Time Horizon as a Competitive Advantage
There is an old joke that works as a common denominator across disrupting forces in large and established industries: “A significant breakthrough is five years away and will always be.”
This line reflects how hard it is to transform supply chains and, more so, how hard it is to build them. The latter is usually taken for granted by incumbent players and underestimated by disruptors (and the media). It’s also the main reason breakthroughs seem to be five years away when, in reality, the claims are just focused on a specific technological advancement and ignore massive -and required- developments across value and supply chains for those breakthroughs to materialize.
This dilemma is not new nor specific to green energy. During the 17th century, as England transitioned to coal as the primary source for heating, wood shortages led to a fast 10x increase in coal shipments to London to satisfy the new demand. To keep up with production, miners dug deeper underground until they found their mines flooding. Keeping mines dry was hard, and available technology wasn’t up to the challenge. Fortunately, by 1695, entrepreneurs like Denis Papin and Thomas Savery conceived new systems to raise water by using the force of fire (steam). Excitement across the industry emerged, and a significant breakthrough in coal production seemed just years away. But the initial engines had an energy efficiency of around 1%. The promise didn’t turn into reality for another decade until Thomas Newcomen introduced the concept of cold water injection to the steam engine, designed for (and limited to) pumping water from hundreds of feet below. Newcomen delivered the first full-scale commercial cold water injection steam engine in 1712, gaining massive adoption (550 engines were built in Britain and abroad in the following decades). The technological puzzle might have seemed solved, but English roads were in terrible shape, and transporting the new output by horse was a challenge on its own. It took Abraham Darby, a Quaker inventor, another decade and a half to integrate iron-casting technology to develop the first iron wagonway wheels and cast-iron rails to move coal production from the mines more efficiently. By 1765 (70 years after the first breakthrough), James Watt transformed the Newcomen engine, enabling new uses such as steam-powered locomotives. As iron smelting advanced, iron wheels and rails allowed steam-powered wagons to move the new coal production between mines and canals and then between cities. A full-scale supply chain empowered every piece to live up to its potential.***
Just like this, it’s easy to look at history as a logical sequence of events but hard to picture the ups and downs entrepreneurs and investors went through during those 70 years. In that sense, the potential for green hydrogen has been “five years away” for almost three decades, after the initial breakthroughs in hydrogen combustion engines and fuel-cell systems. In 1991, Japan started an eight-year R&D program on fuel cell and hydrogen energy development, followed by the Millennium Project (1996), to develop fuel cell vehicles and residential cogeneration energy systems. Since then, we’ve been reaching significant breakthroughs to realize that a massive piece in the chain is still missing. Japan and Korea have hundreds of hydrogen refueling stations, thousands of hydrogen-powered vehicles on the road, and hundreds of thousands of fuel cell combined heat and power units installed in residential and office buildings. And the breakthrough still feels to be “five years away.” This feeling is reasonable since the progress achieved during the past decades requires hydrogen production and supply chains deployed at scale to be truly disruptive (remember coal?). And the first giga-production projects are going through their initial feasibility study phases and won’t deliver before 2025.
When we look back, it’s impressive to see how every step got compounded by new infrastructure, technology, and policy. To a historian, it may even look like a planned and coherent sequence of events that resulted in the fertile grounds on which current giga-green hydrogen production projects emerge today. For entrepreneurs and investors, those ups and downs might look slightly different.
When we look forward, things in 2022 or 2023 won’t appear too dissimilar to today in the hydrogen/ammonia spaces (except for more press releases). And yet, once production projects start delivering hundreds of thousands of tonnes of hydrogen or millions of tonnes of ammonia, many things will change and evolve again. From the fertilizers we use to grow our food to the fuel we use to ship our goods. Would this be the final breakthrough? No way, fertilizers alone consume close to 150 million tons of ammonia per year. Those won’t green in five years. We would have only taken another step forward, hoping that someday those will look part of a logical sequence of events.
The fact that these changes and uncertainties reside five years away and that results won’t show up next quarter, year, or even years makes it hard for many companies to consider jumping in today. A dynamic that opens up a tremendous opportunity for anybody with a different time horizon.
Building a company to embrace those opportunities and use time horizon as a competitive advantage is both unintuitive and profound. Bill Gates said something along the lines of: “People overestimate what they can do in a year, and underestimate what they can do in a decade.” That’s the unintuitive part. Wrapping your mind around the idea that something five years away is the result of what you do in the next five minutes or the following five is not something your brain can embrace without some level of discomfort. Keeping focus and motivation every day is hard.
Luckily, we’re not alone and get to spend part of our time supporting the multiple pieces and entrepreneurs required to make this five-year breakthroughs happen. We get to see small and sometimes incoherent pieces of the puzzle and have to imagine and develop the missing ones. The opportunity lies in being part and a result of this process, shaping our operations by focusing on a five-year horizon and working backward. Playing this game while trying to show significant results within a year would mean becoming irrelevant right after. Our success depends on our ability to self-encourage that long-term focus.
Progress feels (and probably is) inevitable. One way or another, human nature pushes forward, compounds over acquired knowledge, and that’s how every aspect of life evolves. But one thing we can learn from history is how to anticipate slowdowns and capitalize on the opportunities that result from developing paths to streamline the next five-years-away breakthrough.
***This compilation was by and large extracted from the wonderful book “Energy, A Human History” by Richard Rhodes.