From Detroit, a biofuel breakout

DETROIT - There were snickers aplenty here last week when General Motors joined hands with an Illinois company to announce a major biofuels initiative.

Cynics in the audience at the 2008 North American International Auto Show joked that the union between giant GM and relatively small Coskata has about as much chance of succeeding as a Hollywood marriage. Others found smug comfort in the theory that the whole GM-Coskata affair was little more than a green publicity stunt.

Admittedly, on the surface, the joint venture, in which GM has an undisclosed equity stake in Coskata, seems audacious. Coskata would use a proprietary, three-step conversion process to turn diverse, carbon-based feedstock - corn, sugar cane, waste from processed sugar cane called bagasse, used tires and other commercial and municipal trash into ethanol, thus making production of that fuel possible almost anywhere in the world.

Not only that, but Coskata would work its fuels magic at a production cost of less than a dollar a gallon, giving it a tremendous price advantage over traditional fossil fuels, such as gasoline and diesel.

Here's the kicker: GM, which is to flexible fuel vehicles what Toyota is to gas-electric hybrids, would work with Coskata to set up a global distribution network for Coskata fuels. Imagine that! GM annually produces more than 1 million flexible fuel vehicles capable of running on ethanol and other biofuels. Globally, GM has 3.5 million flexible fuel vehicles in operation, 2.5 million of them in the United States.

By 2012, GM plans to make half of its global vehicle production flexible-fuel ready. GM-Coskata, this could be the start of something big!

Or could it?

Richard Wagoner, GM's chairman and chief executive officer, moved quickly after the GM-Coskata media conference to quiet any speculation that the Detroit company is determined to topple a few oil titans on its way to regaining its recently lost status as the world's largest manufacturer of cars and trucks.

"It's nothing like that," Wagoner said. "This is a strategic move" to assist GM's future development of flexible fuel vehicles, he said. Then Wagoner tried to make the GM-Coskata union seem strictly parochial, saying that fuels delivered to GM by Coskata would be used primarily for testing and evaluation of the car company's future flexible fuel vehicles.

Wagoner's assertion produced even more snickers, but this time from transportation industry analysts who believe they know better.

Consider a just-published study by Accenture, a global marketing research and technology development firm. It is a 37-page piece titled "Irrational Exuberance? An Assessment of How the Burgeoning Biofuels Market Can Enable High Performance."

The basic premise of the Accenture study, which analyzed developing supply-side bioethanol and biodiesel markets in 20 countries, is that the biofuels market, now an economic embryo, is growing rapidly. By 2012 - the same year GM plans to have half of its global vehicle production flexible-fuel ready - that biofuels market will be an aggressive and still-growing toddler, the Accenture report said.

That means there will be businesses, such as that represented by the GM-Coskata joint venture, producing and distributing ethanol and other biofuels for substantially more than parochial purposes, the Accenture report says.

In short, the GM-Coskata announcement initially greeted with cynicism here could, indeed, be the start of something very, very big.

The direction of the push for biofuels and other alternative fuels "is still being decided and probably will take some time to be fully realized," said Richard Spitzer, global industry managing partner of Accenture's Automotive and Industrial Equipment practices. "But our study indicates that on the biofuels side of the equation, there are encouraging signs that the automotive industry will have a biofuels market to draw on. An accessible biofuels industry could be a boon to the auto sector as the imperative to become more fuel efficient, energy independent and environmentally agreeable increases."

Conventional wisdom has long held that any major breakthrough in the development of a global biofuels infrastructure would have to come from the petroleum industry - after the petroleum industry has drained all of the cash it possibly could from the world's known oil reserves.

But conventional wisdom could be upset here, according to Spitzer and other transportation industry analysts. In this case, the outcome of who controls what share of the emerging biofuels industry will de determined by technology, ingenuity and mostly by a sense of urgency and need.

The behind-the-scenes chatter among transportation industry analysts is that the world's oil companies are moving at a snail's pace in developing alternative fuels because they are still getting so much money from oil. But the world's car companies do not have that luxury. Their businesses are negatively affected by rising fuel prices. They are under regulatory pressure from governments worldwide to improve fuel economy and clean up their tailpipes. They don't have time to wait.

In that light, the GM-Coskata union is no small thing, the Accenture analysts said. Coskata claims it can get biofuels from almost any carbon-based matter for less than a dollar. It says it can obtain nearly eight units of energy for every one unit invested. That looks like good math. With GM's millions of flexible fuel vehicles thrown into the mix, along with the determination of both companies to develop a global biofuels distribution network, that could be a very, very good business.