Economics of 3D Printing, Part One: A Brief History of Manufacturing

After shedding jobs for more than 10 years, our manufacturers have added about 500,000 jobs over the past three. Caterpillar is bringing jobs back from Japan. Ford is bringing jobs back from Mexico. After locating plants in other countries like China, Intel is opening its most advanced plant right here at home. And this year, Apple will start making Macs in America again.

There are things we can do, right now, to accelerate this trend. Last year, we created our first manufacturing innovation institute in Youngstown, Ohio. A once-shuttered warehouse is now a state-of-the art lab where new workers are mastering the 3D printing that has the potential to revolutionize the way we make almost everything. There’s no reason this can’t happen in other towns. 

– President Obama, 2013 State of the Union Address

 

There is no shortage of buzz about the potential of 3D Printing to bring manufacturing back to America.  Much of this buzz is justified.  As we’ll talk about in Part Two of this post, 3D Printing stands to fundamentally alter the economics of manufacturing.  But to appreciate how this will unfold, we first need to look at the history of manufacturing.  We need to understand where we are today and how we got here.  With this understanding, we can better foresee where we’ll go, and the implications of that evolution.

With that in mind, this post is dedicated to discussing the evolution of manufacturing since its earliest days – with an emphasis on the massive advancements of the last two centuries.

 

Primer on Input Costs

As we embark on this journey through the history of manufacturing, I think a few input costs prove most useful to track over that time.  These input costs are the key variables that make up the total cost of a product, and they have evolved significantly over time.  You’ll readily find these variables in an economics text book or the revenue statement of just about any business around.

Material – This is the component of cost for the raw material inputs to a product.  Basically, the stuff used to make a product.

Labor – This is the cost of manual labor included in a product.  Basically, the cost of the folks who are working in the assembly line or warehouse to get the product made and out the door.  When combined with Raw Material cost, you get COGS as listed in a typical revenue statement.

Shipping – This is the cost of getting finished products from your business to the market your products service.

Overhead (Machinery, Property, SG&A) – This is the cost of having a business and keeping the lights on.  It includes the machinery purchased to make goods, the lease/mortgage to house your operations, and the basic personnel required to oversee a business’ operations.

As we talk through the evolution of manufacturing, we’ll try to be consistent in our rankings on the basis of historical comparison.  So you might think of a high/medium/low rating as a comparison to the historical level for that input cost to create a single product.  In other words, cost of labor today is lower today than in the past based on the productivity of that labor – even though the wage might be higher than in the past.

 

Pre-Industrial Era (2000BC – ~1800AD)

Pottery in ancient Greece, manufacturing in the classical era
Pottery in Ancient Greece is one the first examples of manufacturing

In the early days of manufacturing, you wouldn’t call it manufacturing.  You’d call it making.  People simply made stuff.  Think in terms of Homer’s Odyssey through to Colonial times.  In this era, the stuff people made was based on what was handy and local.  Aside from colossally expensive feats like the Pyramids, people manufactured with what was in their proverbial back yard.  And even with the Pyramids, goods were just floated down the Nile.  Fast forward to the Colonial era, people still used what was local to them or what was easy to ship down a river.  The invention of roads and nautical trade routes allowed for things like luxury goods to be transported across longer distances – for instance the Atlantic and the Silk Road – but large scale transport of basic goods simply didn’t exist.  Here’s how the economics of that looked:

Material – Medium.  People just used whatever stuff was lying around.  This eliminated the cost of extraction, but it limited the materials used.  The notion of using materials from anywhere other than “over that hill there” basically was a non-starter.

Labor – High.  It was whoever was around to make it.  And to make something took a lot of manpower.  So much, in fact, that people in power would often choose to tip the scales in favor of keeping costs down through vassalage or slavery – so artificially low despite still being pretty high.

Shipping – High.  Roads as we know them now hardly existed.  And the stuff moving across them was a horse, donkey, or camel – not exactly geared for massive shipment.

Overhead (Machinery, Property, SG&A) – Non-existent.  Quite simply, there weren’t a lot of machines around to do work – it was all hand labor.  Machinery costs didn’t exist, property costs were somewhat irrelevant due to the lack of outside competition, and formal sales and marketing divisions didn’t exist.

Summary: It was expensive to make just about anything, so you used what was handy.

 

First Industrial Revolution (~1800 – ~1840)

Cotton Gin
The cotton gin was a game changer that brought the first industrial revolution

With the arrival of the cotton gin, the game changed.  Harvesting cotton became more efficient and suddenly textile mills started appearing near rivers.  That’s where the power of rushing water could be used to power looms and expedite the production process.  During this phase of manufacturing history, the cost of material went up a bit – people were investing in cultivation of the land – but the amount of labor required for a singular task went down.  While knitting a new shirt once took weeks or months (just ask my mom, who’s been at work on family Christmas stockings for the better part of her adult life), it suddenly just took hours or days.  This reduction in labor input singlehandedly offset higher costs of overhead in the form of machinery, and material costs, as “what was lying around” didn’t always work nicely with a loom.  Here’s how the cost picture looked:

Material – High.  As the possibility true manufactured goods arrived, so too did slightly higher input costs.  Looms only run on cotton, so you paid whatever it cost for a whole bunch of folks to manually plant and reap the crop.

Labor – Medium-High.  The cost of manufacturing things was reduced manifold.  What once took months or years took days or months.

Shipping – High.  Rivers were the cheapest means of shipping.  Roads weren’t paved.  And the vessels moving on those thoroughfares were of a distinctly manual nature.

Overhead – Low.  This went up as well.  Whereas before people were just doing their own thing, buildings needed to be put up to house machinery, and some limited management had to be created to oversee the worker bees.

Summary – The first machines significantly dropped the cost of labor.  It was still expensive as heck to ship anything anywhere, and some overhead costs were created to oversee larger groups of people doing a task, but those high costs were more than offset by customer demand for these goods and the relatively lower amount of labor required to make them.

 

Second Industrial Revolution (~1840 – ~1910)

Ford assembly line
The assembly line made manufacturing much faster but increased overhead costs

This phase of manufacturing history was defined by the arrival of the factory as we know it.  Massive facilities were created to process raw materials and turn them into usable ones (e.g., US Steel, Standard Oil) and companies grew up to efficiently turn those input goods into finished goods (e.g., Ford’s assembly line).  During this phase of manufacturing history, the cost picture looked like this:

Material – Medium.  Increasing specificity in material needs – namely coal, steel, and oil – drove up the standard cost of material.  Extracting that stuff wasn’t easy – people mined mountainsides and dug oil wells for these substances that had suddenly become immensely valuable.  To trim down the cost of moving raw material around, factories tended to locate close to the places where mining opportunities existed.

Labor – Medium.  Again, efficiencies in manufacturing drove down the input cost of labor significantly.  But the sheer manpower required to make Model Ts and other industrial products of the era was significant.

Shipping – Medium.  Considering on its march downward, shipping costs declined as railroads began lining the countryside.  Oftentimes, railroads would be run directly into factories so that goods might be delivered straight to market.

Overhead – Medium.  More personnel was required to oversee growing numbers of employees in a factory.

Summary – Shipping costs tracked down a bit with the arrival of railroads.  Labor input for a given part also dropped relative to the cost of the part, as plants and assembly lines made industry as we know it possible.  Sure, a bit of additional management had to be created to oversee the many folks in a factory, but again, market demand for these manufactured goods and the savings created by more efficiently making them more than offset any cost increases.

 

The Arrival of Modern Transport (1950-1980)

Red_B-double_truck
Trucks along the interstate system further drove cost down

On the whole, the manufacturing world tracked on the path that was created for it during the Second Industrial Revolution until this era.  During this time, shipping costs took another step downwards, as the interstate system grew up and rapid transportation from one state to another was possible.   Manufacturing companies began moving their operations out of expensive downtown areas in favor of locations on the periphery of town near “circumferential highways” that circled around a central business district from a few miles out.

Material – Low.  Advancements in extraction continued.  The cost of shipping extracted materials to factories dropped as the interstate system allowed for efficient delivery to factories.

Labor – Medium-Low.  The labor input cost for a given good also continued downward.  Increasingly automated machines required fewer workers to complete what was done in the past.

Shipping – Medium-Low.  With the arrival of the interstate system, shipping costs dropped even lower than before.

Overhead – Medium-High.  The sheer number of workers in the factory didn’t materially change, but the administrative staff did.  Increased specialization in the workforce harkened the arrival of sales and marketing departments.  Companies relocated to the suburbs, reducing property costs relative to more expensive downtown locations.  This offset the cost of more “white collar,” higher dollar workers.

Summary – Labor costs continued marching downward as factories increasingly automated, requiring fewer workers on the line.  Jobs in sales, marketing, and middle management were created, filling this void.  The reduction in shipping cost was really the driving force between overall reduction in cost of goods.

 

Globalization (1980 – 2015)

Shipping routes
Shipping routes show the density of commercial shipping

Globalization has been defined by “offshoring” – the relocation of jobs to lower cost countries.  Free Trade agreements opened the door to moving manufacturing to lower cost locations like China and Southeast Asia.  Then, advancements in telecommunications and the arrival of the internet allowed for the offshoring of various “white collar” jobs like telemarketing and web development.  Globalization has been in many ways defined by the decision of where labor is located, and whether the cost of local labor for a given task can be justified vs. utilizing overseas workers.

Material – Low.  The technologies to extract materials from the earth remained as efficient as they were in the previous generation.

Labor –  Low.  Trade agreements like NAFTA and Trans-Pacific Trade Pact opened the door to lower labor-cost countries like Mexico (NAFTA) and China.

Shipping – Medium-Low.  More efficient vehicles drove down the cost of shipping over land and sea.  At the same time, the distances they had to cover tended to be far greater.

Overhead – Medium.  Overseas properties tended to cost less to lease, although the management layer to manage international operations was higher.  Equipment cost similar amounts wherever it was sold, although local production of equipment sometimes created overhead reductions as well.

Summary – Without anywhere to turn to continue the inexorable march toward more affordable goods, manufacturing increasingly was moved overseas to lower cost locations.  Only those industries deemed worthy by governments of “special protection” could sustain themselves competitively against foreign competitors that were capable of producing similar goods at lower prices.

 

Third Industrial Revolution (2015 – TBD)

3rd industrial revolution
3D printing is bringing the 3rd industrial revolution.

You may have noticed the trend line here.  Companies have been looking for ways to drive down cost since the dawn of time to maximize their ability to win in an increasingly competitive, now-global, marketplace.  Where can companies turn when Material and Labor costs have gone seemingly as low as they can go?  3D Printing offers an interesting potential solution, fundamentally changing cost calculus myriad ways.  Since it is a work in progress, you’ll note that we’ve included trend information in the ratings here.

Material – Medium trending down.  On a historical level, 3D Printed materials aren’t inordinately expensive, but they are in comparison to the hyper efficient extraction techniques developed to date.  For any 3D Printing process, true raw materials aren’t an option – they only accept materials that have been pre-processed into powder, filament, or liquid resin form.  However, as more competitors enter the market and advancements in material science take place, these costs will go down.

Labor –  Low trending toward zero.  Whereas even the most automated operations require some manual operation, 3D Printing is trending toward almost no labor input.  That is significant, because when you’re multiplying an hourly wage by zero, the product is zero.  The cost advantage on labor-intensive manufacturing that lower-cost countries enjoy gradually fades away.

Shipping – Low trending toward zero.  Because production can co-locate next to its target market – with CAD files beamed via the internet to nearby production options – the cost of shipping is significantly reduced.  In fact, as 3D Printers proliferate and penetrate all corners of the globe, the ability to eliminate shipping altogether is created.  A customer can simply arrange for printing in-house or at a nearby printer and pick up the good rather than have it shipped.

Overhead – Medium, trending down.  3D Printing equipment is expensive – very expensive.  Top of the line plastics printers cost a few hundred grand; metal printers often over a million dollars.  Bringing operations back onshore inherently carries higher cost for a given space, but the spaces required for 3D Printing tend to be smaller.  Instead of a massive factory, a fully functioning 3D Printing service bureau can exist in a space the size of a living room.

Summary – 3D Printing heralds the arrival of a new generation in printing.  Quite simply, the crux of 3D Printing’s economics is the potential savings in labor and shipping vs. the higher costs of machinery and material.  In smaller part runs, 3D Printing is already the more cost effective option.  Our 3D printing customers regularly see significant savings for smaller runs of goods than they would going overseas for a 3D Printed, machined, or injection molded part.  As we watch the cost of equipment and material drop over time, this will only become more pronounced, eventually making larger production runs more cost effective and local in nature.  In this way, the reshoring of manufacturing will take place.

 

 

Conclusion

Over the history of manufacturing, there has been an inexorable march toward reduction in cost.  By pulling the levers of material, labor, shipping, and overhead cost, people are now able to access a myriad of goods at a fraction of the price of even a generation before.

But so what?  Cost coming down shouldn’t be a surprise to anyone.  What are we to make of this evolution?  Why does 3D Printing’s arrival really matter?  Does it signal massive reshoring of jobs?  Will cost really come down significantly?

We’ll answer these questions in a future post…