Forces affecting Gevo's competitive position in biofuels

Gevo

Forces Affecting Industry Conditions

There are several forces that are affecting the industry conditions. With respect to external forces, technology is the major force. Technology has long been the driver of the alternative fuels business. The objective of the business is to produce fuels that are cheaper, more plentiful and more sustainable than fossil fuels. Without these characteristics, there is no viable business. However, the fuels need to have these traits in relation to each other, because alternative energy, and biofuels in particular, are substitutable. As a consequence, competitive advantage goes to the company with the technological advantage. It appeared for a time that GEVO might be that company, but 2012 sales were far below expectations, indicating that perhaps the company's product is not as compelling as it sounds. Most of GEVO's competitors are large multinationals that can dedicate tens of millions, if not hundreds of millions, to the development of alternative energy. As a result, of such investment, it is likely that for the next 1, 3 and 5 years innovation will continue to be the main driver of the alternative energy and biofuels businesses. The key for GEVO is where it will be positioned in terms of its innovation.

The second force affecting the industry conditions is the role of government incentive. During the initial research & development phases, alternative energy sources are typically not viable economically. In order for them to become so, there usually needs to be some sort of research support, often from government if there is no parent corporation to provide it. For GEVO, the ability to tap into alternate revenue sources would be instrumental to offset some of the high costs of the business while it refines its product and finds new applications for it, in order to generate more revenue. This force presently has more potential to be a game-changer than actual impact. Over the next 3-5 years, however, this force could be more important.

The third force affecting the industry conditions is the overall state of the economy. Macroeconomic forces are important because of cross-price elasticities in energy. The Energy Information Administration (2012) notes that cross-price elasticities in energy vary by region and type of energy. For GEVO's product, the exact cross-price elasticities are not known, but what is known is that a lower price of oil will diminish the propensity to substitute biofuels. This propensity is unlikely to change much in the coming years, but the price of hydrocarbons should continue to fluctuate. There are a number of factors the point to a long-run continuation of the trend of rising hydrocarbon prices, which would result in rising demand for biofuels (Heinberg, 2011). However, fracking has lowered prices in the short run, so in the 1-3-year time frame it is not expected that biofuels will get much increase in demand but 5+ years they should, because of the long-term trend line in hydrocarbon prices.

Overall, these forces are going to govern the viability of GEVO, along with the company's own technology, over the course of the next 1-5 years. Innovation (competition) and cross-price elasticities are going to be the most significant factors, the latter depressing demand for biofuels in the next year years but restoring to a long-run increase in demand. The wildcard demand influencer is policy, but there are not expected to be major rollbacks in policy, resulting in relatively slow, sustained growth, but focused on existing applications (Pinto, 2011).

Competitors

The impact of these forces is going to be greater on GEVO than it is on the competitors. The reason for this is simple -- GEVO is a small company with a high burn rate, while the competitors are multinationals that can sustain money-losing research with an eye to stronger sustained growth in the long run. GEVO needs the forces to align favorably right now; Exxon, DuPont do not. Amyris is in roughly the same position financially as GEVO is and therefore is going to be affected to the same degree as GEVO to all three of these trends. Amyris and GEVO are competing in terms of technological advantage. Whichever of these two will develop the best biofuel solution is likely to be the one that succeeds in the marketplace, unless the two companies develop different applications for their products. The industry is too small for troubles in this industry to be considered a threat to either Exxon or DuPont, but these firms may decide to exit the business if they feel that the business lacks long-term viability.

Key Success Factors

The key success factors going forward in this industry are technology development, capitalization and competition. The technology remains nascent in terms of its marketability, so that needs to change. In addition to improving the technology, the firms in the industry need to find more applications for their fuels in order to spur demand. Doing so is critical to the long-term viability of the industry -- GEVO needs to win business away from other forms of energy by offering a sound value proposition.

The second key success factor is capitalization. GEVO has been able to continue to access financing on the future promise of its technology, but there is a snag now. Its revenues in 2012 were significantly lower than they were in 2011. The company is earning almost nothing in terms of revenue, and that is going to make it much more difficult to acquire financing in the future (MSN Moneycentral, 2014). Amyris is in a similar position, indicating that this is industry-wide weakness, but nevertheless GEVO has a high burn rate and will need to be able to find financing without revenues in order to be an ongoing business, since the industry does not look promising for the next 1-3 years.

Finally, competition is going to be a factor. If the industry recovers, the leading firm will succeed but all else might fail. It is important to lead with access to markets, good applications for the product and to have the best technology. In a declining market, there is going to be some attrition, so having the best competitive position is the best defense.