weaknesses facing the company [(or region / groups of companies)]’ 2-6 Step 2-6 are similar to the Synthesis of External Factors – see explanation Appendix V and apply for internal factors
EU Bioethanol Firm Strategy MSc. Thesis - David Borgman Appendix VI: Interview – Strategic Option Assessment
General information Date: Name: Organization: Contact details:
Type of firm:
Position in market / industry:
Open Questions 1. How would you qualify the competitive position of the EU industry in comparison to the Brazilian and U.S industries?
2. Has the EU industry the potential to achieve a competitive advantage with EU-based bioethanol production, in comparison to the Brazilian and U.S. industry?
3. What are, in your opinion, the key success factors for achieving a sustainable competitive advantage in the bioethanol industry? (Global industry vs. EU industry)
4. Is the current EU governmental support suitable for the development of a competitive EU bioethanol industry? (What is required?)
5. In your opinion, in how many years will large scale advanced bioethanol production become cost competitive (commercially viable)?
EU Bioethanol Firm Strategy MSc. Thesis - David Borgman Strategic option statements
Option 1: Strategic Alliance Fully disagree Fully agree 1 2 3 4 5 The option improves the firm’s efficiency and cost-base to a competitive level
The option improves the firm’s access to sufficient feedstock
The option improves the environmental sustainability of feedstock supply and bioethanol production
The option improves the innovativeness of the firm and its competitive position (e.g. advanced biofuel, efficiency, added value products)
The option enables a large scale EU producer to achieve a sustainable competitive advantage in comparison to (large scale) Brazilian and U.S producers. Option 2: Global Strategy 1 2 3 4 5 The option improves the firm’s efficiency and cost-base to a competitive level
The option improves the firm’s access to sufficient feedstock
The option improves the environmental sustainability of feedstock supply and bioethanol production
The option improves the innovativeness of the firm and its competitive position (e.g. advanced biofuel, efficiency, added value products)
The option enables a large scale EU producer to achieve a sustainable competitive advantage in comparison to (large scale) Brazilian and U.S producers. Option 3: Innovation 1 2 3 4 5 The option improves the firm’s efficiency and cost-base to a competitive level
The option improves the firm’s access to sufficient feedstock
The option improves the environmental sustainability of feedstock supply and bioethanol production
The option improves the innovativeness of the firm and its competitive position (e.g. advanced biofuel, efficiency, added value products)
The option enables a large scale EU producer to achieve a sustainable competitive advantage in comparison to (large scale) Brazilian and U.S producers.
EU Bioethanol Firm Strategy MSc. Thesis - David Borgman Option 4: Transition towards Exit 1 2 3 4 5 The option improves the firm’s efficiency and cost-base to a competitive level
The option improves the firm’s access to sufficient feedstock
The option improves the environmental sustainability of feedstock supply and bioethanol production
The option improves the innovativeness of the firm and its competitive position (e.g. advanced biofuel, efficiency, added value products)
The option enables a large scale EU producer to achieve a sustainable competitive advantage in comparison to (large scale) Brazilian and U.S producers.
General remarks / additions / adaptations: What changes / improvements would you make to the discussed strategic options?
Do you have any other remarks or questions?
EU Bioethanol Firm Strategy MSc. Thesis - David Borgman EU Bioethanol Firm Strategy MSc. Thesis - David Borgman