I recently introduced the opportunity presented by the tire industry for the synthetic biology platform under development by Amyris (NASDAQ:AMRS) and partner Kuraray. This year three major tire manufacturers are expected to complete road tests with low-rolling resistance tires created with Liquid Farnesene Rubber, which is significantly easier to work with during manufacturing than the component it replaces. In all, 13 of the world's top tire manufacturers are working with the company on development and commercialization. If new formulations can improve upon current-generation tires aimed at improving fuel economy, such as Assurance Fuel Max from The Goodyear Tire & Rubber Company (NASDAQ:GT), then drivers could save over 2,600 miles of fuel over the lifetime of their vehicles' tires.
The opportunity could be huge. In fact, CEO John Melo believes tire manufactures could fund the completion of a half-completed 65,000 metric-ton-per-year farnesene facility in Brazil by 2016 that would be fully dedicated to the tire industry. While Amyris is guiding to be cash flow positive in 2014 and profitable in 2015, such a move would greatly aid the cash-strapped company and add to its growing momentum. What does Amyris have to gain from the tire industry? And more importantly for investors, what does it have to give up to capture the opportunity?
How does the manufacturing process work? Liquid Farnesene Rubber is created when polymerized farnesene acts as a binding agent to strengthen the adhesion of rubber and fillers. In addition to reducing viscosity during manufacturing, Liquid Farnesene Rubber improves tire shape, stability, and performance, which also results in improved fuel efficiency. Judging from the composition of a standard tire, it could become an important part of the manufacturing process.
The global tire market has an estimated value of $140 billion per year. Despite supporting over two dozen players from around the world, the top four manufacturers account for the majority of sales. That shouldn't limit the opportunity for Amyris, however, which will begin to sell farnesene to Kuraray for processing and distribution to tire manufacturers sometime in 2014. The farnesene initially produced will come from the company's biorefinery in Brotas, Brazil, although the goal is for a larger facility to begin producing the molecule exclusively for the tire market in 2016. A 65,000 MT facility dedicated to farnesene production for the tire market could generate $320 million in annual sales if product was sold for a conservative average selling price of $4 per liter.
Want to see how Amyris' polymerized farnesene fits into the tire manufacturing process? Watch this five-minute video that demonstrates how tires are made from start to finish.
In addition to farnesene, Amyris is working with Michelin to develop a process for producing commercial quantities of the molecule isoprene, or natural rubber. While the development is neither directly related to nor dependent on the commercialization of Liquid Farnesene Rubber, Amyris could leverage its existing relationships with tire manufacturers to sell product -- significantly reducing time spent on courting partners and navigating the market.
Tire manufacturers may be willing to fund the completion of the half-completed facility by 2016, but they won't be doing so for free. The details of such a proposal are unclear now, although investors should probably expect Amyris to sacrifice quite a bit in the short term to reap the long-term benefits of such a facility. The company's bargaining power is limited due to its less than envious cash reserves, which means it will need to rely heavily on the tire manufacturer or manufacturers for completing the facility or raise dilutive funds to match a portion of the capital expenditures. That former may result in less favorable profit-sharing terms for production (up to a certain volume or volumes). In other words, Amyris would capture less than a 50% portion of sales and profits for the first X metric tons of production.
That's all just speculation at this point. Remember, sugarcane supplier Usina Sao Martinho -- the other half of the SMA Indústria Química joint venture with Amyris -- has a stake in the 65,000 MT facility, too. Exactly how a third group (the tire manufacturers) would fit into the ownership structure of the manufacturing facility is difficult to predict. But it doesn't take much to see that Amyris will have to make sacrifices to complete the halted construction.
Foolish bottom line
Let's face it: An investment in Amyris comes with unique risks. Future expansion has the potential to result in share dilution or fairly restricted profit-sharing contracts. That will cap shareholder gains and/or revenue potential. But I think many often characterize the company based on impressions formed during the struggles faced in 2012 and 2013. The company has revamped its commercialization approach by focusing on engineering principles when scaling biology, which has resulted in lower production costs and more reliable operations. Given the value that is being created by Amyris' platform and the future potential that could be enabled, I would suggest that investors give a deeper look before blindly dismissing the opportunity.