The media company Vox recently posted an interesting video about the search for plastic garbage in our oceans. Plastic alternatives is a category we are researching, plan to invest in, and the video was insightful. For some meta level discussion, watch the video here:
There’s no question that plastics need to be reduced and eventually replaced. A few issues:
- Plastic doesn’t really disappear, despite claims. In the Vox video, they were alarmed when they found a plastic basket from 1971. Fifty years is much too long for a basket to be sticking around in the ocean, likely shedding micro-plastic.
- They threaten wildlife that consumes them, thinking they are food. This is particular a problem in oceans, where there is such a large volume of it, and where bags get mistaken as food (ex jellyfish)
- Plastic leeches large amounts of chemicals into the ecosystem, which ends up in our water and food
- Certain chemicals have been shown to cause health issues with humans. The most publicized on recently is that penis size and sperm counts are shrinking globally, due to the way phthalates affect our hormone development
Many countries have been taking action. The EU ban on some single use plastics began at the end of 2020. Canada has planned to ban several single use plastic items, beginning with 6 items at the end of 2021 (straws, plastic bags, stir sticks, 6-pack holders, plastic cutlery, food packaging, more info). Just a few weeks back, Canada successfully declared plastics as toxic, winning a long battle with the plastic lobby. The US will be next, though it will likely be state by state.
This creates a situation where regulation will create new markets. This is interesting for investors in itself, but the fact that it’s one that will be helpful to the health of the planet, it’s people, and wildlife, makes it particularly motivating.
At Synkun, we are always looking for markets that we expect to grow at least 100% in the next 5 years, with market sizes of at least $10 billion. Trying to figure out the potential market size for plastic alternatives is not easy. Just trying to learn the volume of plastic straws Canadian companies sell per year is difficult. Here are a few estimates of market size:
- 2025, $8.57 billion USD for plastic alternative market (info), CAGR of 16%
- 2021, $71 billion USD for plastic alternative packaging market (info), CAGR of 16%
- 2023, $6.12 billion USD for biodegradable plastics, CAGR of 15%
These market numbers are below our usual before investing, but we expect growth to be so fast that it will be $10 billion before any investment in the space reaches maturity anyway. Regulation will likely not be linear — it will reach a critical mass, which will increase the CAGR here. And technically, the potential market for plastic alternatives is essentially the entire plastic market if your horizon is long enough.
Where to Invest
This is where it gets difficult. There are many parts of the economic chain here that have opportunities, all the way from investing in material research and development, to the recycling of products after use. Here are a few places for investment opportunities, depending on your expertise.
- Materials development
- Product manufacturing
- Fast-moving consumer goods
Plastic Alternative Materials
The solutions for new products start with the materials used. The barrier to entry is massively high because of the capital costs, and the expertise. Most of what we’ve seen for new materials are developed by plastic companies trying to convert some of their product range to sustainable materials, to avoid being regulated away. In fact, only one company we’ve met lately has no connection to the plastic industry.
New materials are actively in testing and development, with varying degrees of sustainability and price. The more sustainable a material is, the higher the cost seems to be, which is a given with new areas of research. While many are investing in PLA, or PLA sub-type research, we are not interested. PLA requires high temperatures and specialized facilities to break down, which are tough to find. Even if they weren’t, we don’t expect consumers to be able to tell the difference, let alone recycle them separately. PVA is something that has been suggested to us for use in bags, as it dissolves in water
This issue with investing on the manufacturing side is that we would need to hire a team of experts, which we can’t do. Even if we could, leaps in material development over the next 5 years will be like those in the disk drive space in the 80. Every 2 years there was an innovation better than the last, and the companies that created them never ended up capturing any of the gains.
Taking the raw materials that governments approve of and consumers want, and putting them into products ready to be used in cafeterias, and airplanes will be huge. For incumbents, they are waiting for the right time and materials to do big investing in. Companies like Sysco will benefit largely if they can make exclusive deals with manufacturers of the right product.
We won’t be investing in this area for reasons similar to the above. In the end, massive capital will be needed, and small players cannot make mistakes.
Fast-moving consumer goods
We believe that consumers are going to push this market more than any other side. The incumbent plastic companies are making green-washed “solutions”, which essentially are a low-risk attempt at branding materials as biodegradable when they are in fact not. There will be mind share available for new brands to enter here because older boomer brands (think Glad) will always have a connection with plastic. New brands will need to have a literal “clean” image.
Importantly, with a consumer-facing brand, reviewing the entire manufacturing landscape, you can always move in new materials to your moulds when a better, faster biodegradable, cheaper material hits scale. All the items in the supermarket now have a target on their backs. For a consumer brand to succeed here, they will need exclusives on proprietary technology (or own it outright), grow to speed quickly to achieve economies of scale, and nail branding.
Barriers to Success
The major risks to losing all of your investment are plenty.
The first is that although governments are regulating what will happen with single-use plastic, the enforcement is in question. In Taiwan in 2018, the government banned plastic straws, but they can be found everywhere. This could be because there are not any good plastic alternatives, or they’ve given time for stores to adapt – we can’t tell. In Canada, regulation begins at the end of 2021, but we don’t know what they will actually enforce. If enforcement doesn’t happen, the market may not arrive, and you will eat through capital as you wait.
Another is of course lobbying. The Formosa Plastics Corp is the 4th largest company in Taiwan by market cap. Exxon is in the top 30 in the US. They’ve built up their influences over the past 100 years. There are many examples of the petrochemical industry influencing politics, and that will likely happen in this space as well.
We are a consumer focused venture builder, so that’s where we will be investing. We expect the biggest push for plastic alternatives to be from consumers concerned about the environment, so we will invest in branded products lines. There should be an announcement before the end of Q3 2021. Likewise, we welcome any material or product developers to reach out, and we will be watching the changes in policy closely. It is going to be a very exciting market over the next 10 years, and one worth investing time in.