View from the Top: William Banholzer, Dow Chemical Company

I'm delighted to welcome Dr. William Banholzer, the executive vice president and CEO of the Dow Chemical Company as today's speaker in the first "View from the Top" of the spring semester. As you know, the "View from the Top" series give the college community and the university community a chance to hear from the best of today's business leaders and technology visionaries. I'd like to thank the Berkeley chapters of the American Society of Chemical Engineers, as well as the Society of Asian Scientists and Engineers, and those are the brave volunteers who are- can you raise your hands there- they've helped put this together, so thank you. Before I introduce William Banholzer, I invite you to mark your calendars for yet another special event in this "View from the Top" series. Coming to the college on Thursday, April 5th, we will celebrate the inaugural Ernest Kuh Distinguished Lecture Series with our very special guest, Andy Grove. Please mark your calendars, Thursday April 5th. As you know, Andy Grove is co-founder of Intel, one of the great pioneers of Silicon Valley, a leader in developing technology and innovation that built not just the Valley, but spurred the entire IT revolution. He's a graduate from the College of Chemistry, a graduate of engineering, and he's been a professor, he's been an alumni, he's been a CEO. What he'll talk about will and what he is- he's a staunch advocate for accelerating the pace on reducing the cost of technology advances in medicine. So please look at the college website for registration information. Now coming back to today, as many of you know, the emerging field of synthetic biology is taking shape in a big way here at Berkeley- the Berkeley campus, LBL, you know Steve Choo taught us to say Berkeley and mean both the University of California, Berkeley and LBL, and it's really quite engaged in an array of research enterprises, synthetic biology and advanced fuels, including our synthetic biology institute, which we launched this year- here's one of the co-directors of the synthetic biology institute. Adam is not here, I don't think, is that right? These research efforts represent what Berkeley does best, which is to work across several disciplines to tackle issues on a global scale and developing technologies, which have transformative potential and energy materials, pharmaceuticals, chemicals, food products, national security, and other industries. But, really, what we are here to think about, and to engage in the conversation that is to follow, is really about what are the real possibilities for the future of biofuels and the payoff of these amazing advances in synthetic biology. We've invited Bill Banholzer to give us sort of a view, as the title says, which is not about the height but really about the road blocks and the concerns about how this technology may shape our dialogue in the future. I know that a lot of synthetic biology and biofuel zealots in the audience, and I encourage you to engage in a friendly reparte at the end of the talk in the atrium, and I hope you enjoy this. A few words about Bill: he is part of the executive leadership team at Dow; he works on the corporate strategy for national performance and resource allocation, and he also told me, as we were talking, that he leads their venture arm, and he also said that he has a special interest in early round investments. He's responsible for this great, huge company, venerable company's, global research and development activities, directing an annual budget of over a billion dollars. Of course, Dow has done a huge amount for the campus- the one other activity I'd like to say is the CEO of Dow, supported by Bill and Terry Z. have been pushing the country on an agenda for developing road maps for advanced manufacturing; it's the presidential initiative called AMP, Advanced Manufacturing Partnership, and you may recall, we had our regional meeting here to support AMP, where Theresa spoke in December. A little bit more about Bill, prior to joining Dow, he had a long and successful career of 22 years at many parts of GE. In 2002, he was elected to the National Academy of Engineering, and he has served on corporate and academic boards across the country, including currently on the Berkeley College of Chemistry Advisory Board, so we are very, very proud to count you as part of our Berkeley family. Please give a warm welcome to our speaker, Dr. William Banholzer. *clapping* Well, thank you for inviting me. It's really an honor to be here. Berkeley is such a fantastic place, and it's a distinct privilege to talk to you, so I thank you for the invitation, and I'd also say, if there's one message I have that I think that all you guys are going to have an amazing career. The education that you're getting prepared for, assuming most of you are engineers, I think is going to be important because I believe that we have great problems in the world and society- clean energy, water, and engineering is the skills that we need to attack those problems vigorously. In fact, there's a quote from Michener that says, "Scientists dream of doing great things, but engineers actually do them." So as a chemical engineer, I sort of like that one. But what I would say is that I'm a little bit disappointed because I think, as engineers, we've let society down. You're trained to close energy and mass balances, you understand thermodynamics, and some of the hype that's out there is actually taking the country down wrong paths and wasting resources. What I'm going to give you today is sort of my view of how I think about energy, and you might say, what's a chemical guy doing talking about energy? Well, what you would call fuels, we call feed stocks, and we are intimately in touch and synced up with the petrochemical industry, so a lot of the things that apply to fuels, apply to us, and in some cases, what they do is going to dramatically affect us, but we all are dealing with commodities, and commodities is a feed stock, and I think that's one of the biggest messages I want to explain today is that when you think about going into fuels, it is a commodity, it is a privately sourced material, not a public material, a privately sourced thing, you pay for it- it's in private hands. It has capital flows that are part of the capital market, so I'm going to try to explain some of the hype that I hear versus what the reality actually is. I also get to run our venture capital arm, so I see a lot of new startups and a lot of new business plans, and it's amazing how many of those business plans forget fundamental engineering. In fact, the first words out of every venture capitalists mouth are "exit strategy." They're not here to make long term investments; they're here so they can get their money out and put it to work. That's not always useful in energy, where you can have constants that are 10, 20 years. I think we've got a better job to do. Now, another thing that you need to understand, if you're in a company, you are financial entity. There's no right that says you have to do research. Research is a privilege that we earn by creating value for our customers. We provide products that they're willing to pay for, which in turn funds new research, so it's a virtuous cycle. But there are three questions that we have to answer. What do people want? What will they pay for? And what can they afford? And to be a successful business, you have to have an affirmative question to all three of those questions. For example, we all know what people want- that's self-evident. But what you'll pay for is important, so I want a bunch of apps for my iPhone, but I'm not going to pay anything for those. I could afford it, but I'm not going to pay that 99 cents. You need to understand, will they actually part with their money. It requires them to make a value decision if what you're giving them is worth the money. Also, can they afford it? So my son would like a porsche, he could really pay for a porsche, but he can't afford a porsche. So we have to have a discrete answer to all of those questions before we can move forward. Now, I'm in an academic institution, and here, I think you have pretty well defined definitions of success. This is a two by two grid, so there are two axises. You can have huge scientific success or you can have huge business success, but there are four quadrants to this. You really want to be there in the upper right. You really want to have great science that creates great businesses- the transistor, antibiotics, or manmade diamonds, so those are great science that actually turned into great products. You can also have great businesses that really don't require much science; I mean that's sort of a devoid quadrant, in fact, cements about the only thing we could come up with. Usually if you don't have good science, usually things sort of go by the wayside. But the important part that goes back to my previous slide is that great science does not mean that it's going to have an impact on society. So Bucky Balls, Noble winning, high temperature superconductors, Noble winning prizes, you know they've done a ton of prizes in this area, but there is no significant impact on society because of the Bucky Balls. So I have a second question, which is is it great science and why will people pay for it, and why can I make sure that they can afford it. So affordability goes to cost, which is going to be a key theme to this talk. And now of course, you can have bad science. We all know abut the cold fusion, and it's very difficult to say that you're going to have bad science come of anything. You can see that my view is that hydrogen is somewhere in the middle. There's some good science there but it's just bad business, and there's a bunch of things that just don't make sense, and that's a whole other talk of how did these guys get venture capital money, but how'd they even get DUE money for these ideas. It's a question that goes back to engineering principles. So the theme here and question I was asked to address is how important is biology in solving the world's problems, especially energy? So we have a chemical business, and I would tell you that business' entire future relies on improvements in biology. We have herbicides, insecticides, fungicides that are chemicals that are important, but the true breakthrough and revolution has been increasing crop yields through genetic engineering, integrating genes into these things to make herbicide tolerant plants, to try to make drought resistant plants, to change the output so we can change the oil to have no saturation or low saturation- that is profound. I don't want anybody to think that I'm not a huge supporter of biological sciences, but I do think we've got a little bit of a balance issue. I don't think it can solve all of the issues that people are trying to apply it to, and that's what I'm going to try to spend the rest of the talk on. This is the way I think about it- we need to stop talking about what is possible and start focusing on what's practical, and practical means capital flow, not "I can get some donor money to make a demonstration plan," but will society benefit from taking that knowledge and reducing it to some commercial entities, small business, big business, but again, academic research is not reduced to practice, does not benefit society, and I think most of you are here to try to actually have an impact on society. If you think back to this possible vs. practical, when I grew up, I was expecting by now to be flying in around in a jet pack. But they're not practical for the same reasons that a lot of the biological things aren't practical, which is the limits of biology and energy density, so I'm going to talk a lot about energy density that goes directly to cost. You've got to carry the fuel, so the jetpack is limited by the strength of my biological knee, and there's only so much I can carry, which means there is only so much I can fly because I only have a given amount of energy density. So even with highly concentrated energy forms, liquid fuels, because remember, we move energy around the world in two ways: by electrons and by chemical bonds. Chemical bonds, by far, are the most efficient at storing energy, but even liquid fuels weigh something. It's just not practical. Now here's a projection of what we think biologically derived fuels are- it's that little black bar, so you can see liquid biofuels there, out to 2035. These aren't my projections, these are what IEA and EAI and other people have said, and it's 2 or 3%, but if you go to the popular press and look at how much dialogue, press, and funding is going into what is 3%, an optimistic assumption, you sort of wonder, well, why aren't people worrying about the other 97%, so let's just remember, we're not talking about a small part. So the question is, how can I make that bigger? How do I get bioderived feed stock for us, bioderived fuels for most of us, into broader adoption. Well, you've got to also remember we started both for fuels and the chemical industry, from biologically derived feed stocks, and this shows you the biological is that big green biomass, and overtime, we have systematically moved away from bio feed stocks, both in the chemical industry and as fuels. And that didn't happen spontaneously, it happened for deliberate reasons, which is it's cheaper to go to fossil fuels, so if we had this trend, you say "oh it's different now," it's not all of a sudden going to be undone, and you can say well because we're going to run out, price is going to go up, or CO2, we've go to do something because we think that CO2 is important. The question is well, how are we going to reverse that trend. Capital is going to redistribute and force us into other options. Here's the biggest problem: biomass is too reduced, it's too dispersed, has too low of energy density to compete with fossil fuels. So if you take a refinery, and what I did here is showed btu per pound, that the energy density, how much energy do I have per pound of mass, and then I've got what does it cost to actually recover and make that usable. So oil has higher energy density and for a million btus is costs about $10 of capital, that's $10 you've got to use to build a refinery. If I want to try and make it out of biomass, cellulosics or even corn, that's $30-$120, so my plan costs me more because my energy isn't as dense, plus the transformations are harder. The other issue is just scale. We get the cost down by making things bigger. You can't do that with biomass scale. Because of the lower energy density and the need to be close to the feed stocks you're going to harvest, you need 100 ethanol plants to equal one refinery. So you've got a distributed infrastructure that's got to be made from scratch, and you're taking basically an organic vs. inorganic source of metals and all these other things. It's not just the biomass- you've got to look at the total resources: how much water do I need, where's the steel going to come from. There's a lot more than just the biomass to deal with when you look at these costs. Now, the question is what's a fad and what's a future trend and how do you know the difference? I put up a couple up here, but the question is, how do we decide? You clearly remember there was the hydrogen fad. For a while, that was all you heard about, the hydrogen economy was going to take over, and eventually I think people realized how difficult that's going to be. There is no hydrogen mines out there. Hydrogen isn't a source of primary energy, and once people looked at the four very challenging problems, including not knowing how to make it without carbon, we don't know how to store it, we don't know how to transport it, we don't know how to make fuel cells cheap enough. There are just a lot of problems there, so hydrogen sort of died down. I think corn ethanol, most people would agree went through a big peak and then most people now are saying, look, but the sort of balances on greenhouse gases, and land requirements, and especially since corn is such an intensive crop, it needs fertilizer, it's not attractive. Biodiesel was around the same time as corn, but then people started realizing what the biodiesel yield is per acre and that's sort of fallen off because there's just a limit, it almost gets to be too small, and you can't do it. What about cellulose ethanol, and algae. I'm going to talk about those. Now Dow has always looked for alternatives. In 2002, we spent 8 billion dollars on hydrocarbon and energy. Last year, we spent 22-26 billion dollars on hydrocarbon and energy. That's a big number. If we could go back to the 8, we would be happy. If anybody's motivated to find alternative sources, it's us. So we have a huge financial incentive to get away from fossil fuels and look at alternative feed stocks. So we looked at this continually for decades. These are a couple examples, which is we looked at a PLA, a plastic that is derived from biomass and actually had a joint venture on it and spent a lot more money than I can publicly disclose. We tried to make that work and then got out of it. And we got out of it because PLA is a crappy plastic and it's got a cost problem. So I was really fortunate to work at GE under Jack Welsh, and Jack had a very simple outlook, saying "business is easy," make great products and have the lowest cost. Two out of two is good, one out of two is okay, and what he didn't say that is obvious is that zero out of two is dumb. And that's what PLA is, it's too expensive and it's a crappy power, it doesn't process well. But you can adapt it and make it work. Cargo and Nature Works made it work. Now, remember what I said, you guys as consumers, I have to understand what you will pay for- what you want, what you'll pay for and what you can afford. And so Nature Works continued with this program, and they actually the Sun Chips bag, which is a bag from Poly lactic acid (PLA). Now, the general consensus of marketing data is that people will pay a little bit for green. Most people now (I used to say nobody will pay for green), but most people now will pay about 5%, you won't pay 15%, but 5% is about what you'll pay, depending on your age and how liberal you are, but that's a general number. What you won't do is sacrifice quality. That's universal. Even if you'll pay more, you're not going to give up quality. This is a good example to show how fickle we all are. That bag worked. The chips didn't fall out. They could print on it. They didn't go stale. And you as consumers rejected it because the bag made too much noise. That's how fickle we are. So we start talking about tradeoffs. You won't trade off.