'Greenomics': Making Cents in a Low-Carbon WorldPublished: January 12, 2011 in Knowledge@Wharton
Seoul-based Hyundai Motor Company has good reason to be riding high. Its recent earnings reports have been turning rivals green with envy -- including its first quarter 2010 net profit, which jumped fivefold from the year earlier to 1.13 trillion won ($1 billion), and sales that gained 40% to reach 8.4 trillion won. But while South Korea's biggest auto maker might be an industry pacesetter in many respects, it still shares the same big headache its rivals do: How to meet the growing demand for environmentally friendly cars in a way that's profitable for car companies yet affordable for consumers.
It's a tall order. Despite ever-more stringent regulations worldwide for a greener automotive industry, "the shift to eco-friendly vehicles is rather slower than we expected," said Hyun Soon Lee, head of corporate R&D and vice chairman of Hyundai Motor Company, during a keynote address at the recent Wharton Global Alumni Forum in Seoul. "The real problem is the cost." Despite years of research effort, auto companies still spend as much as $50,000 on the battery alone for each electric vehicle they manufacture. Without governments providing subsidies, "who can afford that?" asked Lee.
Welcome to "greenomics," or the economics of being environmentally friendly, which are leaving companies like Hyundai struggling to balance their eco-ambitions with hardcore business pressures. As experts gathered at the Wharton Global Alumni Forum for a panel titled, "Creating New World Greenomics," noted, greenomics isn't just about corporate profit and loss statements. Rather, it requires a symbiotic relationship between the public and private sector, non-profit and non-governmental organizations (NGOs), and consumers. Yet, observed Eric Bradlow, Wharton marketing professor and the panel's moderator, all these groups are a long way away from helping the business world reach the day "when we no longer need the term 'greenomics' because it's simply embedded into everything we do."
A 'Green New Deal'
Until that day, the panel agreed that governments around the world can and should play a pivotal role in supporting greenomics. "Governments can create regulations, but also a market, even if it's through subsidies," noted Jong Hyun Chang, president and partner of management consultants B&MC (Booz & Company) in Seoul. What's more, they can also go as far as to influence major lifestyle changes among consumers. "Governments have a big role to play but I think they are afraid to," he said. "They think if people do a bit of recycling here and there so that they feel good about their lives, that's enough. But [environmentally friendly behavior] needs to get regulated."
There certainly has been no shortage of governments announcing national green initiatives and targets ever since the failed global push to combat climate change at the United Nations conference in Copenhagen last year. Among the more ambitious governments is South Korea. In November, the country volunteered to cut greenhouse gas emission 30% by 2020 from 2005 levels. It's a noteworthy pledge for several reasons. Over the past 60 or so years, South Korea's prosperity has been highly dependent on carbon-intensive industrial growth. The country has been one of the fastest-growing emissions sources among members of the Organisation for Economic Co-operation and Development, with the country's greenhouse gas discharges more than doubling between 1990 and 2005.
However, well before last year's Copenhagen talks, South Korea President Lee Myung Bak had ambitious climate change goals and unveiled his "Green New Deal," said Kang Nam Hoon, a panel participant and director general of energy policy at the country's Ministry of Knowledge Economy (MKE). In the summer of 2008, just weeks after beginning his five-year term as president, the former mayor of Seoul and Hyundai executive set up a committee dedicated to "green growth" initiatives. Months later, the Green New Deal was then melded into the administration's economic stimulus package to spur employment and business growth. For us, Kang stated, greenomics "means new jobs, new industries [and] new markets."
With a budget of $84 billion (about 2% of the country's GDP) to be allocated to environmental measures over the next five years, the South Korean government says it will generate as many as 18 million new jobs between 2009 and 2013. But the Green New Deal is not without controversy. For example, many of the new jobs will be part of the Four Rivers Restoration Project, which plans to construct or restore a number of dams, levees and reservoirs for an estimated cost of $13 billion. Many environmentalists say parts of the project could do the country's fragile ecosystem more harm than good.
There's more to the Green New Deal than ecology. While reducing its reliance on fossil fuels, the government also wants South Korea to become more energy self-sufficient, noted Kang. Korea currently imports 97% of its energy supply, with 84% derived from fossil-based fuel sources. "We have to make our best effort to develop renewable energy," said Kang.
Solar energy is one avenue that Korea is pursuing, but embracing the technology presents some challenges. According to consultancy Euclid Infotech, South Korea lags countries, such as the United States and Japan, when it comes to both R&D and price competitiveness in key solar power technologies. Currently, solar energy accounts for around 50% of South Korea's renewable energy output, yet nearly 70% of the solar modules needed for that output are imported.
Arguably, a more-promising source of energy for South Korea is nuclear power, said Kang. Less carbon-intensive than fossil fuel, nuclear energy could benefit South Korea's domestic and international energy ambitions as the country increases the exports of the technology it began commercializing some 40 years ago. The organizations behind a recent deal with the United Arab Emirates to export South Korea's nuclear know-how and technology say it will create 200,000 new jobs alone, while nuclear-related public bodies will recruit more than 2,000 employees this year.
The Weakest Links
With or without assistance from governments like South Korea's, there's plenty of greenomics that businesses can pursue independently, observed Chang of B&MC. That includes cleaning up their supply chains -- from increasing the use of renewable energy and recycled materials to improving manufacturing efficiency and material yields. It can mean moving factories closer to logistic centers and customers to reduce travel time; partnering with suppliers to ensure goods are procured from more eco-friendly sources; or even investing in green manufacturing technologies, regardless of whether the return on investment is immediately clear.
The starting point for any of these measures is "to look at every link of a supply chain to understand what its carbon footprint is -- that is, how much CO2 each link is emitting," noted Chang. "Then you have to figure out how to reduce it, how to avoid it and how to take advantage of it, with [initiatives like] carbon credits." Addressing supply chain issues with "a thorough, fact-based analysis of CO2 emissions" can bring surprises. For example, he said, a newspaper company using recycled paper could actually have a larger carbon footprint than a competitor that isn't printing on recycled paper but is using green energy to run printing plants and has eco-friendly trucks delivering its papers.
"It's very simple, once you understand where the energy is used and wasted," Chang added. "Each product has different CO2 constraints. So management needs to run a product-by-product analysis to find a solution. But as long as we see the green issue as a cost, there is no way we'll make progress. If we see it as an opportunity, there is a chance."
The good news is that many green opportunities are within reach, according to Dong Sup Kim, president of SK Energy's Institute of Technology (SKEIT), the 30-year-old innovation center run by the Seoul-based energy and petrochemicals company. "The solution is very easy to me -- on paper at least: Expand the supply of energy, increase efficiency and mitigate emissions," he asserted. "The 'how to' is the difficult part." To that end, SKEIT's mission has been to develop groundbreaking technologies that can be used to make products more environmentally friendly.
Consider GreenPol, a plastic SKEIT developed that is made up of 44% carbon dioxide, and can be used to manufacture products like cling film, food containers or car parts. "The question for us was how to turn CO2 into a valuable product," recalled Kim. According to him, SK Energy is the first company to commercialize a CO2-based polymer. What's more, unlike with conventional polymers, GreenPol is "clean burning -- there is no soot, no toxins." And its money-making potential is promising. "By 2025, the market for eco-friendly plastics such as GreenPol could be worth some $25 billion," Kim predicted.
Another big potential market that has captured SKEIT's attention is batteries for electric vehicles, to the delight of auto makers such as Hyundai. Since beginning commercial production of batteries that can be used in electric vehicles in 2005, SK Energy has won deals to supply both Hyundai and Mitsubishi. Citing research from the non-profit Electric Power Research Institute, Kim said the global market for such batteries could generate some $1.4 trillion of revenue by 2030.
Where's the Payback?
If companies need an additional incentive to develop greenomics, they should look no further than BP as it wrangles with the Gulf Coast oil spill, said Douglas Woodring, co-founder and director of Project Kaisei, a San Francisco and Hong Kong-based environmental non-profit focused on cleaning up plastic debris in the ocean. The environmental damage of the oil spill is devastating enough, he noted, but the U.K.-based oil giant also is facing potentially irreparable damage to its reputation among stakeholders as a worthy global citizen that is ecologically proactive. "Companies cannot hide, as the BP oil spill shows," he stated.
Looked at from another perspective, Woodring cited research from a global public relations firm showing that companies enhance their reputations among the general public by associating themselves with green projects, such as Kaisei. Launched last year, Kaisei (which means "ocean planet" in Japanese) brings together conservationists from around the world to focus on what the organization calls the "Plastic Vortex," a part of the Pacific Ocean containing an estimated four million tons of floating plastic waste in a mass nearly four times as large as Japan.
"National Geographic estimates that over 85 million plastic bottles are used every three minutes," Woodring noted. In many cases, plastic waste that is not incinerated or put in landfills ends up in the ocean. "Most plastics are ... something you use for a few minutes, but will last hundreds of years. There is a serious mismatch in the materials we're using and the way that we're using them." Moreover, he said, when plastic is dumped at sea, it does not biodegrade.
But it's a problem governments "are escaping," he said. "There is no ownership out there [in the ocean], no laws, no boundaries." This is where NGOs and the private sector come in. While the situation is a "nightmare," Woodring added, "it's also an opportunity." Project Kaisei is, among other things, developing a new way to treat ocean-based plastic waste, which uses low heat, no oxygen and allows for a variety of plastic waste to be processed into diesel fuel.
When it comes to greenomics in general, Woodring called for companies to put their money where their mouth is. "Companies need to invest in green technologies, otherwise we won't get the economies of scale to make them viable from a business sense," he said. "We shouldn't be afraid of these new technologies and processes. We can't forget that the economy is a 100% subsidiary of the environment. But who's going to take the first step? People always ask where the payback is."
Beyond corporate and NGO involvement, however, SKEIT's Kim, in the panel's concluding observations, said the "blame game" for damages to the environment needs to stop, and individual consumers might have the biggest role of all to play in greenomics. "I don't think its right to point the finger at [an environmentally unfriendly] product, especially if we don't change our lifestyles," he noted. "Do we really need all the energy we're using?"