What could happen if next generation materials replace animal-sourced materials. Can the cow actually be disrupted by these next generation leathers? What are the unintended consequences if this happens faster than expected? And what are the systemic implications? These are important questions to consider for the investment and environmental community alike.
We discussed some of these issues in our previous blog “Will alternative proteins disrupt textiles?” and this blog picks up the theme ahead of the discussion we will take part in at the Material Innovation Initiative’s1 (MII) inaugural (virtual) conference May 18-19th 2022.
RethinkX, an economic disruption think-tank, proposed in their “Rethinking Food and Agriculture 2020-2030” report2, that new technologies will not just disrupt food proteins like the ones found in meat or milk, but will disrupt proteins found in a whole host of products, like leather and other materials. This is because these new technologies have the potential to give us access to cheaper and better alternatives to many textiles and materials we use today and the winners will always be those that are superior and cheaper, meaning the disruption is inevitable from an economic point of view. However, unlike food, the barriers to entry are easier for materials companies – this will be a B2B driven disruption, with no regulation to hinder the growth of the new technologies.
The disruptive companies in the next generation (“next-gen”) material space are not dissimilar to those currently taking the food world by storm. There are new plant-based alternatives, ranging from use of new materials such as pineapple leaves like Piñatex,3 or developing new manufacturing routes for biobased materials like Natural Fiber Welding,4 to fermentation-derived alternatives (including mycoprotein like Bolt Thread’s Mylo™5, Mycoworks’ Reishi™, and Spiber’s precision fermented Brewed Protein™6) and cellular agriculture-based products (like VitroLabs,7 who are growing hides from cells). These technologies will work in parallel to disrupt traditional materials.
Economic led disruption
Products from the cow, like milk, meat and leather, are particularly susceptible to this disruption. The industries are interlinked in that dairy cows can be used for beef and leather can come from dairy or beef stock, but these are the minority and in the main the industries operate separately and with highly volatile margins. It is therefore likely that any disruption to beef and milk will also lead to the disruption of leather.
Cow-based leather is the most abundant animal derived material out there. Today, the leather industry is a USD 80 billion manufacturing sector, with exports of hides and skins alone exceeding USD 5 billion annually. The annual global leather goods market was valued at almost USD 400 billion in 2020, with around half being footwear.8
Bovine leather makes up about 65% of the global leather market.9 The primary raw materials for the leather industry are hides which are a waste product from the meat processing industry.
The leather industry itself is deeply inefficient. Hides are limited in size, quality is highly variable, the supply chain is low-margin with a highly fragmented value-chain and the production time is years. As such there is a lot of waste – not only from the processing part, but also simply in dealing with the non-conventional shapes that animal skins come in. This leads to wastage (in some cases about 30-40% of a cow hide by area and almost 80% by weight is lost in this process). In weight terms this is even more significant – in leather processing one metric ton of raw material is converted into only 200kg of usable leather product.10 The quality variability means hides are graded from A (the best) to E (the least good), with only 2-4% of hides being graded A. As a result, A grade hides are sold out years in advance, as the luxury goods houses seek to secure their supply. The inefficiencies continue as the processing of hides requires significant amounts of water and can produce toxic waste effluent.iv
However, in recent years the mismatch between the desire for meat and the desire for leather has meant that in some regions we see cows (buffalo) being bred predominantly for their hides,11 while in other regions the hides are being thrown away, as they have no economic use.12 It is the supply and demand imbalances between the parts of the cow that leads to these economic imbalances. In another twist, the growing improvement in the faux leather – plastic-based leather – market, has contributed to this change in supply-demand dynamics.
Leather, Already Disrupted
One of the first faux leathers was made of layered and treated paper pulp. Called Presstoff, this alternative came to prominence in World War I in Germany due to the rationing of animal-based leather. Since then, technologies have continued to get better.
While the quality is not quite on a par with animal leather for some uses, they are far cheaper – a good estimate is that synthetic (plasti- based) alternative leathers are about a third the cost of animal-based leather. Today about two thirds of the overall “leather” market by volume and a third by value is taken up with these alternative leathers. As such, the synthetic leather market is currently worth about USD 28 billion.
This growth has not come without consequences. Synthetic, faux or vegan leathers are predominantly made of plastic. This comes with all the environmental downsides of any plastic-based material, derived from fossil fuels and contributing to microfibre pollution. Many of the next-gen materials are bio-based and so do not come with the downsides of fossil-based materials.
This comes down to being cheaper and better. How we determine if a material is better than another will depend on a variety of factors – its durability, aesthetics, as well as how it performs on sustainability metrics such an environmental and social impacts.
Better also means better than the existing best. Perhaps cow leather isn’t the “best” leather out there? Maybe it is jellyfish-based, or rhino or even mammoth?
Business to business ingredient-led disruption
“It’s not that we have to replace every single thing that people value from a cow. We have to replace enough of the profitable components of a cow to make it unprofitable to grow more cows”. Pat Brown, Impossible Foods13
There are very few, if any, instances where consumers would purchase a hide directly from a cow, or even a sheet of tanned leather. This is because companies, not consumers, decide what raw materials to use in their products. Companies seek to maximize revenue – that is, lower their input costs while still keeping the quality high enough so they can continue to make a profit. Companies will switch to a different raw material as soon as there is an economically viable alternative. Furthermore, since materials typically go on the body instead of inside it, there are far fewer regulatory hurdles and personal trepidations – like emotional or cultural attachment – that could arise compared to food. Because of this, and because of the high price tags of many products, the barrier to entry is far lower and thus the bulk of the disruption of materials could very well occur before the disruption of food.
Another way to think about this is that leather is often an ingredient in the end product sold to consumers, like shoes, handbags or the seating interior of a car. Leather itself is made from animal hides. With alternative leathers, we are not just seeing products made from only one new or old technology, but we are seeing biotechnology used to enhance other biobased materials – Modern Meadow call these products bio-alloys. Using these proteins as ingredients and building the materials up using technology in new ways comes with property enhancing benefits like better colourfastness, with implications for dye run-off, for example.14
The major driver of disruptions is economic, but there are other influencing factors that affect adoption of new products. With leather, depending on the application, properties such as thickness, suppleness, finish, durability, permeability, size, warmth etc. are all important. Leather from cows, however, is constrained by biology. The glacial pace of evolution limits improvements that can be made to these properties. Improvements in processing technologies can only go so far. Not so for leather produced through new technologies.
With next-gen materials the possibilities are endless. There is so much more customization that can occur because the raw materials are individual proteins and fibres that can be assembled in an infinite number of ways. There is also no reason that the modern products that replace leather goods need to be made using bovine proteins– they just need to replace (or exceed) the old product’s function. More likely than not, leather goods will be replaced by materials that are far superior in every way. What is impossible for cows to produce, becomes possible. Materials of any size or texture, with any properties desired like changing color with the temperature or glowing in the dark. This is not science fiction – there are many proteins in nature that have far better properties than bovine collagen. Spider silk protein, for example, is stronger than steel, but farming spiders is close to impossible. But with new technology it becomes possible – it could for example be used for highly durable covers for car seats, or hard-wearing clothing or unbreakable ropes.
This is why, as soon as costs and capacity allow, these next generation products will capture market share quickly.
What happens if the disruption of leather is faster than expected?
History tells us that all technology adoption follows an S-curve. Why should next generation leather be any different? At the same time, every other part of the cow is seeing the development of good enough and cheap enough alternatives. If any one of these developments happens quicker than expected, this would have knock on effects for all parts of the cow. If you take away the revenue contributed by (say) leather because it has been replaced by a next-gen material, the cost of the cow falls on fewer components, pushing up their prices. This in turn changes the cost equation for other next-gen materials (e.g. dairy product replacements) and the effect can quickly magnify as individual components are substituted in turn leaving less and less of the cow as a valuable output.
Because animals have a fixed composition, farmers and meatpackers cannot adjust production to compensate. In fact, if meatpackers can’t sell a certain part of the animal to secondary processors or consumers, they can raise the price of the other parts, cut processing costs, or pay farmers less for the animal. To balance, farmers may then need to adjust the size of their herd, purchase lower-cost inputs or alter their timelines – none of which can happen overnight. Changes in supply or demand of any one part affect the economics of all the other parts even if the products are supplying different industries. But new technologies have the flexibility and adaptability to change these ratios immediately.
Materials will be a crucial part of this process because, while with cattle the value of the hide is worth 2-5% of a slaughtered steer’s value,15 a relatively small amount, (the beef is worth >90%), the loss of this additional revenue could be significant. Profit margins in the beef cattle industry are volatile and in single digits. For example, JBS is the largest meat processor in the world and its operating margins remain volatile – see Figure 1.
Figure 1: JBS Operating margins have been extremely volatile over the last decade
Source: Company reports, Planet Tracker analysis
If the leather industry shifts to next-gen leathers, this would mean reduced demand for cattle hide and thus a 2-5% drop in the amount of money earned per animal – leaving the meatpacker with damaged margins. While an instantaneous and complete disruption is unlikely to occur, a prolonged decrease in the demand for cattle hides will have a serious impact on the profits of meatpackers and therefore of farmers. With demand for all other byproducts (5-8% of value) and beef (90% of value) simultaneously being chipped away, animal agriculture doesn’t stand a chance.
Unexpected financial and environmental consequences
Unlike food, there are few forecasts of disruption in the leather industry. But if alternative proteins grow as much as some expect,16 there will be knock-on impacts for the materials markets. So, bearing in mind this is likely to be faster than expected, what is the impact for investors and beyond? This would represent a systemic shift of the food system, with huge ripple affects.
Investors have a huge responsibility in this and the decisions made will have ESG implications. First, investors need to decide if they believe this disruption is going to be significant, which technologies and materials are likely to be the winners, both from the price and technology point of view. This in itself is not simple, although there are good resources to help with that!17
Second, the implications of picking those winners needs to be considered. These implications can be profound. For example, meat processors could effectively cease to exist, or hides could be grown in factories next to where they are turned into leather goods.
Finally, if you are an ESG investor, these implications have further ripple affects that need to be considered – some positive and some less good.
For example, environmentally there could be huge positives – suddenly deforestation could be halted and there may even be a case for afforestation and rewilding. As the next-gen leather industry represents a move away from the current plastic-based alternatives, this is also a positive, as we become more aware of the impact of micro and nano plastics on the environment and human health.
However, next generation materials still require raw materials which often rely on finite sources. How these are used, in what quantities and where, will be important. Leather and textiles will continue to be processed so these new materials need to come with better manufacturing techniques to allow them to be turned into the goods consumers want with minimal to no environmental impact. While recycling and their impact on disposal remain important.
Socially, the impact of these next generation materials on existing markets has greater implications. Currently the leather industry is globally diverse (cattle grown across the world and hides processed in the Global South, before processed leather is shipped across the world to be turned into consumer leather goods), while next generation materials could be produced anywhere. How will investors bet on a new industry and manage a just transition? If environmental risks remain high in certain regions, will the industry take social responsibility and not just move manufacturing to cheaper and better locations? With these next-generation materials continuing to grow and attract investment, we as a financial community need to think about these systemic implications today.
1 The Material Innovation Initiative (https://www.materialinnovation.org/) is working to accelerate the development of next-generation sustainable materials for the fashion, automotive, and home goods industries, with a focus on replacing animal-based materials. They work to shrink the environmental footprint of existing fibers, such as synthetics and cellulose, and to seed plant-based and lab-grown innovations.
2 The author of this blog post Catherine Tubb is also a main author on this report
3 Piñatex from pineapple leaves. https://www.ananas-anam.com/
4 Natural Fiber Welding (NFW) develops new manufacturing routes and material chemistry to unlock new levels of performance for natural materials. https://www.naturalfiberwelding.com/
5 Mylo™ is produced by Bolt https://boltthreads.com/technology/mylo/
6 Brewed Protein is produced by Spiber™ https://spiber.inc/en/brewedprotein/
7 VitroLabs Inc https://www.vitrolabsinc.com/
9 The Global Leather Industry. Mahi Leather. Discussed here.
10 Energy from Toxic Organic Waste for Heat and Power Generation. 2019. Chaper 5. N.M. Sivaram and Debabrata Barik.
11 In India the value of waterbuffalo hides is significant. Fine more here.
12 In the US Americans are eating more beef, but cheaper leather alternatives has meat there is a glut of hides. See here.
13 Temple, J. (2020, October 20). Would you like “milk” with that Impossible burger? MIT Technology Review. Retrieved from here.
14 “At Modern Meadow, we build our materials from the proteins up and we use an extraordinary process to express colour. We dye our materials in the liquid state in which the dyes chemically bind to the proteins we have selected & tuned in ZOA™. This allow us to use only the precise amount of dye we need, which eliminates any dye runoff from material manufacturing and finishing”. From here. (Solution-dying)
15 The value of products from a slaughtered cow in the US can be found weekly here: https://www.ams.usda.gov/mnreports/nw_ls441.txt.