Critical Strategy Issues Facing Advanced Manufacturers: market disruption, capital investment, planning for next few years

I recently attended the largest U.S. design and advanced manufacturing event, consisting of five co-located conferences involving medical technology (“medtech”), aerospace, plastics, electronics and robotics manufacturing.  The Medical Design & Manufacturing (MD&M) event is the nation’s largest medtech gathering.

While historically most medical device manufacturing was done by the device original equipment manufacturers (OEMs, such as Becton Dickinson for example), today a large amount is outsourced to contract manufacturing organizations (CMs or CMOs) – especially so if startup to expansion stage companies.

GE has produced a turboprop airplane engine partly by 3D printing, named “the Catalyst,” that reduced testing from 12 to 6 months, weight by 5%, 855 parts were replaced by 12 printed additively, with an expected up-to-20% reduction in fuel-burn and up-to-10 % more power. Maintenance, wear and leakage will be reduced, too. The engine will come to market this year in the Cessna Denali. (Various GE announcements and articles)

Many CMOs also support other high-precision industries such as aerospace, automotive, and various electronics.  Among American manufacturing, this is an elite group, representing the most advanced, quality and security-regulated industry participants holding globally-recognized certifications.   

The importance of additive manufacturing (AM) or 3D printing (the terms are used interchangeably) grows each year.  One report indicates that the AM industry grew 24% in 2018 for a total market value of $9.3 billion.[i]

Most metals and plastics manufacturing CMOs do not yet offer additive manufacturing solutions. 

Since I have had an active interest and previously written about the emergence of this technology as an innovation catalyst and force of disruption, I dedicated much of the Medical Design & Manufacturing Conference (MD&M) to symposia on that topic.  Globally-leading companies and individuals presented, participated in panel discussions and in the audience dialogue.

Conclusions

My conclusions pertain mostly to American advanced manufacturing, not the super high-volume production that long-ago moved offshore.

• Rapidly Changing – This technology is changing so rapidly even industry thought-leaders struggle to stay abreast of developments.[ii]
• Degree of Market Disruption – We don’t know how much traditional manufacturing will be replaced by additive technologies, but we can be confident that the ratio will shift continuously to AM in the coming years. Nobody is seriously discussing the prospect of additive manufacturing completely replacing conventional technologies like injection molding or casting.  For some applications and smaller production scale, 3D printing already has replaced other production methods.  In fact, BMW recently produced its one millionth part this way.  
• The determination is entirely circumstantial, dependent upon variables pertaining to a product or part, but in no case would AM production runs in the millions be the most economical full-scale production method at this point.
• Old assumptions about what is and isn’t suited for 3D printing technology, whether and when to convert from 3D to another technology, i.e. the breakeven point at which an established process may be more economical for production scale, may be invalid now.
• In general, AM technologies are pushing out the breakeven point to larger volumes. While AM is no longer restricted in practicality to prototyping and very short runs, the point at which it becomes practical for on-going production at significant scale will be highly variable and product-dependent, i.e. there is no standard for “large” production.  One representative of a very large industrial AM equipment seller quoted 50,000 units as being a rough, conversational – and possibly controversial – rule-of-thumb at which point injection molding probably is more economical.  I heard people still citing low single digit thousands as breakeven, but I suspect many of those comments to be based on outdated assumptions.
• When High Volume? – Since there are so many variables, industry thought leaders find it difficult to guess at what point 3D will significantly replace existing technologies like injection molding for all-but-the highest volume production. However, a guess of three to five years gets little challenge.
• Big Players Are Now in the Game – Very large international companies have committed to this market, such as GE, HP, DuPont, and BASF. As stated at the conference, “We didn’t get into this business for prototyping volumes.  We’re here with the expectation of building into full-scale production.”
• Capacity Limits Growth – It is important to realize that there are not enough 3D printing machines in the world to suddenly overtake production from injection molding or any other conventional large production volume technology. While AM growth is happening rapidly, it cannot scale overnight.   
• Existing Tooling – If the capital is spent, there is little to no incentive to switch from conventional to AM.
• Materials Breadth – Almost 2,300 input materials are available, including over 1,000 metals and almost 1,000 polymers.[iii] Metals AM technology is well established, [iv]  with several success stories of high precision items produced this way – e.g., aerospace, automotive and industrial applications.  The HP Metal Jet market entry in 2019 will encourage more large corporations, like Volkswagen, to utilize AM.[v]    
• Parts Quality – Some products produced by 3D printing are actually superior to molded products; for instance, a mold seam can be a structural weakness. Manufacturers claim to produce some metal components with material properties better than cast and comparable to wrought materials, with complex geometries that conventional manufacturing methods, such as CNC machining, cannot achieve.  Processes like direct metal laser sintering and melting may compete directly with conventional manufacturing like CNC machining and casting in complexity, product quality, and weight reduction.[vi]  Conversely, AM parts often require more post-processing finishing work (50% of cost).
• Spurring Design Innovation – The new technology will encourage the creation of parts with more complex geometries than possible with conventional technologies. Aerospace and automotive applications have shown that superior part performance may be achieved.
• Faster, Cheaper Prototyping – Success stories abound of companies dramatically reducing the time and cost of prototyping. Highly-engineered manufactured products, such as medical devices or aerospace applications, may be able to achieve the same result by beginning the process with 3D printing.  At a certain volume threshold, an alternate technology may be more economical.
• DFM + DFAM – While the new product introduction process has always included a Design for Manufacturing (DFM) step, it should now include both a DFM and Design for Additive Manufacturing (DFAM) step concurrently. DFM for machining and injection molding will not inform the 3D printing process – they’re entirely different.[vii] Adding this step initially may save time and money later.
• Creators of medical device or other highly-engineered products should probably evaluate contract manufacturers providing in-house both AM solutions and established technologies, e.g. injection molding, CNC machining, etc. Alternately, evaluate specialists in each simultaneously. 
• Cybersecurity – The more digitized manufacturing becomes; the more pressing end-to-end security protection becomes.

Implications for Contract Manufacturers

As Swiss screw multi-spindle CNC machining rendered most non-adopters’ technology and processes uncompetitive in the market years ago, 3D printing is changing the competitive dynamics of advanced manufacturing now. 

At this point, I think that It’s fair to say that CMOs offering this technology alongside traditional manufacturing processes hold a competitive advantage.  As time passes, that advantage will become a standard and necessity to be competitive.  I do not think that this shift will take very long.

Concurrently, contract manufacturing is in the midst of a consolidation wave, largely in response to a medical device industry with stated intent to reduce the number of participants in its supply chain (as aerospace did already).  It will become increasingly difficult for smaller CMOs to compete.  While existing production contracts are unlikely to evaporate, the small CMOs will likely see fewer and fewer new ones over time.  The future looks a lot more like $50-200 million revenue CMOs than today’s <$15 million norm. 

While the M&A seller’s market remains strong for now, owners of CMOs should consider whether to invest in growth independently, reduce personal wealth concentration risk by bringing in outside investors to share the investment demand, or divest altogether.   

My advice:  Make an active decision now.  Invest or Divest.  Grow or Go.

Mid-Market Securities, LLC is an investment banking broker-dealer that provides smaller to mid-sized companies the international access, insights, processes and professionalism larger companies command. 

We provide strategic and financial solutions to support companies’ growth goals, address challenges to the business and/or facilitate owners’ personal financial goal of maximizing the company’s value and achieving liquidity – either now or in the future.

McGavock Dickinson (Dick) Bransford is a Managing Director in San Francisco with Mid-Market Securities, headquartered at 11 East 44th Street, 19th Floor, New York, New York 10017. Member FINRA/SIPC.  He can be contacted at (415) 294-0002 or mdb @ mid-marketsecurities.com.

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[i] “2019 Additive Manufacturing Market Outlook and Summary Report,” SmarTech Publishing, reported in Machine Design magazine, January, 2019.

[ii] For example, just days prior to and after the MD&M conference, two separate but similar new technology announcements were made: 3D printing method creates objects in one piece (Lawrence Livermore National Lab) and Light Used to Speed Up 3D Printing of Plastic 100 Times, DesignNews (University of Michigan)

[iii] Senvol Database of Additive Manufacturing Materials and Machines, searched February 25, 2019

[iv] 10 Metal 3D Printing Companies You Should Know, DesignNews

[v] HP Metal Jet https://www8.hp.com/us/en/printers/3d-printers/metals.html

[vi] HP video promotes their metals capability, Introducing HP Metal Jet Technology into Mainstream Manufacturing | 3D Printing

[vii] More Information: How 3D Design Opens Up Innovation, February 12, 2019