Get Rich Quick in Biofuels! Make Easy Money! It’s Free! Say Yes! Act Now!

January 30, 2014 | Jim Lane

Er, taking the long view on building transportation industries and companies.

Did it really take 1,631 US automotive failures to achieve the massive industry that ultimately emerged?

There was an old joke in magazine publishing (and has since been adapted to many industries) that went like this:

Q. How do you become a millionaire in publishing?
A: Start out as a billionaire.

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

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

For something more recent, and more directly related to biofuels, let’s look at the automobile manufacturing industry. Which has long since achieved scale. And transformed society in many ways.

Well worth a look back in understanding what it takes to make a successful, and transformative, new industry in the transportation sector. In particular, three items:

There are some interesting things to note about that success — that are relevant to thinking about new industrial technologies.

1. Infrastructure.

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

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

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

2. Time to scale.

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

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

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

Begins to sound familiar, eh?

3. Failure rate.

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

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

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

Now, let’s look at the fails. 1631 in total. A company failure rate of something like 95%.

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

In the most intensive development stage of the industry, when company launches were a regular occurrence and consolidation was rampant — the period between 1899 and 1930, the failure rate was an astonishing 42.72 companies per year.

Not an argument for embracing failure

Failure is failure. It sucks for the investors. And just because there is a lot of failure in, say, the automobile industry, doesn’t grant permission to fail to biofuels companies. Doesn’t entitle them, automatically, to support on the public dime.

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

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

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