How resource scarcity is driving the third Industrial Revolution
The
authors of the new book Resource Revolution argue that high resource
prices are spurring innovations powerful enough to unlock a new phase of global
economic growth.
Will shortages of energy, materials, food, and water put the brakes on
global growth?
Far from it. By combining
information technology with industrial technology, as well as through
harnessing materials science and biotechnology, innovators are showing that it
is possible to produce more with less and to access resources at far lower
costs. In this video interview, former McKinsey director Stefan Heck and director Matt Rogers, coathors of the
new book Resource Revolution: How to Capture the Biggest Business
Opportunity in a Century (New
Harvest, April 2014), argue that to be successful, managers will need to think
in new ways about products, services, and technologies. An edited transcript of
their remarks follows.
Interview
transcript
Stefan Heck: I am an optimist, because while we’re facing this
unprecedented set of constraints—in food, in land, in energy, in water, all
across the planet, with 6 billion people going to 9 billion people all
consuming resources—that really just represents a challenge. It’s a challenge
to humanity, a challenge to ingenuity, to innovation.
Matt Rogers: What you begin to see is the writing on the wall that,
rather than this great threat to the global economy, what we’ve seen is a broad
arc that really is now changing in the most fundamental way it has in a hundred
years.
From
crisis to opportunity
Matt Rogers: Starting in about 2005, we began to see a rapid run-up in
energy prices, in gold prices, in copper, aluminum, steel prices—all driven by
the realization that 2.5 billion people were going to enter the middle class
and that there weren’t enough resources to go around. And that began to worry
everyone, particularly around economic growth. How were you going to sustain
economic growth when you have these kinds of commodity prices essentially
slowing the economy down?
And it began to change around 2010,
2011, when all of a sudden we began to realize that, “Hey, this high resource
price thing may in fact be the beginning of a massive opportunity rather than
the biggest threat to the global economy. It might be the biggest opportunity
we’ve seen in maybe a hundred years.”
What we began to see was a set of
trends that were moving very, very fast, that were, in many cases, driven by
the combination of industrial technology and information technology. The most
striking one was the development of unconventional gas first, now unconventional
oil, in the United States. This was something that no one saw coming.
In 2007, we were sure that the
United States was going to be a massive importer of natural gas. We only had a
few years left of natural gas, and we were going to have to bring it in from
all over the world. And by 2011, we realized that the US was going to be the
largest producer of natural gas in the world and had so much natural gas that
we were going to start exporting it. In 5 years’ time, what usually takes 50
years to develop, in 5 years we all of a sudden were taken by surprise by this
massive change.
At the same time, we saw solar
prices going from $8/watt peak, down to $4/watt peak, down to $2.50/watt peak.
That kind of change in the course of three or four years, again, took everyone
by surprise. So two markets—the natural-gas market and the solar market—both
growing at 20 percent plus per annum. In the energy world, we’re used to
markets that grow at 3 percent per annum as being really fast. And now we have
two massive markets growing at 20 percent per annum, driven by the same
underlying technological fundamentals.
Stefan Heck: What’s important to realize is that the technologies we’re
talking about changing in this way are really basic infrastructure
technologies. And because of that, they have this spillover benefit for the
productivity of the economy as a whole.
When we change the cost of a
structure—in housing or an office—that has a knock-on effect on all these
industries that use or take advantage of buildings. When we change the
economics of the resources required for transportation and for movement of
goods, every industry that ships anything anywhere in the world benefits from
that.
When we virtualize a process to,
instead of physically moving a good, turn it into a service delivered over your
phone or over the Internet remotely, that, again, spreads to many, many
industries, from elevators to automobiles to mining companies. They’re all now
taking advantage of the fact that I can do things remotely. That’s why it’s
very exciting. We’re just at the beginning, the inception point, of these new
materials and new IT technologies beginning to affect many, many other
industrial domains.
Matt Rogers: The bringing together of information technology with
industrial technology, the application of biological technologies to resource
problems, the use of new materials and nanoscale science to these industrial
and resource-productivity challenges all of a sudden enables us to capture the
kind of productivity growth that we need, and more—so that we can grow the
economy while not actually increasing the demand for resources nearly as
significantly, or while making the production of resources much cheaper than
anyone expects.
Meet
the car of the (near) future
Stefan Heck: The recent history has been very interesting. The learning
curve for batteries has doubled from about 4 percent improvement, with every
doubling of capacity, to 8 percent. Eight percent starts to be a very
significant slope. It’s like compounding interest when you make an investment,
right? Eight percent double the rate actually gets you on a very different
trajectory.
And that’s the piece that people
have underestimated. By leapfrogging from smartphones into power tools and now
into automobiles, and then ultimately from automobiles into grid storage,
batteries are going to show up everywhere.
And when we look at vehicles, the
amount of range that we can get out of a battery has gone from 50 miles to, in the
latest cars, about 200 miles, 250 miles. The speed is already higher than you
can legally go on any highway, so there’s no restriction there. It used to be
golf cart speed, and now we’re talking about race cars.
So the last dimension that remains
is the cost. Right now, it’s still expensive. A battery roughly doubles the
price of the car. But if you project that 8 percent learning curve forward—and
there are very good, detailed manufacturing and technology reasons to believe
that that’s achievable—that improvement basically gets to the point where
electrification is a relatively inexpensive add-on option, much like a
navigation system or a nice stereo for your car—couple thousand dollars.
And at that point, given the
performance benefits, the environmental benefits, the fact that the car is
completely quiet, that you accelerate faster, that you consume no fuel when
you’re stopped at a street light, why not go electric?
It’s also the integration of that
particular product into its ecosystem whole. So we’re no longer just designing
a car and shipping it. We’re actually thinking about the car and the way it
interacts. The way it parks: Can it self-park now? Can it interact with parking
garages? The way it charges, if it’s an electric car. And there’s a big difference
between plugging in just when you arrive and actually charging at night. That’s
a huge difference for the grid. So the car has to behave nicely in order to not
bring the grid down, and actually enhance the grid rather than diminish the
grid’s performance.
Then also the way we drive, right?
Whether it’s the basics that we’re already all familiar with, of having a
navigation system, or things that are yet to come. We’ve seen the Google car
navigate and drive on its own. Those sensors that allow that to happen are as
expensive as the car itself today.
But they’re actually on the fastest
cost reduction that I’ve seen. It’s about a 40 percent learning curve, which
means it almost halves with every year. So we’re going to have that as a very
inexpensive add-on option.
And so then that means that the car
will have to think about its environment, will have to know about pedestrians,
will have to think about traffic intersections. And so then the kind of
systems-integration challenge isn’t just making the car run, it’s actually
making the city run.
Matt Rogers: The standard automobile is utilized less than 4 percent of
the time. The economics become quite interesting when you can begin to get that
utilization even up to 10 percent of the time—no less 20 percent or 30 percent
of the time, which Zipcar and others are able to do.
So you see the convergence of the
Tesla and the electric motor with Google and the driverless car and all the
technologies that come with that and with the kind of dispatch technologies that
Uber and Lyft and Zipcar have. And you begin to see a whole different approach
to transportation that we’re just beginning to see today.
What
managers need to know
Matt Rogers: We went for almost a hundred years where each year, on
average, commodity prices got cheaper. So if you were a manager, you kind of
had a little advantage because next year, the commodity price inputs were going
to be about 2 percent cheaper. And you could get about 1 percent or 2 percent
better in your performance and be just fine.
We’re now going into a period where
managerially you have to be able to see things coming from wholly different
directions. You have to see your neighboring industry showing up in your
industry. You have to see trends that are coming at you at 20 percent per annum
change rather than 2 percent or 3 percent per annum change. You have to be able
to do substitution of materials very fast so that you avoid the high-risk ones
and you capture much lower-risk ones. You have to create these kinds of
circular chains where you can recycle a lot of the material that you produce so
that it doesn’t cost you nearly as much. For example, “I need to bring software
and embed it into my hardware.”
Stefan Heck: You need a mixture of talent. You need not only mechanical
engineers but chemical engineers, software engineers, electrical engineers,
people who understand psychophysics and human behavior.
But beyond just the skill sets, the
real challenge is that the complexity of the device has increased. So making
the trade-offs between the disciplines, between the different features, has
become more complicated.
The thinking really has to expand.
It has to expand beyond the traditional industry that you’re in, because you
have to suddenly include innovations and changes that come from your suppliers.
You have to include changes in the rest of the ecosystem that your product gets
deployed in.
You may have other industries that
begin to influence it. So a lot of the technology for autonomy comes from
aerospace, comes from the military. So, again, there’s that collision of
different industries that are suddenly beginning to change each other. And then
I think the other interesting dimension is it’s going to expand across time.
Increasingly, we need to think about
the full lifetime. What happens during usage? What happens when there’s a
breakdown? How do we do maintenance? A lot of companies are now doing systems
engineering to improve the ease of maintenance, to make that possible remotely
so that I don’t even have to send a person out to fix whatever the product is.
And then the end of life: being able
to upgrade it, being able to reuse it, forms of circularity that allow you to
get much more life and productivity out of the same device. And then
ultimately, being able to take it apart, recycle it, and reuse materials and
components. So we have to think about systems integration not just horizontally
into other pieces of the ecosystem but actually forward in time and back in
time, to think about what does all this mean for our supply chain and for
future use?
-
Stefan
Heck is a consulting professor at
Stanford University’s Precourt Institute for Energy and an alumnus of
McKinsey’s Stamford office. Matt Rogers is a director in the San
Francisco office.
http://www.mckinsey.com/Insights/Energy_Resources_Materials/How_resource_scarcity_is_driving_the_third_Industrial_Revolution?cid=resourcerev-eml-alt-mip-mck-oth-1404
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