If we can become much more efficient in manufacturing and consumption, businesses and future generations will end up wealthier
Most people have no idea how much material they consume in a day, and many don't care. We buy cars that sit idle in a garage for most of the day; we use only a fraction of the space in our homes and we have no problem keeping on our lights when we're not at home.
We're at a point, though, where people have to start paying attention to how much material we use, says Stefan Heck, a director at McKinsey & Company, a global management consulting firm, and the co-author of Resource Revolution: How to capture the biggest business opportunity in a century.
Heck says one person uses 86 metric tonnes of material a year, which is way too much. More demand for goods means that commodity prices are increasing around the world and if companies don't find ways to reduce our reliance on commodities then we won't be able to afford anything.
A resource revolution is coming, but it's not something to fear, Heck explains. In fact, by being more efficient with materials, time and other precious resources, businesses can make more money and people can become wealthier.
Q: What is a resource revolution and why is it coming?
Heck: It's essentially a shift in production, similar to what we had in the industrial revolution. We need to achieve high-productivity growth more efficiently and use fewer resources. For the past 100 years commodities and energy have been relatively cheap, so we haven't had any reason to make industry or our homes more efficient in terms of energy usage and material storage. Now resource prices are going up across the board. Everything we buy – household goods, food, electronics – all the inputs into that are getting more expensive, not cheaper.
The reason this is a problem now is simple. Since about 1990 wealth in emerging economies has risen very quickly. We've got 100 times more people getting 10 times wealthier than we did in the industrial revolution. Back then it took 150 years to double wealth. Now 2.5 billion people are increasing incomes by 8 per cent to 10 per cent and in some places, such as China, that's happening every 12 years. So that trend of commodities getting cheaper has reversed as people consume more.
How are we inefficient today?
We have cars, but we park them most of the time. When people buy a home, they look at the kitchen and how many bedrooms it has, but not how the house is going to be used. The dining room almost never gets used. Utilities only use 20 per cent to 40 per cent of their transmission and distribution capacity, while the heat-rate efficiency of the average coal-fired plant hasn't improved much in 50 years. A lot of people don't think of this – the inefficiency is hidden. Look at the way GDP is calculated. It gets into labour productivity, foreign direct investment and capital investment. We don't measure GDP based on per units of water used or per area of land. We need to do something or our children will have to pay more for everything.
Are you concerned that resources will run out?
While we will ultimately run out of those things, that's not the right way to look at it. We'll still have this stuff in 50 or 100 years. We need to look at it from an economic point of view. Things will get a lot more expensive well before they run out. We're digging further offshore and in harder-to-reach places to find materials, and the grade of the materials we are finding is lower than it used to be. So prices will go much higher before we run out of anything. We argue that the resource revolution will kick in because it's much better to increase productivity than to extract.
How will this revolution take shape?
There are [certain] levers that increase production. One is waste reduction. In the aerospace industry, manufacturers are shifting to more exotic materials to get higher performance and to make lighter planes. Companies are using much larger amounts of titanium, but it's extremely expensive as it's rarer than steel. So what they've done is they've started using the titanium that's wasted in other industries and they're also recycling their own waste. When they started doing that the ratio of how much titanium ended up on a plane went from a small fraction to 90 per cent.
Here's another example: Half the food that gets produced in developed countries doesn't enter anyone's stomach. There's a company in Britain that puts a digital scale in restaurants – every plate bussed is weighed and measured. Did they eat their meat? How much fish did they consume? Then they can adjust portions and avoid putting food on a plate that will be unused. That's a very direct profit-making opportunity.
You also write about substitution.
That's a close relative of reduction. It's substituting one technology or material for another. We've been doing this for a long time – we now have electricity where we used to use coal gas, for example. But now our level of understanding of materials is at a nano scale. Nano-scale carbon fibres allow us to make objects that have a higher performance. The Tesla, for instance, uses more composite and carbon fibre than any car before. The materials being used are strong and that makes the car safer. It's lighter so that reduces the amount of fuel used and mileage is better. These materials also give manufacturers more design flexibility in how they lay out the car, and that can create more efficiencies.
What are some other main levers?
Optimization and virtualization are big ones as well. The former is applying software, algorithms and big-data techniques to classic industrial problems. Here's a simple example. UPS was able to save time and fuel by designing routes where its drivers make only right turns.
Virtualization allows us to do things remotely. We've seen this in the consumer world – we got rid of our CD collection with iTunes and now books can be read online. Vehicle recalls are a good example. Last month Tesla had a recall. Normally, recalls are a huge expense for car manufacturers, but the Tesla recall was over with within one hour. They just downloaded new software to the car and fixed the issue. Lots of machinery has software in it that can be upgraded with software.
Where are we in the revolution?
We're in the early stages, but a lot of companies are doing things already. The industrial revolution played out over 30 to 50 years and we're still in the first decade here. But companies are realizing why this matters to them and that they have a chance to make more money. They can deliver improved performance at a lower cost and, as a result, get more margins.
What will the world look like after this plays out?
We'll see a tenfold increase in productivity and a lot more people in the middle class. Those people will have a better quality of life without having resource price spikes to deal with. It won't play out evenly and without distress, and there will be periods where prices rise and stabilize, but as a whole, people will wind up better off.
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