Are you ready for a resource revolution? Q&A with Stefan Heck

In the next two decades, economists and demographers estimate that we will integrate 2.5 billion more people into the urban middle class. Building the cities and infrastructure to house them, connect them to work, and provide the energy, water, and food needed to support a middle class lifestyle represents one of the greatest economic and operational challenges ever.

According to Stefan Heck and Matt Rogers, “The global economy is trying to do in two decades for emerging markets what it took the whole twentieth century to accomplish for the United States.” Heck and Rogers are the authors of the new book, Resource Revolution: How To Capture The Biggest Business Opportunity In A Century. You can read an excerpt from the book on our sister site, Supply Chain Management Review.

While many are predicting stagnating economic growth, extreme resource depletion, accelerating commodity price inflation, and increasing pollution, Heck and Rogers argue that we’re on the brink of a third industrial revolution. Or, as the title of their book predicts, “the biggest business opportunity in a century.”

I recently had a chance to speak with Heck.

SCMR: Many people look at the future and predict a coming scarcity of resources such as water, oil, farmable land, and forests. You and Matt take a contrary position. Why is this the biggest business opportunity in a century?

Heck: We don’t believe in the scarcity argument for several reasons. If you look at any natural resource, such as oil, coal, or rare earth metals, the proven reserves have a finite number of years on them. But that finite number can change. For instance, technology is always improving. Shale gas is the best example. We have known about shale gas reserves for years, but there was no economical way to recover them. So, shale gas was a scarce resource. However, as prices have gone up and the technology for extracting shale gas has improved, more resources have become available.

In our view, we’re debating the wrong question. Instead of talking about scarcity we should be talking about productivity. Two-and-a-half billion people will join the middle class in the next decade. Their incomes are going to increase ten fold. That will lead to an increase in demand for everything from food to energy to computers in a way we’ve never seen before. Unless we can continue to convince 2.5 billion people to live on less than we do, we could see dramatic increases in prices.

That is a challenge. But, we also believe it is a business opportunity for the same reasons I just described. This huge spike in demand opens up new markets. It also creates the opportunity for a shift in productivity – a new revolution - which is the core of our book. We’ve seen previous revolutions. The Industrial Revolution made factories possible and wiped out craftsman who made things by hand. We’ve seen an Information Revolution. We believe the next revolution will be one of resource productivity. We see a future with a ten fold to 50 fold increase in resource productivity.

SCMR: Can you provide an example of resource productivity?

Heck: Look at your car. It’s a resource that’s parked 96% of the time. Of the remaining 4%, you’re either looking for parking or stuck in traffic. You only spend about 2% of your time going from A to B. That’s not a great investment. Roads are even worse. Most of the time, they’re nearly empty. What if we went to car sharing. And, what if we develop the Google car or what Toyota is doing in Japan with cars that can talk to one another. You could load highways so that a 4-lane highway can carry the same amount of cars as a 32-lane highway. If we did that, we’d never have to build another road. That’s the kind of argument we make for an enormous opportunity for an increase in resource productivity.

SCMR: I was also intrigued by the idea that entrepreneurs and environmentalists are aligned by common interests - how to do more with less? Do you think they realize this alignment - especially the environmental community? And, if not, how do we bring about a meeting of the minds?

Heck: First, I would say that there’s a portion of the environmental community that does get this. There are organizations that have collaborated with industry and get the big picture here. There are others that want to leave resources in the ground. If you look at how much is being conserved versus how much is being developed, environmentalists are losing the battle. So, the better approach is to develop those resources with high productivity, to get the most out of them with less waste.

SCMR: How do we do that?

Heck: It’s difficult because we’re talking about transformational ways of business versus how the economy works. The pioneers of shale gas spent 20 years trying out different chemicals and different ways of fracturing. The tipping point, once it came, moved very fast. The same is true of solar. In the 1970’s, solar cost 20 times more for a kilowatt of power than the typical grid power. Now we’re at the point where solar is cheaper than conventional forms of energy in about a third of the world. The cost has dropped 85% in the last several years. Meanwhile, the cost of building and operating nuclear and coal plants has gone up. Here’s another way to think about it. For most people, the carbon footprint for the materials you consume in the course of your daily life – in your home, your office, or using the roads – is about 86 tons a year. Most of that is associated in the supply chain to deliver what you want. And, when we’re done with it, we rip it up and put it in the landfill – for instane, 35-to-40% of all paper we produce ends up in the landfill. If we can change those dynamics, we can dramatically change how much we use. We can imagine using just ten to fifteen tons.

SCMR: What are the new technologies that will reshape traditional industrial technology and why do you see them as important?

Heck: There are two major categories. One is the penetration of computing and software into industrial domains. The catch phrase is the Internet of Things. That’s software to optimize your routing or the schedule of your use of assets. Think of airplanes: You can save 20% of fuel by routing better. UPS uses GPS to optimize delivery routes. We see mines in Australia that are fully-automated. There’s someone in a control center in a city directing trucks and drilling equipment in the desert. Those are big changes in the productivity of that equipment.

The second is driven by materials. Biologically-inspired materials and nanotechnology are changing industrial products. Think of the new materials going into high performance batteries and airplanes being made out of carbon fiber with lighter weights and better performance. We’re on the cusp of solid state electronics coming into our substations and transformers that will make the power grid much more efficient. If you save 6% of 1,000 terrawatt hours, that’s a whole bunch of energy savings. That’s never happened before. Utilities will have to figure out how to make money selling fewer electrons.

SCMR: Talk about one or two companies that are already capitalizing on the principles you cite, and give an example of what they’re doing.

Heck: Dirtt, a Canadian manufacturer of modular interiors for homes and offices, has found a way to fasten products without nails and screws. If you have to reconfigure your office or your kid’s bedroom, it can be taken apart in a matter of hours. It completely changes the supply chain. In stead of most of the building being built in the field with saws and lumbers its done in a factory. There’s zero waste because the products are cut to your needs and anything left over is reused in the factory.

GE is building a research center to put sensors in all of its products. GE has also figured out ways to leverage technology innovations across its businesses. In gas, for instance, GE using imaging technology for drilling that was first developed for its medical products.

SCMR: How will managing - or winning - in a scarce environment impact supply chains? Or, what should supply chain managers be thinking about?

Heck: Our book talks abut this extensively. While we don’t see the risk of permanently running out of materials, we do see big supply chain risks. There could be big price spikes that have nothing to do with your customers. You could have multiple industries competing for similar materials. Or, as we saw with the tsunami that hit Japan, you can have single points of failure. We highlight that the complexity of your supply chain has grown a lot.

We suggest systematically looking at where you are vulnerable and asking what materials can you substitute. It’s also an opportunity to redesign your supply chain for higher performance. An obvious one is substituting carbon fiber for steel. We see the same opportunity with sensors or electronics. There are several companies – and GE is one – that have systematically gone through their products and eliminated some materials and created contingencies for others. Apple plans to phase out the use of any element that is toxic, scarce, or likely to be regulated out by government. They are also looking at ways to shift to materials that can be recycled, like aluminum.

SCMR: If winning in this environment will require new management approaches, let’s discuss an example of what that might entail.

Heck: The next level of sophistication is to redesign your business model. For instance, can you virtualize something? Can you turn a physical product into a service? For instance, instead of a calendar we now have an app on our phone. Construction equipment and mining equipment is being monitored remotely. Ultimately, this changes how you run your company. For example, one steel mill that was in danger of being shut down because it served the auto industry. A new European owner came in and invested in temperature-monitoring sensors and technology that led to a 20% increase and output and a 20% decrease in costs. Today, they are one of the best performing steel mills out there. But instead of a bunch of guys in protective gear and gloves, they’re operators are in a control room writing software.

SCMR: What’s the most important takeaway from your research?

Heck: To prepare for these tipping points and dramatic changes. A tenfold increase in productivity means that a lot of your assumptions, right down to what your product is, are likely to change very rapidly. Look at previous revolutions, and many businesses didn’t make the changes. That’s already happening today around these productivity levers.

Stefan Heck teaches innovation and resource economics at Stanford University. Previously, he was a Director at McKinsey where he co-founded and led McKinsey’s Global Clean Tech practice and the Sustainable Transformation practice. Previously, he led McKinsey’s semiconductor practice.

Matt Rogers, his co-author, is a Director with McKinsey & Company in San Francisco. He served as a senior advisor to the U.S. Secretary of Energy for the Recovery Act implementation from 2009 to 2010.