Industry Agenda

Summary Report - Geneva, Switzerland 29 September 2015

Industry Strategy Meeting 2015Advanced Materials Systems (AMS)

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3Advanced Materials Systems (AMS)

Insights Opening

Overview of the AMS Framework

– Materials R&D is moving to a new lifecycle model, in which end-users are increasingly developing internal capabilities to meet their own evolving materials needs. In order to adapt to this new paradigm, downstream materials providers will need to develop nimble R&D capabilities and increase their speed to market.

– The diverging economics between specialty and commodity chemicals is causing an evolution of industry business models, as companies with broader portfolios are splitting into branches more tightly focused. Innovation will continue to be crucial but will evolve and look different in both sectors. The Advanced Materials Systems (AMS) framework offers strong potential impact for both branches.

– The lack of an “eco-premium” in the auto market is

indicative of how sustainable materials will not be viable as an end in themselves. Companies can create value from sustainable materials, however, by including them as part of a system that improves business outcomes such as reducing costs or improving performance.

– Initiatives such as the Materials Genome Initiative are

opening up vast quantities of potentially useful data for companies. Companies can help to unlock the value in this information by utilizing collaborative partnerships and new digital technologies, such as artificial intelligence, to extract value from this data.

– Universities will have to design programs to support

interdisciplinary collaboration if they want to produce talent that can perform effectively in the new integrated systems proposed by AMS. Nevertheless, a challenge that remains is the mismatch between researchers being primarily incentivized to produce purely academic papers and not to focus their research on how innovations in the lab can be applied in industry.

The session began with an overview of the AMS project and a discussion on the significant potential for chemicals companies to collaborate in the pre-competitive space. One of the objectives of the session was to solidify industry involvement in developing collaborative responses both to the specific challenges facing the industry as well as broader global challenges, and AMS was illustrated as a critical tool for companies addressing these issues. More specifically, this session was designed to give participants a look into the future of innovation systems by bringing together diverse perspectives from industry and academia for an engaging and thoughtful discussion on AMS. During the session participants discussed how to overcome challenges related to successful AMS implementation, outlined actionable items to leverage emerging global trends, and prioritized topics to be addressed during the project lifecycle.

AMS is as an approach for capturing value from global megatrends and unmet needs through functional solutions that focus on systems-level engineering over the creation of new materials. Or, put more simply, the AMS framework prescribes looking at the unmet needs of customers and developing system solutions that utilize mostly currently available materials and technologies. By combining currently available materials and technologies into a system, a more holistic solution can often be created at faster speed and lower cost. AMS is far from a one-size-fits-all approach; several common elements will be crucial for creating functional solutions in this context:

– Materials: Combining or repurposing existing materials to achieve new properties

– Process Technologies: Utilizing emerging digital technologies to enable new analytics and processing capabilities

– Business Models: Rethinking the way companies develop solutions and bring them to market

– Stakeholders: Strategically approaching partner engagement and identifying a unique role to play in an ecosystem

4 Industry Strategy Meeting 2015

Rethinking Product Development in an AMS Context

Participants engaged in an interactive discussion to share their unique perspectives on how developing new approaches to product development and strategic partnerships will be essential for creating and capturing value through AMS in an evolving marketplace. One major consideration for companies is how the roles of chemicals manufacturers and materials end-users have shifted within the context of R&D lifecycle models. Participants noted how the industry has moved through two historical types of R&D models: the original model in which chemicals companies developed new materials independently and then subsequently developed commercial applications for these materials; and the second model in which chemicals companies engaged with customers to identify their needs and then conducted R&D, selling the resulting products to customers. As collaborative innovation evolves, so do the actors and their possible roles within the ecosystem. There is evidence of a new materials R&D model in which customers develop internal R&D capabilities and identify their own materials requirements, a role that was previously taken on by advanced materials companies. A striking example of this is in the automotive industry, where major car manufacturers

have hired large teams of chemists and chemical engineers to perform their own material design in an attempt to reduce costs and increase the speed of the product lifecycle. This can create unique challenges for upstream companies which would previously collaborate with customers on R&D and are now being reduced to material commodity providers. Upstream materials companies will thus need to develop new strategic approaches to business models to find new avenues for growth and value capture. Crucial to solving these challenges will be developing nimble R&D capabilities and reducing the duration of R&D lifecycles. Upstream companies will need to shift their R&D approach by evolving their internal processes from a “scientific endeavour” towards a “business endeavour”. This requires tapping into relevant customer knowledge through new modes of customer engagement and the creation of customer feedback loops. Achieving this will also require internal capabilities such as strong vision and direction from leadership as well as the proper talent throughout the organization. In addition to being nimble, chemical producers will also need to increase speed to market to maintain competitive advantage, with participants noting that “whoever solves time to market, wins”.

5Advanced Materials Systems (AMS)

Additionally, while there will be an emphasis on producing sustainable materials in the future, new materials will need to also provide economic benefits, as consumers are less willing to pay higher prices for sustainability alone. For example, there is no “eco-premium” in the auto industry, meaning that consumers are not willing to pay more for cars produced with sustainable materials. Given the complexity of the automotive value chain, it is difficult to explain the sustainability impact and benefit to consumers. Sustainable materials can create significant value, however, if they also produce other benefits as part of a system, such as a new type of bio-based clear plastic, developed jointly by an automaker and chemicals company, which does not require paint and can reduce costs and processing times. Trends in feedstock availability and price will also have an impact on development of sustainable materials. This volatility can compromise the ability of chemical companies and customers to commit to joint efforts due to the uncertainty of profitability and possible low (or negative) ROI. For example, the fracking boom has changed the economics of chemicals and materials development by markedly increasing the availability of natural gas feedstocks. It may also be decelerating the development of biotechnology materials, which were previously close to achieving economic competitiveness with fossil fuels,

but have since fallen back. This raises many interesting questions such as: how can unconventional actors in AMS help hedge these risks? Can oil & gas and biotech companies be part of the same coordinated R&D efforts? Can one develop a strategy for allocating risks to the best prepared?

6 Industry Strategy Meeting 2015

Developing Strategic Partnerships through AMSSuccessful application of the AMS framework can also be observed through the reimagining of strategic partnerships through more effective stakeholder management and the utilization of innovative technologies. Over the past few decades, several large chemicals companies have begun to collaborate extensively with academia. The real challenges that these companies have encountered came from the minor considerations of these new modes and structures of stakeholder relationships; as one participant noted, “the devil is in the detail”. Despite challenges, companies must find ways to appropriately incentivize collaboration models, as the rewards are well worth overcoming the short-term challenges. Academic institutions are often prime examples of incentivizing behaviour in professors that may lead to success in an academic setting but fails to encourage collaboration with companies. Professors are rewarded when they publish more papers; they are not incentivized to account for revenue or costs. Department structures can sometimes push professors away from collaboration, as specializations and geographic isolation frequently go hand in hand. The solution may be structural changes to the way universities interact with companies. By creating interdisciplinary departments, universities can facilitate collaboration between academic professionals with diverse backgrounds. The millennial generation is creating talent issues for many chemical companies. Millennials switch employers frequently, want to develop foundational business skills and have a strong desire to work for companies with a strong sense of purpose and commitment to improving society. Scientists traditionally held jobs for decades, allowing for long commitment to research projects. Long, linear material development is a disincentive for the new generation of professionals looking for dynamic challenges. Companies need to tailor their organizations to accommodate these values and incentivizing collaboration. Learnings can be derived from the Japanese business environment where companies have run into similar problems. Culturally, in Japan it is difficult for companies to reduce employee headcount, so managers have to create the right structures to best utilize existing talent. New advances in technology and data collection are also having a profound impact on business models and are opening up new avenues of collaboration. New sequencing technologies are exponentially improving the efficiency with which this data can be analysed. For example, work on the human genome project has dropped the price of the

first human genome from several billion dollars to several thousand dollars per genome today. This is creating new opportunities for the data collectors and analysts, such as biotech companies. They have learned how to generate valuable knowledge from massive quantities of data. This is an extremely valuable skillset much sought after in almost all industries today as big data becomes more omnipresent. Within the chemistry and advanced materials industry, the Materials Genome Initiative has made available an extensive inventory of existing materials. New digital technologies, such as artificial intelligence, are allowing for smart searching and analytics that will be enable companies to develop systems level capabilities needed to utilize this information towards creating new materials solutions.

Debrief and Key Takeaways

After the session, participants engaged in a thoughtful exchange of comments regarding AMS. A key concern of several meeting participants was how AMS can be applied to a chemicals industry that is radically restructuring from decades past. Significant change in the structure of the industry is being led by investors driving M&A or separation into commodity and specialty chemicals companies. This will have significant implications for innovation projects. In the past, commodity companies typically earned steady revenue streams and margins that were reinvested into specialty chemical and materials R&D. With the restructuring of the industry, AMS will become even more critical for companies if they want to maximize the value of their inventions and continue to innovate. AMS is a shift away from the traditional, linear model of R&D towards parallel, cyclical or more systemic models. The framework describes how collaboration models can be conducted and which stakeholders can be involved. Several key takeaways were also noted by the group as potential ways to deepen and expand the understanding of AMS while identifying ways that it can be applied to create impact, including: 1. Creating a visual or map depicting the traditional R&D/

business model for chemical companies today and an AMS-inspired business model of the future

2. Investigating the Materials Genome Initiative and its applicability to AMS

3. Quantifying the impact of new technologies on the length of R&D lifecycles

4. Exploring the successful applications of the framework as a means of making it more relatable

5. Creating a glossary or definition of terms for the AMS report

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