Building supply chains upside down

All of the investment VC or PE is focused on the customer end. Who is investing in making sure that there is enough raw material?

In 2019, under pressure from Trump, Apple broke ground to build a plant in Austin, Texas. No sooner had they set up the plant, they hit a roadblock. They were unable to manufacture the Mac because of a screw. They just could not source it in America.

Source: New York Times

This brings me to a book that I am currently reading titled, ‘Innovation in real places’. The author describes innovation as bringing a product to the market not just inventing a product. I have had the opportunity to witness many such inventions which have been consigned to the garbage heap of history because the inventor did not have the skills to bring the product to the market. 

Innovation requires getting the small things right. The big things will often happen by themselves if the small things are right. If the are screw manufacturers, printed-circuit board manufacturers, chip manufacturers and plastic and metal fabricators all in the same place; Apple, Dell, Samsung, etc will set up their factories to take advantage of all this. May I present to you the Chinese manufacturing miracle!

Imagine the manufacturing of the product as a river. At the beginning of the river are all the raw materials needed to manufacture the parts. Then the parts need to be manufactured - screws, nuts, batteries, chips, integrated circuits, etc. Then the product is finally assembled in the factory. The final assembly is the downstream activity and the extraction of raw materials is the upstream activity.

There are 40 brands manufacturing electric cars across the world. This is not including China which has a further 35 brands in China alone. Further, there are 21 brands of two-wheelers (bikes) that are being manufactured across the world. Then you have a number of buses, trucks, ships, drones and planes that are being worked upon.

Each of these brands would hope to sell at least 100,000 vehicles a year. Many of them would have business plans that require millions of vehicles to be sold. A vast majority of them have raised Venture Capital. In 2021 alone, USD 17.8 billion went into investing in EV startups across the world. This is in addition to the USD 10.6 billion that was invested in 2020.

I often tell entrepreneurs that one of the criteria when making decisions on investments is how the investment makes the VC look. You don’t see a lot of investment being made in garbage management while this is a “real” problem. How do you think a VC would feel to be standing at a posh San Francisco party and talking garbage? 

And just like that, while they are happy to invest in 10s of EV startups, do you think any of them are cutting cheques to help mine the stuff that is needed to make the EVs? This is true of private equity as well, the lines have been heavily blurred over the last few years especially since founders choose to keep their companies private longer.

Indeed, the battery materials consultancy Benchmark Minerals calculates that the downstream of EV supply chain is growing at twice the pace of upstream mining and processing. ”Something drastic needs to happen to close this gap if one of the key pillars of the [energy transition]is to exist at scale,” the consultancy’s CEO Simon Moores noted on Twitter this month.

[…]

Though the US has one of the world’s richest lithium resources (pdf), it only has one lithium mine in operation accounting for under 2% of global production.

But what if the US could work closely with allies who are major lithium producers—say Australia, which makes up 55% of world production?

Source: Quartz

When the demand is high and supply is unable to keep up, often shortcuts are employed. This normally translates to intensive resource utilisation to ramp up the scale. Also, the first thing to go out the window is the maintenance of standards.

In May 2016, hundreds of protestors threw dead fish onto the streets of Tagong, a town on the eastern edge of the Tibetan plateau. They had plucked them from the waters of the Liqi river, where a toxic chemical leak from the Ganzizhou Rongda Lithium mine had wreaked havoc with the local ecosystem.

There are pictures of masses of dead fish on the surface of the stream. Some eyewitnesses reported seeing cow and yak carcasses floating downstream, dead from drinking contaminated water. It was the third such incident in the space of seven years in an area which has seen a sharp rise in mining activity, including operations run by BYD, the world’ biggest supplier of lithium-ion batteries for smartphones and electric cars. After the second incident, in 2013, officials closed the mine, but when it reopened in April 2016, the fish started dying again.

[…]

It’s a relatively cheap and effective process, but it uses a lot of water – approximately 500,000 gallons per tonne of lithium. In Chile’s Salar de Atacama, mining activities consumed 65 per cent of the region’s water. That is having a big impact on local farmers – who grow quinoa and herd llamas – in an area where some communities already have to get water driven in from elsewhere.

According to a report by Friends of the Earth, lithium extraction inevitably harms the soil and causes air contamination. In Argentina’s Salar de Hombre Muerto, locals claim that lithium operations have contaminated streams used by humans and livestock, and for crop irrigation. In Chile, there have been clashes between mining companies and local communities, who say that lithium mining is leaving the landscape marred by mountains of discarded salt and canals filled with contaminated water with an unnatural blue hue.

“Like any mining process, it is invasive, it scars the landscape, it destroys the water table and it pollutes the earth and the local wells,” said Guillermo Gonzalez, a lithium battery expert from the University of Chile, in a 2009 interview. “This isn’t a green solution – it’s not a solution at all.”

Source: Wired

So much for protecting the environment. This is classic outsourcing of pollution to another location. From the oil wells in the deserts to the waterways across the world.

This is the result of investment going to all the wrong places. Setting up a store can be a glitzy affair and customer-facing is always cooler. But someone somewhere needs to play with manure and soil in order to make sure that there is stuff that can be put in that store. They need investment and support as well. 

There is a need to place more stringent laws to regulate such businesses and also a need to find more tax dollars to support these industries to transition towards more sustainable ways of doing business.