Blog / Pharmaceuticals / 21 Aug 2020 

The Challenges around Economics

We live in a world where the Covid-19 pandemic has shown us the fragility of our economic system with its focus on continuous growth.

  8min Read

The COVID-19 pandemic has shown us the fragility of our economic system and we are learning that reducing activity, even if it is a forced reduction, can improve the quality of our environment. However, unless we are careful we will soon move back into a world that is driving for rapid growth.

The Future of Economics

Our politicians will want quick zero carbon solutions, but as consumers we will still be wanting access to seasonal fruits like strawberries in the dead of winter. Our desire for quick fixes, rapid growth and immediate accessibility to luxuries is creating an economic system that is becoming increasingly unsustainable. In normal times the current system seems to operate under the assumption that every aspect of the economy should grow all the time and that resources are infinitely available. In addition, we ignore the fact that inefficiency is actually part of the economy, and that the more inefficiency there is, the bigger our economy will be. Bigger, but not better. 

Our experience with Covid-19 and its effect on our lives and our economies is showing us that our view of the world is flawed. It is a strong indication that we need to move towards the principles of Sustainable Development that strikes a balance between economic factors, environmental factors and societal factors. It is an idea that was first laid out in the 1987 report by the Brundtland Commission. In simple terms it is defined as development that meets the needs of the present without compromising the ability of future generations to meet their own needs’. Now more than any time this is a really important philosophy. 

As was highlighted in our previous blogs on Resource Efficiency and The Future of Manufacturing, it is only possible to achieve sustainable development by radically transforming our relationship with resources. Fundamentally we need to reduce the amount of finite resources we use. Rather than just recycling raw materials, we should be designing products that are reused a number of times and remanufactured back into new products to extend product life cycles and reduce the amount of virgin resources we use. 

In addition, manufacturing needs to become more flexible and personalised, with plants situated close to the product’s point-of-use so we reduce our dependence on imported and long convoluted supply chains. With the advent of low cost flexible electronic sensors and the connectivity provided by digital systems and of the Internet of Things, we have the tools in our hands to achieve this. As engineers, we have a big role to play in ensuring that the idea of sustainable development becomes a reality. 

Figure 1: Real vs. forecasted GDP growth in Western Europe from 1950-2010

Manufacturing Drivers

The capacity for manufacturing products also moves in cycles as we have discussed in our previous blog on manufacturing. In recent years many advanced economies have closed down uneconomic production capacity and become reliant on imported products. This import dependency has led to the development of smaller, more digitally-enabled manufacturing plants that have high efficiencies, lower costs and are much closer to the point-of-use of their products. These plants also often use waste products as their feedstocks. This combination of lower cost, flexibility and local supply can offset the problems that occur in post-mature industries and can go some way to alleviate the uncomfortable dependence on imports while also reducing wastes, emissions and carbon footprint. Steel minimills and micro-breweries are well known examples.

The economics of technology development

The development of most manufacturing technologies follows the Boston experience curve developed by the Boston Consulting Group in the mid-1960s. The curve comes from the observation that the margin or price of a product falls between 20%-50% every time cumulative production doubles. It is still true today and is a useful concept to help understand the economics of established industries and emerging technologies. 

For instance, ethylene is the chemical building block for many of the materials and chemicals that support our everyday life. Production started in the 1930s and it has followed the Boston Experience curve ever since. Margin dropped rapidly in the first half of the 20th century as production capacity increased rapidly to match rising demand. The first manufacturing plants tend to be small, have high costs and low efficiency so product cost is high and hence so is product sale price. As demand for a product rises more plants are built. 

Each plant is more efficient than the last and therefore has lower production costs. This allows price to fall and demand to increase. This reducing product price allows demand to grow and costs can be reduced further. As an industry evolves, more and more manufacturing plants are built, to meet a rising demand and price per unit falls as sales increase. Two facts jump out from this experience curve. Firstly, as the market grows, manufacturers can reduce their costs as they improve their manufacturing technology. Secondly, the consumers in the market are only prepared to pay a certain price for a product. If the manufacturer cannot produce at that price then the market does not grow. This problem of product cost being too high for consumers to pay is often seen in emerging technologies. Current examples are graphene materials and hydrogen as a fuel. These products are still high up the Boston experience curve with low demand and high manufacturing costs. 

To become more widely adopted in commercial applications product price needs to fall to a level the market can afford, but this cannot happen without improved manufacturing technology. This is a Catch 22 as without increased demand costs cannot be reduced and demand cannot increase until costs of production fall. Then on top of the cost of the product itself there is a need to build a robust and reliable supply chain to get the product to where it is needed when it is needed. In some cases apparently good technical ideas cannot reach a price/​product combination that can ever be viable and the technology cannot transfer from research to commercial product. Part of the work we do at CPI is to ease this transition from a great – and expensive – idea, to a marketable product that will be readily adopted by society.

Figure 2 shows how techno-economic effects alter the appeal of a hypothetical emerging biotechnology by revealing the extent of investment required to support various capital costs, yields and batch times. It demonstrates that by lowering capital cost, increasing yield and decreasing batch times, massive improvements to economic viability can be obtained. 

However, actually achieving this can be a difficult task, and it is something almost all of CPI’s partners are attempting as they try to move their technology along the Boston experience curve. Realising these goals is often simply’ about becoming more resource efficient – finding ways to reuse manufacturing waste, or produce more prime product from the same amount of raw materials. 

CPI’s work with Calysta is a prime example of this process. Calysta developed an innovative process for the conversion of methane into protein for fish food, is a good example of a company that CPI has helped to achieve economic gains by improving process control and process efficiency to create an economically viable low waste process. CPI designed and built a pilot plant for Calysta at a large enough scale to demonstrate that Calysta’s could manufacture their FeedKind® product at a cost per ton that could allow them to achieve commercial success.

Figure 2: Techno-economic effects on a hypothetical emerging biotechnology technology. As capital cost and batch times are decreased, and yields increased, the investment economics of a technology improve markedly.

A particular challenge for the UK is around its balance between research and innovation (R&I). Investment in R&I is only worthwhile if it generates more value for the UK than it costs the UK. Unfortunately, many of the discoveries made in UK universities do not create value for the UK as there is insufficient emphasis on the economic challenges discussed earlier in this blog. If we can put more emphasis on converting new discoveries into viable processes and ultimately businesses we can create jobs, generate taxes, and fuel further investment into research. 

Recent work has shown that companies and universities that work with CPI are twice as likely to receive private investment than those that don’t. SME’s that receive private investment after working with CPI have used this money to construct facilities, scale up production, launch products and create high value jobs in the UK. By leveraging CPI’s expertise in translation and innovation to bridge the gap between discovery and the market, we can ensure that the benefits of UK investment into research are maximised.

Moving towards sustainable development

To develop more sustainably, it is imperative that the world becomes more resource efficient. This may not lead to huge leaps in economic growth, but it does not need to. The view that the economy must perpetually grow is flawed. In fact, improvements in resource efficiency that reduce wasted resources can meet demand with a much lower requirement for economic growth. 

We need a new view that values resource efficiency over growth, and takes into account the natural cycles that impact us all. If we also understand the economics of product and focus more of our effort on turning our exceptional research into valuable products, processes and businesses we can create many more economically viable sustainable low carbon resource efficient businesses. This in turn will have a positive impact on both social and environmental well-being. Maybe the jolt from the Covid-19 pandemic will make us realise that this is achievable.

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