Saturday, November 07, 2015

The New Economics of Manufacturing

Popped over to Turin this week to give a presentation at a seminar on the Future of Manufacturing.

A lot of the other presentations focused on the technology (3D Printers, Cyber-Physical Systems, Internet of Things), so I wanted to look at the broader economic picture. I drew some inspiration from a recent interview with the French writer Jacques Attali, who predicted the crisis in the music industry.  

"For Attali, music is not simply a reflection of culture, but a harbinger of change, an anticipatory abstraction of the shape of things to come." (from a review of Attali's 1985 book Noise)

Attali now says manufacturing will be hit by an identical crisis - this time caused by 3D printing. Apparently some spare parts have already started to appear on pirate websites. Thus instead of paying the manufacturer for a spare part, you might be able to download and print it yourself. Given that many manufacturers sell their products at low margin, in order to make money from spare parts and maintenance, this could seriously disrupt the economics of manufacturing.

By the way, making money from the consumable part of the product is a very old idea - business schools usually attribute the idea to Gillette's strategy of giving away the razors in order to sell the blades, although Randy Picker argues that the history of Gillette's innovation was a bit more complicated than the usual story.

There are two possible responses to this challenge. Firstly a shift from the cost of the fabrication to the cost of the materials. The materials used by 3D printers are very expensive compared with normal material. And secondly, designing the whole product to frustrate the use of generic spare parts.

We can see both of these tactics in the world of 2D printers. Printers for home use are really cheap, but the replacement ink cartridges cost almost as much as the printer. Printer ink is the most expensive liquid most people ever buy - much more expensive than good champagne. Or for that matter, human blood. (Not that I've ever needed to buy any, thank goodness.)

Which brings us to the second tactic. Yes you can refill ink cartridges or use generic replacements. But the printer can be equipped with software to detect and frustrate this, degrading its performance and efficiency when it detects a third party or refilled cartridge. As we discovered in the Volkswagen "defeat device" scandal, the embedded software in any product may be designed to serve the commercial interests of the manufacturer rather than the consumer.

Manufacturing is shifting away from products (including spare parts) and towards services. Instead of trying to sell you overpriced tyres, the car manufacturer must make sure that only its accredited partners have the software to balance the wheels properly. In other words, not just architecting the product or even the process, but architecting the whole ecosystem.

And of course, music the harbinger. Famous popstars used to do free concerts in order to sell more albums. Now they might as well give away the albums in order to sell more concert tickets.

But we've been here before. Attali makes the point that when musicians in the 18th Century - like the composer Handel - started selling tickets for concerts, rather than seeking royal patronage, they were breaking new economic ground. They were signalling the end of feudalism and the beginning of a new order of capitalism.

Related Posts

Defeating the Device Paradigm (October 2015)

Other Sources

Alex Hudson, Is digital piracy possible on any object? (BBC Click, 9 December 2013)

Randy Picker, Gillette’s Strange History with the Razor and Blade Strategy (HBR Sept 2010)

Sam York, The pop star and the prophet (BBC News Magazine, 17 September 2015)

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