Innovation is exciting but production makes money

Jussi Pesonen
Jussi Pesonen
President & CEO, UPM-Kymmene Corporation
15 August 2018
UPM Lappeenranta Biorefinery 2017

It was a great moment. The year is 2012 and UPM’s Board of Directors has just approved the proposal for investment for the Lappeenranta Biorefinery. The development project that had begun six years earlier would now proceed to industrial-scale execution. The decision meant that the production of wood-based diesel and naphtha would begin with a completely new, innovative process three years later.

The investment of approximately EUR 180 million into the forest industry’s first real, self-developed product of innovation was naturally a risk, but a risk that was taken. If all went well, the company would get a return on the investment made during the innovation phase — maybe even with interest. However, there were no guarantees.

Innovations are the pet projects of companies, politicians and think tanks. They are surrounded by great expectations for the future, and great risks too. That is why public funds are also used to support research and product development.

Research, product development and innovation are essential to companies. They create the conditions for growth and transformation, as well as streamlining existing operations and enhancing competitiveness.

Research and product development are usually done by a large group of partners, so the operations of big companies have a great spill-over effect on public research units, SMEs and start-up companies.

From the perspective of a big company, public funding is only a small portion of the total investment that goes into the innovation. However, Finland needs business-orientated applied research to maintain and increase its competitiveness. Strategic cooperation between companies, universities and higher education and research institutes binds companies to Finland. This is vital.

It can easily take ten years to complete the innovation chain, which consists of developing, piloting and commercialising the technology. To the company, this means a negative cash flow and expectations for repayment that lie far in the future. This applies to the Lappeenranta Biorefinery as well.

The economic added value is marginal to both the company and society at this stage. Spaces are possibly rented, a small number of pilot machines and equipment are ordered, raw materials are bought for testing purposes and salaries are paid to a limited group of highly educated developers. The expectations lie in the future.

The actual economic added value to the company and society comes from scaling the innovations to production activities. At this point, investments, construction, machine orders, and raw materials purchases begin on an industrial scale, a workforce is hired, services are bought and production activities are set in motion, and the innovation products are taken to market to be sold. A few developers are no longer enough; the spectrum of professions is multifold and the number of personnel is on an entirely different level.

This is the desired phase, where money is made by both the company and society. This phase can last for decades — in the forest industry, about 30 to 40 years. That’s why I think it’s odd that so many decision-makers think the innovation phase is more desirable or glamorous than the production phase. After all, both are essential parts of one value-adding process. Without innovation, the industry does not evolve together with the market, but without a competitive and profitable industry, there is no income and thus no money for new innovations.

The Lappeenranta Biorefinery’s process was developed in Finland in collaboration with a Danish technology partner. In the early stages, pilots were also conducted in the United States. Internationality is a part of modern innovation, but thankfully, the most important thing for the national economy—industrial production for export—was achieved in Finland.

Finland has to invest in innovation and development using public funds, too, but it is detrimental to the national economy to let the industrial scaling of innovations escape to a location outside of Finland, where it is more cost competitive or where there are more attractive taxation laws.

This is the danger of generating public research and development funds by increasing existing industrial taxes: it decreases the attractiveness of an operating environment for investments and increases the likelihood that the scaling of innovations into industrial operation will happen outside of Finland, in a country where industrial taxes are lower. The Finnish Government should not generate innovation funds at the expense of the competitiveness of companies.

UPM is currently assessing the investment conditions for two projects, both of which would use new, innovative technology. One concerns refining solid wood into biochemicals that replace fossil raw materials in the chemical industry. The other concerns producing renewable diesel and naphtha with new emerging technologies using solid biomass as raw material. The aim is to produce products that significantly decrease greenhouse gas and local road traffic emissions.

Do Finnish industrial policy decisions ensure the kind of operating environment where our innovations can be scaled into industrial operation within our country and not elsewhere?

It took nearly ten years to develop and build the Lappeenranta Biorefinery. The facility has only been running for a few years. Since the investment decision, I have witnessed many great moments; we have achieved the production target and operations are profitable. Currently, most of the production is exported. We can be very proud of the innovativeness of the facility, but ultimately, it is the efficient export production that brings money to the company and to Finnish society.

This article was first published in Lännen Media newspapers during the weekend of 30 June to 1 July 2018.

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