A bias for biofuel
In the search for renewable fuels, biofuels are making headway. Professor Gary Pisano (Harvard) looks at a startup, Amyris Biotechnologies, that applies synthetic biology techniques and is soon to start producing commercial quantities of biodiesel in Brazil.
Amyris Biotechnologies was founded in 2003 to pursue development of the anti-malarial drug using synthetic biology, and by 2005 was investigating other commercial opportunities which the case focuses on.
Biofuels and specialty chemicals
Two possible growth sectors were biofuels and specialty chemicals. The first generation of biofuels was derived from plants. The most popular fuel was ethanol, produced mostly from sugar cane in Brazil and corn in the USA. The second-generation of biofuels turned to non-food crops such as cellulosic matter. Third-generation biofuels went beyond ethanol to produce biodiesel.
A second potential market was specialty chemicals. These are low volume, high value added compounds (such as adhesives or additives). This industry derived most of its products from petroleum and accounted for sales of $472 billion in 2008.
The move to biofuel
In early 2006, Amyris succeeded in obtaining a $20 million financing. The newly appointed CEO chose a strategy focusing on biodiesel. Jet fuel would also be pursued but that required a longer certification process. The company would also keep a foot in chemicals.
The scientists at Amyris developed a biodiesel that, unlike ethanol, did not provoke pipe corrosion ; also, it did not break down during storage and transport and was stable at low temperatures. Last but not least, it produced 80% fewer emissions than petroleum fuels. The EPA approved the fuel in 2009.
One of Amyris’ key operational decisions was what feedstock to use. Quickly, Brazilian sugarcane became the leading feedstock candidate. Since sugarcane needs to be used within 24 hours of cutting, the plant needed to be located close to the fields.
Gearing up for production
To speed up the commercial production process, the first pilot plant was built at headquarters in Emeryville, California. Thereafter, full attention could be devoted to a large demonstration plant in Campinas, in the Brazilian state of Sao Paulo.
The demonstration plant featured a 5000 liter fermentor and was up and running in June 2009 at a cost of $3 million. At the same time, Amyris was finalizing the yeast strains, fermentation conditions and plant design for its first commercial plant. The targets were an opening date in 2011, a production capacity of plant 100 million liters per year production capacity and a maximum cost threshold of $2.00/gallon.
Unfortunately, at about the same time, the financial crisis was working its effects and Amyris was forced to tweak its strategy somewhat. The American venture capital partners were asking Melo to slow down and cut staff. Instead, Melo decided to seek out Brazilian partnerships. The idea was to convert existing Brazilian ethanol plants into farnesene plants. The Brazilian partner would provide the capital for the actual plant conversion while Amyris would provide the technology and assist with commercial distribution.
Challenges and questions
Looking toward its first sales in 2011 Amyris is faced with a number of challenges. One is the issue of hydrogenation (transforming farnesene into diesel). Hydrogenation equipment is expensive so Amyris was seeking out major oil and gas companies that could hydrogenate and resell some of Amyris’ farnesene to blenders and distributors. But because biodiesel margins could be located anywhere along the supply chain, Amyris wanted to keep a foot in the tail end of the chain and intended to also sell through its own subsidiary, Amyris Fuels.
Two other important issues provide discussion subjects. The first is whether to focus on the Brazilian or American market for diesel sales. It was not clear which market would offer higher margins since this depended on a number of outside factors such as bio-diesel subsidies, tariffs and exchange rates.
A second issue concerns the possibility of specialty chemicals as a higher margin alternative to fuel. Because of the uncertainties surrounding diesel margins, Amyris was continuing its specialty chemical research efforts.
In its quiet way then, the case invites the reader to wonder what managerial yeast should be used. And thankfully for the case method, such yeast has yet to be genetically engineered…
Reference:
Harvard 9-610-031
“Amyris Biotechnologies: Commercializing Biofuel”
Professor Gary Pisano and Alison Berkeley Wagonfeld
Harvard Business School
Published July 2010
