| The Future: It's Closer Than
You Think
Zsolt
Rumy, Chairman and CEO of Zoltek Companies, Inc., delivered this speech -- the keynote
address at the 1998 annual convention of the Society for the Advancement of Materials and
Process Engineering (SAMPE).
This the tenth SAMPE conference that I have attended, and yet I know that I am a
controversial choice for delivering this keynote address. If being controversial means
that I represent a significant change in our industry then I feel I am succeeding.
From the time the public first became aware of carbon fiber composites--with the U.S.
space program back in the 70s--people have talked about the enormous potential that exists
for applying these composites in everyday products. But many people, even in our industry,
seem to have concluded that this is an impossible achievement. But it is not!
Today I am going to try to convince you that the long-awaited commercialization of this
material is not only at hand, but that it has, in fact already begun and it is gathering
speed. I also want to challenge those of you who are not yet involved to participate
before you get left behind. By commercialization I mean the transformation of this
material from a high-priced niche product into a price-sensitive, omnipresent commodity.
My point to you is, "The Future Is Closer Than It Looks."
I don't have to reiterate the valuable properties of this class of composites. You all
know them. What other commercially available material on earth is lighter than aluminum,
stronger than steel, capable of withstanding great extremes in heat, conductive and almost
impervious to corrosion and fatigue?
I believe that the commercial use of carbon fiber reinforced composites will have a
profound, pervasive effect upon the everyday lives of people in the 21st century, just as
the commercialization of steel did in the beginning of the 20th Century.
It is also my hope and belief that many of you in this room will play an active and
creative part in bringing this transformation about. And those of you who will be the most
creative and the quickest to join this revolution will be richly rewarded, professionally
and financially.
Many of you heard this before and may be wondering if this is just another person, with no
basis to make these claims, who is blowing smoke. It may help for us to back up and take a
look at where we are now and how we got here, both as an industry and Zoltek as a company.
Carbon fiber was first used by NASA in rockets and space capsules The quantities were very
small and price was never the object. Nevertheless, as producers gained experience, the
price of the material fell from an out-of-this world level of about $300 a pound to the
level of $100 or $200 a pound. And as that happened, the use of these composites slowly
spread... to aircraft and then to commercial aircraft.
Over the past few years the market has spread to sporting goods, where price was not a
major issue because of perceived performance benefits, and to conductive plastics, which
began as something of a dumping ground--a place where all the carbon fiber manufacturers
chopped and milled their mistakes. Although these two commercial markets are well
established and expanding, aerospace still accounts for about two-thirds of the total
world consumption of carbon fiber composites.
The first companies to move into the development and production of carbon fibers were
chemical and carbon companies that were looking forward to moving into a high-tech arena
where high margins were combined will long-term contracts and the possibility of growth.
When you sell tons of products for Dollars, a market for pounds of product for tens of
Dollars appears attractive.
However, despite the superlative performance of the product, carbon fiber producers have
historically had an extremely difficult time earning money. As a result all the USA carbon
manufacturers traded ownership. In fact, this is how Zoltek entered this business and
became the first producer to do so profitably on a consistent basis.
In 1988 we acquired Stackpole Fibers in Lowell, Massachusetts, which was a subsidiary of a
large privately held carbon products manufacturer. Some of you may have heard me joke,
"If the company were any better than it was, I couldn't have afforded it; and if it
were any worse, there wouldn't have been a company."
At this time, I had no idea of taking the carbon fiber business in a new direction. To the
contrary, I was caught up in a false euphoria of the high-tech aerospace business. The
aircraft brake business finally started to become a commercial reality. At the same time
it looked like we were to have a lock on a piece of NASA business-- namely, the supply of
carbon fibers for rocket nozzles.
However, NASA quickly brought me back to earth. Not wanting to do business with us, it
spent more than $80 million to find another supplier who was more to their liking. It
became clear that we must re-look at our business and its strategic position.
We did pilot studies to determine the feasibility of manufacturing carbon fibers from an
inexpensive, textile-type of acrylic precursor. When this proved positive, it was as
though the clouds had parted and we could see the future for first time. We now knew we
could duplicate the properties of the most commonly used aerospace carbon fiber, and do so
at a substantially lower cost.
From the strategic point of view, we came to the need to realize the need to compete with
alternate materials of connection, not with other carbon fiber manufacturers. This
realization caused us to become much more competitive in our initial core business,
aircraft brakes, and to turn our attention to selling carbon fibers to commercial
customers.
We began the construction and expansion of our carbon fiber facilities in 1991. We
constructed our first facility to house all of our carbon fiber manufacturing, including
an experimental continuous process line, in St. Louis, Missouri. We now have manufacturing
facilities in Abilene, Texas and in Hungary. Our total capacity for producing carbon
fibers is 8.5 million pounds, 2.5 million pounds of specialty products and 6 million
pounds of reinforcement products.
Today there are two distinct segments in the carbon fiber business, aerospace and
commercial. Zoltek has made several important contributions to the initiation of the
commercial carbon fiber business.
First we provided an outsider's perspective. It is sometimes easier to see the big picture
from a distance than it is from the inside. We were frustrated in our attempt to become an
insider but it is the best thing that ever happened to us. It forced us to begin thinking
about creating a whole new market--rather than doing everything we could to hold onto an
existing small piece of an already established market.
Second I believe that the core competencies of Zoltek--as a company engaged in the sales,
service and design of industrial equipment prepared us well for what was to come. Long
before we entered the carbon fiber business, we were deeply involved in process
engineering. That has helped us in focusing on the need for new systems and processes for
driving down costs and prices.
Third, as an entrepreneurial company that has looked to the capital markets rather than to
government contracts for the funds needed for development and expansion, I believe
we have brought much needed visibility to the field of advanced materials in the financial
community.
We raised $4 million in our Initial Public Offering in 1992 when we had just begun to
articulate a strategy centered on driving down costs and prices and seeking rapid growth
in commercial markets. Today the market capitalization of the company is about $500
million--or almost 700 times the amount of money that I spent in original acquisition of
Stackpole Fibers and 50 times the capitalization at the time of the Initial Public
Offering.
At least partly as a result of Zoltek's success and visibility in the financial community,
several major investment banks began to follow, or have increased their coverage of, the
composites and advanced materials industry. Historically, the capital markets have fueled
the growth of many young industries. They will do the same for ours.
So where do we go from here?
I referred earlier to the commercialization of steel. It transformed shipbuilding,
construction and other industries as well and it led to creation of whole new kinds of
structures, such as the modern skyscraper, which has so altered the urban landscape in our
own time. In fact, I believe the commercialization of steel provides an extremely good
analogy to the way in which the composites industry as a whole is now developing.
In much the same way as steel was an extension of and an improvement over iron, carbon
fibers can take the existing composites to a higher level of performance. Glass fiber
reinforced plastics have made major inroads in replacing traditional materials in many
markets, such as marine products and industrial vessels and pipes.
There are approximately 4 billion pounds of glass fibers sold annually for composite use
compared with only 30 million pounds of carbon fibers. However, glass fiber-reinforced
composites are reaching their performance limits and their potential growth is limited
without the stimulus carbon fibers can provide.
Carbon fibers are not going to replace glass fibers! To the contrary, I believe that
carbon fiber-reinforced composites will take glass fibers and plastics into a new
dimension of growth and application possibilities.
Commercialization of carbon fibers is going to do is to broaden, deepen and diffuse the
market for many finds of composites far beyond anything we have seen to date. It is going
to lead to a fusion between carbon fiber composites and other materials in the creation of
new families of composites that take selective advantage of the great stiffness, strength,
conductivity and lightness of carbon fibers.
Furthermore, many of the lessons learned in the development of glass fiber markets,
products and fabrication techniques can be used in the commercialization of carbon fibers.
We at Zoltek have identified ten commercial markets as ripe for development for carbon
fiber composites. That includes two broad markets that are already in a growth mode; four
more with huge near-term potential; and another four that we expect to develop just a
little more slowly.
The first two are sporting goods and conductive plastics. Both sporting goods and the
conductive plastics market are firmly established commercial markets. Most of the carbon
fibers in sporting goods are used in golf shafts. However, every day brings new examples
of carbon fiber composites being used to boost the performance of an array of sporting
goods. As the cost of manufacturing is reduced even more applications will develop. In the
area of conductive plastics, the makers of all kinds of electronic devices have come to
rely on its electrical conductivity--which accounts for its utility in dissipating static
electricity.
Four markets have become real hotbeds of experimentation that
have fast-growth potential for the immediate future.
- Infrastructure--where carbon fiber can be used as a substitute for
steel in creating bridges that require little maintenance and repair and ar virtually
earthquake-proof.
- Marine--where multiple applications exist from composite piers to boats
that benefit from carbon fiber's light weight, strength, stiffness and resistance to
aqueous corrosion.
- Industrial--where there is great interest in such things as
fast-rotating composite shafts, lightweight, corrosion-resistant offshore drilling
platforms, vessels, and pipes.
- Fiction products--such as brakes and clutches, that take advantage of
carbon fiber's unique strength in high-temperature regimes.
We have also identified four additional markets for long-term development that also
have explosive potential a little farther in the future--say, three or four years from
now, rather than over the next year or two.
- Automotive--where it is only a matter of time, as we
see it, before we see the introduction of carbon fiber-reinforced parts and assemblies.
- Other transportation--including shipping, rail
trucks, buses and--to an ever increasing degree--airplanes.
- Construction--there is already a good deal of
activity in the use of carbon fiber to reinforce wood for residential and commercial
construction.
- Alternative energy--competing ideas abound in this
field, but the most promising roads all lead to increased use of carbon fiber, such as
flywheels and windmills.
What are the particular obstacles to be overcome in turning such
heavy-volume applications into reality?
As I see it, there are three principal challenges: cost,
availability and application development. All three require action from the materials
suppliers and the composite manufacturers.
The theme of this conference is affordability, and to me that means
expanding markets by improved relative performance and dramatic reduction in cost and
price.
Clearly, if we are successful in lowering the price of carbon fibers, there must be some
point at which it becomes economically advantageous for different industries to begin to
substitute carbon fiber composites for other materials. We are already at that point in
some cases and we are within striking distance in many others.
For the first time in the 30-year history of our industry, the cost of carbon fiber is now
longer a serious obstacle to the development of carbon fiber-reinforced composites as an
everyday building material.
Several years ago an independent consulting firm, identified a price of $7.50 per pound as
the prospective "cross-over point" at which it would become economically
desirable for the automotive industry to begin substituting carbon fiber for other
materials. At a price point of two to three dollars per pound below that, the study
concluded, massive substitution would begin to occur.
Not long after the report was published, Zoltek announced a price of $8 per pound for
volume users of carbon fiber. And we have held to that price despite easy opportunities to
divert product to more expensive markets.
What's more, we have been publicly committed for some time to lowering our price to $5 per
pound by the year 2000. This can be accomplished without a technical breakthrough. At the
risk of making a little news right now, I want to go on record in saying we will have a
selling price of $4 per pound by the year 2005. This will come some technical changes in
the precursor and the carbonization manufacturing process.
Let me assure you: we are not giving carbon fibers away to create markets. In fact, we
expect to earn a gross margin of 35-40 percent with everything we sell in order to
maintain our marketing, process development and expansion programs. With a little bit of
mental arithmetic, you can see that an $8 selling price for us must therefore equate with
a cost of about $5 per pound in the production of carbon fiber. That is almost precisely
what it is.
For us to get the price down to $5 per pound and continue to maintain the necessary
margins we must lower our cost per pound to about $3.
Our biggest single cost today is the acrylic raw material, or precursor, which we buy from
an outside vendor. Our objective is to develop our technical knowledge in the manufacture
of acrylic fibers to be able to purchase acrylic fibers at the textile market price
levels. And that is the main reason we bought our facility in Hungary. It was already
making acrylic fibers. With some additional investment, we could use that facility to
produce our own precursor and utilize the existing expertise to develop new sources.
Having taken that step, we figure we can reduce that part of our cost by approximately
$1.50 for every pound of carbon fiber we produce--and raise quality standards at the same
time. Everything we have seen to date in testing precursor make at our Hungarian facility
supports that expectation.
The rest of the cost reduction will come from increasing production capacity and seeking
economies of scale wherever we can find them. We will reduce our energy cost for example,
by buying electricity off the grid from sources other than local utilities.
Finally, in opening new lines in Abilene, Texas, and in Hungary, we have designed our
equipment and production processes to minimize costs at every step. We have substantially
reduced our long-term capital costs by using a modular approach in the design and
construction of new production lines. Each new line is identical to the others.
Let's turn now to the question of availability. For huge new markets to develop, new users
must be able not only to buy at the right price, but also in substantial quantities. The
industry is now adding new capacity at an incredibly fast rate by any historic standards.
Zoltek is very much in the lead here.
We more than doubled our rated capacity with the addition of five new lines producing 5
million pounds per year, last year and we are installing additional 4 million pound
capacity now with more to follow immediately until we reach capacity of 40 million pounds
per year in the year 2000. To put that in perspective, consider that total world
production last year was approximately 30 million pounds for all carbon fiber
manufacturers combined.
More important, we have demonstrated that we can add new capacity in six-month increments.
The rest of the industry traditionally has been on 18 to 36 month intervals. I might add
that we expect to complete this massive capital expansion drive through the combination of
capital already raised and through cash flow we generate.
Frankly, we are hoping that at least one other carbon fiber producer will emulate our
low-price, fast-growth strategy. If that happens, it will give users even greater
confidence in the future availability of low-cost, high-performance carbon fiber.
This brings me to the third and final challenge. This is application development. It is
the last great frontier. And this is where I want to issue a challenge to all of you.
I have talked at length about changes in the production of carbon fiber. But that is only
the first great battle in a campaign that will involve many different companies and a host
of different technologies--everything from production of new kinds of resins and the
adoption of new fabrication techniques to the development of automated fabrication process
to replace hand lay-up in final applications.
Right here in this room, we have perhaps the greatest concentration of knowledge and
expertise in the area of advanced composites and process engineering gathered in one place
at one time.
It is up to you to take what has begun to the next level--and to make this the next great
chapter in the story of human progress through the advancement of new materials.
We must drastically reduce the number of steps required to go from fiber and resin most
directly to the finished product, through the perfection of such methods as pultrusion,
filament winding and others in development now.
For new materials to achieve a breakthrough, the users and fabricators must have known and
accepted standards of product performance. When a customer buys a grade of steel or a type
of glass fiber from a catalogue, he knows exactly what he is going to get and what to
expect when he begins to work on that product. By contrast, we still have what amounts to
a proliferation of proprietary and prototype products.
Let's take a close look at how standards were developed for glass fibers and glass fiber
reinforced composite fabrication techniques, and see how much of that we can borrow and
adapt to carbon fibers.
There is a further need for standardization in how we test products. Again, I call on
you--and SAMPE--to come up with new ideas that will give existing and prospective
customers a clear window for looking at our products and processes. We should not be
afraid of greater transparency, we should embrace it with real enthusiasm.
There is a great need for new attitudes and new thinking across a spectrum of players and
activities when it comes to application development. The opportunities that await our
efforts are now few in number, or small in scale. They are almost limitless. And they are
going to require collaborative ventures and a true willingness to share ideas and to look
beyond the retention of old business to the creation of new ventures and possibilities.
We must therefore switch from what has historically been an inward-looking,
program-oriented mindset to an open-ended, market-oriented mindset. We must switch from
exclusionary to inclusionary in our mode of thinking. The security in the future will come
from market leadership and competitive technologies and materials, not patent protection.
We should expect to see increasing linkages between technologies and companies as we move
forward. Such linkages may be in the form of pooling technologies with materials or
pooling the financial strength with the technical strengths of companies in joint ventures
to reach critical mass at a more rapid pace than individually.
In closing, let me say that I feel great to be a part of the creation of a new industry. I
believe the next few years will be quite exciting and will give us a clearer view of the
future. Collectively, we have the ability and the opportunity to revitalize our
industry and to make the future happen.
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