How Synthetic Biology Can Help Fix the Supply Chain Crisis

Supply-chain disruptions are testing companies around the world. Can solutions be found in a fermentation tank? We believe the crisis could accelerate the adoption of synthetic biology to ensure local, sustainable supply of many products from materials to food.

Crises inevitably lead to great changes and opportunities. Today’s supply chain crisis may be no different. Since the beginning of COVID-19, companies and countries have struggled to ensure steady supply of key inputs to the normal functioning of our economies. This year, key commodities and other products from Russia and Ukraine have been disrupted amid the war. And the increasing prevalence of natural disasters driven by climate change in recent years has also interfered with supply chains.

Car factories lie dormant because a missing microchip has thwarted production. Pharmaceutical providers rely on overseas supply for active ingredients in many medicines. Food producers that depend on wheat exports from Ukraine, a country known as “the breadbasket of Europe,” are at risk because the spring planting season is in jeopardy. Companies facing challenges like these in a variety of industries may find innovative ways to redesign supply chains by turning to synthetic biology.

Synthetic biology is a revolutionary technology that could make a profound impact on the way a vast array of products are manufactured. In our recent white paper, we explained how the science works and is rapidly expanding into new applications (See The Synthetic Biology Revolution: Investing in the Science of Sustainability). It all happens in a brewery-like environment. Production organism cells (yeast, for instance) are typically grown and fed in a fermenter, and the downstream output (purified protein, for example) is harvested. Beyond the biotech industry, where synthetic biology was first adopted, falling costs are promoting its use to create materials that improve the quality of products such as pet food, watch straps and cement. Now, the retreat of globalization may be a catalyst for broader adoption.

Reversing Decades of Globalization

Decades of relative peace prompted companies to globalize their supply chains. Car parts often cross the US-Mexico border several times before they’re installed into a vehicle. Apple’s iPhone contains parts made in over 40 different countries. This supply chain optimization enabled companies to squeeze out ever higher profit margins—but also created hidden vulnerabilities.

The savings gained from sourcing cheaper supply for a component overseas can quickly evaporate when a local COVID-19 outbreak causes ports to close or a geopolitical conflict disrupts supply. Many inputs for products we rely on every day, like fertilizers for farming, come from far away around the world, often from countries governed by non-democratic rulers. Even if the current conflict is resolved, we believe companies and economies won’t simply revert back to the old-normal supply chains, having realized their inherent fragility.

How can synthetic biology help? By providing cost-effective local production. Anywhere you can brew beer, you can make things with synthetic biology. Here are some examples of potential opportunities for synthetic biology to alleviate tricky supply issues.

Oil and natural gas—are not only used for generating energy. Plastics and nylon are byproducts of petroleum that could be produced using synthetic biology. Some fertilizers are derived from natural gas and a recent study reported engineered bacteria could be used as a substitute for ammonia-based fertilizers, which currently rely on natural gas.

Pharmaceutical ingredients—about half the world’s drugs are derived from plants and nature-based materials. According to the FDA, some 78% of active pharmaceutical ingredients manufacturers are located outside the US. As more pharmaceutical companies tap into the power of synthetic biology to create these chemicals, dependence on supply from abroad will wane.

Food and flavors—recent events have exposed vulnerabilities in different parts of the food supply chain. For example, during the pandemic, as US consumers faced major meat shortages, Tyson Foods warned that the “food supply chain is breaking.” Synthetic biology can be used to create alternative protein sources, which can be manufactured in a variety of locations because they can be economically viable at relatively small scale, according to the Good Food Institute; a distributed supply system is more resilient to disruption. In Singapore, 90% of all food is imported, so the country has been at the vanguard of regulatory approval for cell-culture meat. Synthetic vanilla now commands up to 85% of global supply, solving chronic supply difficulties for a flavoring that is naturally produced mainly in Madagascar.

Clothing—it’s become the norm to find that your shirt or shoes were manufactured on the other side of the planet. But McKinsey reports that 71% of apparel and fashion companies are planning to increase nearshoring by 2025. McKinsey predicts that synthetic biology fermentation can yield significant cost savings in production of materials such as nylon, silk, cotton and clothing dyes.

Electric vehicle batteries—a professor from Columbia University used synthetic biology to develop a special microbe that can extract precious materials from a mine in a more environmentally sustainable way. This can help improve local sourcing for electric vehicle batteries in the US.

Using Science for Strategic Advantage

Many companies might have scoffed at synthetic biology as a futuristic, expensive technology that wasn’t aligned with globally dispersed supply chains. We believe it may become a more attractive option as established companies seek to re-orient their operations, and younger companies grow and build out new supply chains from scratch. Greater investments in synthetic biology lead to discoveries that push down the costs of production, opening up more applications and markets, and creating a virtuous cycle that draws in further investment.

Investors should take note. Select innovative companies that are enabling the synthetic biology revolution offer attractive growth potential, in our view. And companies across industries that are embracing the technology to address supply chain challenges may enjoy strategic advantages versus peers that can unlock promising long-term return potential.

Edward Bryan, CFA
Senior Research Analyst—Sustainable Thematic Equities

The views expressed herein do not constitute research, investment advice or trade recommendations and do not necessarily represent the views of all AB portfolio-management teams.

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