There was a time when emerging markets were seen as a dumping ground for old technology – production lines for older, simpler designs that had run their course in the developed world were routinely shipped to new markets, to get the car industry off the ground, writes Mark Bursa.
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How things have changed. Consumers in emerging markets have become much more sophisticated – they don’t want hand-me-down technology. And manufacturers have begun to realise that dumping older, less environmentally friendly technologies on emerging markets is building up problems in terms of global warming and finite fossil fuel stocks.
The need to develop alternatives to gasoline has been placed into sharp focus with the explosive growth in Chinese car sales. Demand in China could do the same for gasoline supplies and prices as it has for steel – shortages and price rises.
While automakers have dithered with electric cars, hybrids and fuel cells as alternatives to fossil fuels, their subsidiaries in Brazil have developed a practical, cheap and sustainable alternative – ethanol.
It’s not a new technology – in fact it’s been around since the early days of the auto industry. Henry Ford himself predicted that “ethyl alcohol is the fuel of the future” – though he didn’t specify how far into the future.
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By GlobalDataIn Brazil, ethanol has for more than 30 years been used as an automotive fuel. After the 1970s oil crisis, ethanol refined from locally grown sugar cane became the dominant fuel thanks to heavy government subsidies for domestically produced ethanol, derived from sugar cane. By 1983, 90% of Brazilian cars sold were designed to run only on ethanol.
When oil prices fell, and sugar prices rose, the government could no longer afford to prop up the ethanol fuel market, and sales of ethanol-only cars dried up after 1986. But a national filling station infrastructure for Ethanol had been installed, and this has been maintained to this day.
What’s changed since then? There have been great advances in agricultural cultivation of sugar cane, which once again has made ethanol a viable proposition. New varieties of sugar cane have been developed; bigger, better plants that grow faster and provide better yields. The productivity of Brazil’s ethanol producers has steadily increased. In 1975, Brazil squeezed 2,000 litres of ethanol from a hectare, of sugar cane. Today, it is nearly 6,000 litres.
And sugar cane is eight times more effective as a source of ethanol than the corn-based ethanol developed in the US – a source of concern to Brazilian producers as the US slaps a 54 cents per gallon import tax on its ethanol so as to protect the inefficient US producers and corn growers.
At current prices, Brazil can make ethanol for about $1 a gallon, according to the World Bank. That compares with the international price of gasoline of about $1.50 a gallon. While cars running on ethanol don’t perform as well as their petrol-powered equivalents, the car industry has developed flex-fuel cars which can run on a blend of ethanol or gasoline. These cars, introduced to the market in 2003, took 53.6% of the Brazilian market in 2005 – a total of 866,267cars – according to the Brazilian auto trade body Anfaeva. The level will top 70% this year.
There are still government incentives – ethanol is taxed lower than petrol – just nine cents per litre compared with about 42 cents for a litre of gasoline. But the growth is still impressive, and points the way to creating sustainability in other fast-growing emerging markets.
Many of these share the same sub-tropical climate that has allowed Brazil to develop the sugar cane business: plenty of warm sunshine and – crucially – plenty of rain. There are parts of China and India where such conditions also exist – and indeed, trade delegations from both countries have visited Brazil to see for themselves how the ethanol infrastructure works.
Meanwhile Brazil has set itself the goal of becoming the world’s leader in alternative renewable fuels – biodiesel is also being developed in tandem with ethanol. The country’s state-owned petrol producer Petrobras has started exporting to Venezuela, Sweden and Japan, and has set up a joint venture in Japan to help develop locally-produced ethanol.
Crucially, multinational agribusiness giants such as Archer Daniels Midland, Bunge & Born, Cargill and Louis Dreyfuss have recently begun showing interest in Brazil’s cane-based ethanol technology. Their entry to the market is welcomed by the Brazilian government, which believes sharing the trade secrets will accelerate the growth of ethanol as a fuel.
“We are not interested in becoming the Saudi Arabia of ethanol,” said Eduardo Carvalho, director of the National Sugarcane Agro-Industry Union. “It’s not our strategy because it doesn’t produce results. As a large producer and user, I need to have other big buyers and sellers in the international market if ethanol is to become a commodity, which is our real goal.” That goal looks increasingly realistic – and it could become a necessity.
Mark Bursa
