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One of the important things any company needs to do is to establish itself apart from the competition, to give end buyers some kind of incentive to approach them over another company.
May 27th, 2014
Successfully navigating the inevitable transition of nanomaterials from speciality materials into commodities
If you're in the material production business one of the ways this can be done is by marketing your products as "differentiator products". These are generally materials of superior quality or price performance that, crucially, no one else can make due to patents, technical expertise, after sales support or a host of other beneficial elements that serve to entice the buyer. Speciality chemicals are a good example of this. They are a unique class of materials, generally tailored towards individual client needs, often protected by patents and only available from one or at best a few suppliers (i.e. switching suppliers is either very difficult or impossible).
This kind of exclusivity, while working well for low-volume, niche applications, will only work against wider bulk uptake. This is because speciality chemicals are not commoditised i.e. commodity chemicals. If the nanomaterial industry is to grow to become a dominant, driving force in mankind's future development, if the so called 'carbon age' is really going to happen, if nanomaterials are to fill their enormous potential, it is essential that they transition from the realm of speciality chemicals into commodities.
What is a commodity? Materials produced by a number of companies in high volume to a specification that are, from the viewpoint of the applications they are used in, functionally identical and therefor fungible. As the nanomaterial industry continues to mature and patents (from the enormous growing pool of tens of thousands of patents) start to expire, many nanomaterials will transition from speciality chemicals into commodities as multiple companies produce materials to a specification for industrial end use. This inevitable trend can be accelerated by technology licensing.
Producers are concerned about maintaining a healthy profit margin, which is something that experiences erosion as a material becomes more commoditized. They typically have high capital expenditure and can have high asset intensity (low profit per dollar of assets). Often they are forced to reinvest significantly in order to maintain market share (in some cases because they have no means of financing production through forward sale). The commodity chemicals industry also suffers volatility due to commodity prices being heavily influenced by the price of their chemical feedstocks. Both of these problems, financing production and volatility, are addressed by an Exchange system.
At the initial stage of a products life there is a risk that it will not be continuously adopted by users. This is where most nanomaterial producers are right now. When the product enters growth stage, competitors will expand production capacity to capture demand, which increases the burden of debt. When the product is at a stable phase an increasing number of competitors catch up to the required technological level (where patents start to expire as explained above) and can produce material to an industry agreed specification. Price pressure increases through improved transparency and rising competition. The product has become heavily commoditized.
The nanomaterial industry generally focuses on patented production processes as their differentiators with many producers looking purely at niche applications tailored to specific end-users. To address resource applications like industrial lubricants, asphalt, coatings/paints, polymer composites etc, producers need to start viewing their materials as potential industrial commodities and additives. Bluechip end users are never going to want to be reliant on a single producer of a speciality chemical as a critical additive in an end product that is made on an industrial scale.
Nanomaterial producers are concerned about margin and bulk use, but market pull for higher volumes will not improve unless margins take a hit. There is an optimal point in the balance between revenue growth and profit but it cannot be achieved if producers are unwilling to scale up. Although the profitability of commodities tends to be significantly lower than specialities per unit, profit levels can be maintained if the materials are sold in large enough quantities. Demand also increases in line with market growth (the market for engineered nanomaterials is expected to grow 23% CAGR over the next few years (Lucintel)). Besides, what good is a high margin when your sales are close to zero?). As a result, exclusivity works well for low-volume, niche applications, but will only work against wider bulk uptake. This is because speciality chemicals are not commoditized although in many cases will inevitably become commoditized - it is part of the natural life cycle of many materials. Speciality chemicals are no exception. Take carbon fibre as an example. This was a speciality material manufactured by a handful of companies such as Toray, Zoltek, etc but is now becoming commoditized to the point where the material that was once the preserve of NASA, Formula 1 and the aerospace industry is now being adopted by car manufacturers on a global scale.
Frequently, small producers of speciality chemicals will be forced into forming strategic partnerships with much larger companies to make sales. Strategic partnerships sound good on paper, but generally benefit the big guy as they undervalue the material produced. This is because the producers lack the financial firepower to offer competitive terms of trade and often need to get paid upfront, or are not able to offer commercial volumes or a secure supply of the material.
Additionally, bluechip companies want to buy from a minimum of two or three suppliers. If they can only choose materials from one supplier, well, they pay a discount. Strategic partnerships also allow the larger company to effectively lock down the global supply of a particular material grade, with the option of acquiring the producer always on the table. Obviously companies can price their materials at a fairer rate, but when they have a large cash burn and limited sales this is not a long term option. Companies positioned in the speciality space are also service oriented and these high service levels cannot be sustained profitably under increasing price pressure from competition. Finally, it is not just the limited number of suppliers that creates risk for the buyer, but often the size of the suppliers themselves.
Strategic partnerships are presumably preferable to another method of acquiring capital, which is venture capital (or equity) financing. This can and frequently does occur despite producers often having limited sales (this is quite typical for VC acquisitions) and involve a far deeper cut that selling discounted materials; selling equity in their own company to finance upscale and production. This is particularly risky as in many cases the producer doesn't have secure demand in their materials. As a result, the VC company with no real long term interest in the company or industry is long gone with their cut by the time the producer, by this point with a staggeringly high PE ratio, starts to fall at terminal velocity into the valley of death. Despite perhaps even floating on a stock exchange with high expectations and barely contained hype, eventually their stock price gets cremated over the course of the next few years. There are many examples, unfortunately, of nanotech and nanomaterials companies that have done this.
Relying on lack of transparency and confusion over material grades is not the way to grow the industry. Realising that nanomaterials are raw materials and commoditisable is essential, however.This is particularly important now more than ever given how nascent and fragmented the marketplace for nanomaterials is. Producers that collaborate and supply materials to specification to be listed on a commodity exchange protect themselves financially but also improve their capabilities and therefore industry demand in their services.
An exchange such as INSCX brings together a network of experts, producers and complimentary dispersion technologies with the aim of collectively meeting demands of industry. The reason why a collective of producers is advantageous is improved capacity, security of supply, a broader suite of capabilities, the ability to upscale their production and value their materials at the right price on a level playing field with industry buyers.
An analogue to the current nanomaterial industry, particularly in CNTs and Graphene, is the fledgling steel industry during the 19th century before widespread uptake of the Bessemer process. Steel fabrication was foundry specific and regarded as a low volume/high price niche application. Nowadays steel, which is ubiquitous and essential to many industries, is made to exacting specifications and billions of tonnes are traded annually .
There is a strange dualism between nanomaterial producers needing some standardisation for widespread adoption by industry but also trying to cling onto differentiation so that they are not just in a price war. It's important to reiterate, the fact that nanomaterials are semi-synthetic materials means they can easily be standardised. The fact that many nanomaterials are semi-synthetic materials with a large gap between feedstock and final product value also means that since process technology across an array of production methods is constantly improving, there will be a continuous reduction in price.
As a result, until the feedstock of a producers semi-synthetic nanomaterial is a significant percentage of the price of the final product (this includes the energy used to produce it), their competition will be working flat out to drive down the price they can sell it at while maintaining a reasonable margin. There will always be a negative price pressure on semi-synthetic materials in a transparent marketplace, because producers will continuously shift their prices down to whatever their margins allow, using the wider market price as the benchmark to beat, as they improve production cost and capacity. This allows them to remain competitive. Currently though, the nanomaterial market is not transparent. It is opaque. This is detrimental to the industry for a variety of reasons.
Dozens of producers use unique processes to make completely different grades and quantities of materials that aren't standardised and can vary in quality between batches at prices that aren't set by the forces of supply and demand. This kind of process specific "special snowflake" mindset and difficulty in directly comparing what materials companies are producing means that short of licensing out their technology, in order to meet industry orders the producer needs to enter into exclusivity deals with end buyers.
To mitigate the risks inherent in sourcing materials from a single producer, as well as inflexibility in payment terms, end buyers engaged in exclusivity deals (sometimes called joint ventures) will undervalue the materials they are buying, despite the potential technical expertise and wider market access they may be providing the producer. This is particularly true if there is a large disparity in size between companies. A producer might think they have struck gold (or carbon) by signing an agreement with a bluechip company, but in reality they are selling their materials at a significant discount, potentially even selling part of their company and certainly forfeiting their ability to engage in an open supply chain with those materials.
Licensing your technology out to other producers is a possible option, thereby enabling yourself to aggregate production capabilities and level the playing field, engaging with industry on equal terms. For this to occur, however, you need to be able to standardise your materials. Otherwise, as demanded by industry, how else could two or more producers manufacture materials to the same specification? The idea that nanomaterials somehow are above standardisation is a pervasive theme in the nanomaterials industry. I am convinced the reason for this relates back to the point I made about having a differentiator product. Put it this way, if pork bellies can be standardised and commoditised, despite every single one coming from a different animal (and they are, because they are traded in large volume every day on commodity exchanges), then so too can nanomaterials.
The fact that another company could produce a material at the same specification but at a cheaper price to their own is a galling one to a producer, but the nature of competition. Unfortunately many producers sit, feet dangling precariously on the edge of the valley of death, with rapidly depleting resources fully committed to a particular production method. Greater transparency would very quickly filter out companies with products and processes that just aren't as good as they need to be. This can only be a good thing for the industry. Lifting the veil of price and product confusion empowers both the end buyers and producers that hold the legitimate process technology needed to drive the nano-revolution forwards.
The last things any industry needs where end buyers are unsure of what materials to use or whether they even work are price ignorance, lack of supply certainty and confusion over specification, insurance and regulation. A formal commodity exchange such as INSCX is the best way to eliminate these problems. I say this with the understanding that commodity exchanges have been an essential component of industry and agriculture for hundreds of years. Whatever the eventual solutions, one thing is clear; overcoming these barriers is a critical component for the long term growth and ubiquitous adoption of nanomaterials.
Fullerex is a merchant member of INSCX™ Exchange, an electronic trade platform and world marketplace for trade in Nanomaterials, Base Oils, Specialty Minerals and Polymers.
For more information about Fullerex please visit: http://fullerex.com/
For more information about INSCX™ Exchange please visit: http://inscx.com/