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Using plants as plants
The McKinsey Quarterly, 2000 Number 2, pp. 92–99
Companies that make chemicals1 have been searching for new sources of growth over the past decade. The quest has prompted some chemical conglomerates to spin off their traditional chemical businesses, such as commodity2 and specialty chemicals, to concentrate on more profitable, noncyclical life science enterprises. But the hopes these companies had of realizing synergies among their life science businesses—especially in biotechnology, which they all use—have been largely unfulfilled.

This is not the moment, however, for chemical companies to give up on biotechnology. It still offers huge opportunities (Exhibit 1), and two trends suggest that they are worth exploring. During this century, science will continue to advance its understanding of living organisms and how to control them. At the same time, humanity's search for sustainable resources will intensify. Using biotechnology to produce chemicals lies squarely at the intersection of these trends. Although the risks are substantial, they can be managed. Chemical companies should therefore revisit their biotechnology strategies now.

Exhibit 1: Biotech: Opportunities abound


Biotechnology was born in the late 1970s following the development of techniques for recombining genetic material. Today, pharmaceutical companies are the big users of biotechnology, though they find it risky and expensive. Traditional pharmaceutical companies put an average of 15 percent of their annual revenues into research and development; typical large biotech companies, more than 30 percent. The payback is slow. R&D for a single innovative product costs up to $350 million—in biotechnology, there are no sensible small-scale investments—and takes five to ten years. Moreover, many products do not perform as hoped. And even if a company does produce an effective biotech product, consumers may reject it out of fear that it could damage the environment, human health, or both.

Given these risks, how should chemical companies go about investing in biotechnology? By emulating the techniques venture capital firms use to manage the risks of investing in pharmaceutical biotechnology. Biotech venture capital funds do as well as other types on average, and some of the first start-ups have outperformed the blue chips.


Today, the market for biotech-based basic and intermediate chemicals, fine chemicals, polymers, and specialty chemicals accounts for only 2 percent of the total chemical market, or about $25 billion in revenue. 3 But biotechnology, thanks to its cost, scale, and quality advantages, has swiftly come to dominate the product segments in which it does play a role in production: enzymes, certain organic acids, and certain vitamins (see sidebar, " Chemical processes go live"). In 1994, for example, more than 95 percent of all riboflavin was still chemically synthesized along traditional lines. Today, 95 percent of it is produced by genetically enhanced fermentation at a current cost that is 50 percent lower, and with 40 percent less capital expenditure, than conventional techniques require, in factories that can turn a profit at one-tenth the scale of conventional ones.

Both the technical performance of chemicals produced today from biotechnology and much current R&D indicate that, by 2010, the price and quality of biotech-based products will make them competitive in 30 percent of the chemical market as a whole (Exhibit 2). Fine chemicals will feel the change first and most: by 2010, biotech-derived fine chemicals will have won a market share of some 60 percent thanks to their purity, ease of production, and enhanced efficacy. The next area to be affected will be some 30 percent of the market for specialty chemicals.

Exhibit 2: The road ahead for biotech

Biotechnology is already used to make fine chemicals, dyes, food additives, and textile chemicals. Laboratory and pilot plants have been built to produce pigments, polymers, and surfactants. But can biotech-based products really challenge the dominance of polymers and basic chemicals produced from oil? Both scientific research and market research suggest that they will, eventually taking over as much as 50 percent of polymer markets and 15 percent of the market for basic chemicals.

By 2010 to 2015, the raw-material costs of biopolymers produced from plants should be no higher than those of petropolymers. It currently costs around $1.10 per kilogram to produce polyesters from oil. Production costs of biopolymers made from corn would be, on average, $0.75 per kilogram, assuming an extraction rate of 35 percent.4 In the medium term, it will be fermentation that helps biopolymers enter the commodity polymer market. Dow Chemical and DuPont plan to start world-scale production of the biopolymers PLA (polylactic acid) and PTT (polytrimethylene terephthalate) in 2002 and 2003, at an estimated cost of just under $1 per kilogram.

Biotechnology-derived products will not be competing on cost alone. In some areas—certainly in biopolymers, enzymes, fine chemicals, and new materials—biotechnology can generate new product features. Pull quote hereSeveral of the biopolymers under development display advantages (biodegradability, for example, and compatibility with living tissue) that lift them beyond the category of commodities. Of the more than 100 varieties of the biopolymer PHA that have been developed, for instance, one displays a combination of high mechanical resistance and softness that makes it an ideal substance for fashioning synthetic human heart valves.

Similarly, industrial applications of newly discovered enzymes that can tolerate extremely hot, saline, acidic, or alkaline conditions are forecast to expand the $1.8 billion industrial-enzymes market by more than 20 percent a year. And the ability of biotechnology to produce pure chiral molecules will make it the production technology of choice in fine chemicals, since it will help allay growing concerns about the safety and efficacy of pharmaceuticals. Like novel biopolymers, other revolutionary materials will open new, potentially large markets. Biosteel for example, a strand of amino acids derived from spider silk, is stronger than steel but has expansive properties that make it one of the best materials available for building earthquake-resistant suspension bridges.


The business activities of most chemical companies today are so diverse that it would be both extremely difficult and unacceptably risky to apply biotechnology to all of them at once. Before these companies decide where to focus, they need to assess the opportunities and threats biotechnology poses to each business. It will help to answer the following three questions: How much does this business matter to the company? What impact will biotechnology have on it? And when will the impact be felt? Companies can then decide how to respond to the threats and develop options for exploiting the growth opportunities.

Those companies that decide to use biotechnology in production could build capabilities internally and at the same time acquire small biotech firms and form alliances. So far, only a few companies have made much progress in developing and producing biotech-derived products: Dow Chemical, DSM, and DuPont, among the big chemical companies, and Genencor International and Novo Nordisk Pharmaceuticals, among the smaller players. New entrants still have room to maneuver.

Making a commitment to biotechnology will profoundly affect the organization and mind-set of a typical chemical company. Most biotech businesses devote a much larger part of their financial and human resources to discovery than chemical companies do. Chemical conglomerates need to devote greater resources to generating and developing good ideas if they are to use biotechnology to grow. This will entail greater openness to innovation and to risk in the R&D phase, higher funding for long-term projects, and the building of links with the external research community to gain access to new ideas.

Nonetheless, chemical companies, which already have strong operational skills and customer relationships, are well positioned to achieve profitable growth through biotechnology. But they need to start building biotechnology skills now. As in the pharmaceutical industry, the first movers have already begun to establish the networks, the technical leadership, and the intellectual property reserves that might keep latecomers out.


There are three main types of biological production processes: fermentation, bio-catalysis, and plant-based production.

Fermentation uses genetically engineered microorganisms to produce organic chemicals. Substituting fermentation for chemical synthesis can reduce production costs by more than 50 percent. The technique is likely to spread thanks to improved genetic-engineering methods, the greater use of multipurpose fermentors (which let manufacturers scale up production quickly), and lower costs resulting from the substitution of light and carbon dioxide for petroleum (exhibit).

Exhibit: A recipe for cheaper L-lysine

Bio-catalysis means the use of enzymes from living organisms as catalysts in chemical reactions. Biotechnology is used to identify and modify appropriate enzymes. Bio-catalysis reduces the number of steps in the production process while increasing the purity of the resulting chemicals. The conventional production of cefalexin, an antibiotic, takes six chemical steps, for example. Bio-catalysis requires just three steps, producing a purer product at a current cost 60 percent lower than that of the conventional process and at a capital cost that is 50 percent lower.

Plant-based production means using plants themselves as chemical factories. Genetic engineers are developing crops better suited to producing chemicals than their naturally available counterparts. Using "plants as plants" can lower manufacturing costs even more than fermentation does—by more than half, in the long run. Plants, using light as their source of energy and carbon dioxide as a raw material, could run any kind of enzymatic machinery to produce the desired chemicals. The first ones produced in plants are already commercially available, but it might be another 10 to 15 years before they produce commodity chemicals at competitive costs.

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Biotechnology: Techniques that analyze and manipulate phases in the lives of living organisms—animals, microorganisms, and plants—for purposes such as the manufacture of biological products and improving the understanding and treatment of disease.

Chiral molecules: Stereoisomers or molecules of the same chemical that differ in their three-dimensional structure.

Commodity chemicals: Single molecules differentiated only by their level of purity.

Enzymatic machinery: Scientists' term for a number of enzymes used to catalyze a chain of chemical reactions in a production process.

Enzymes:Proteins that act as catalysts for the synthesis of specific chemicals in living organisms.

Life science enterprises: Businesses that make chemicals used in the fields of agriculture, animal nutrition and health, and pharmaceuticals.

Polymers: Plastics and fibers made of relatively complex molecules differentiated by their molecular weight and structure and by their particular properties.

Specialty chemicals: Single molecules or mixtures valued for their particular abilities—for example, killing bacteria or slowing the spread of fire.


    Rolf Bachmann is a principal in McKinsey's Zurich office; Enrico Bastianelli is a consultant in the Brussels office; Jens Riese is a consultant in the Munich office; Wiebke Schlenzka is a consultant in the Hamburg office. Copyright © 2000 McKinsey & Company. All rights reserved.

    1. That is, companies making basic, intermediate, and fine-quality commodity chemicals, polymers, specialty chemicals, and life science chemicals, plus conglomerates making some combination of these.

    2. Terms printed in italics are defined in the glossary at the end of this article.

    3. This excludes revenue from chemicals made using traditional fermentation processes unenhanced by biotechnology—"classic" ethanol, for example.

    4. At present, the average extraction rate in laboratory experiments is only 14 percent, but with further genetic modifications it could exceed 35 percent. Some experiments have already extracted biopolymers at levels exceeding 50 percent.

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