You may have noticed a recent marketing fad where the term “disrupt” is overused. This trendy term was popularized in 2010 after a book was released titled Disrupt: Think the Unthinkable to Spark Transformation in Your Business, and since then, we’ve experienced a few cases where the term disrupt seems fitting. Uber disrupted the taxi industry. Airbnb disrupted the hotel industry. Maybe a few other examples come to mind, but despite recent reports such as the World Economic Forum’s Emerging and Disruptive Technologies for the Future of Manufacturing, and The Manufacturing Institute’s Disruptive Innovations in Manufacturing, no single startup seems to be poised to take the manufacturing industry by storm, potentially dethroning large incumbents. While a lack of disruption might not come as a surprise, we might want to pause a moment and ask, “Why aren’t there any major companies disrupting the manufacturing industry? And, should there be?” A definitive or simple answer can’t address such broad questions, but perhaps it’s worth exploring what’s holding manufacturing back from disruption despite declarations that manufacturing is undergoing a period of rapid change and modernization.
A look at an industry that is rapidly modernizing
If manufacturing were really undergoing the rapid change people claim then the effect would probably culminate in labor productivity growth. Labor productivity is the efficiency at which labor hours are utilized in producing output of goods and services, measured as output per hour of labor. But as we can see in this chart, manufacturing labor productivity hasn’t been growing rapidly over the last seven years:
During the 90’s technology boom, with the advent of PCs, programmable controllers and networking, manufacturing labor productivity grew rapidly and consistently, especially compared to today, but ever since the rebounding spike during the recovery in 2010, productivity growth has sputtered. If manufacturing underwent rapid technology advancements, those gains were mostly realized in the 90’s and early 2000’s. Whereas in retail, we see a very different set of graphs that reflect serious disruption, mostly driven by Amazon. During a period of time where overall retail sales steadily increased:
Amazon realized unprecedented gains and traditional retailers like Walmart languished:
Despite increases in the retail industry’s total sales, jobs in the retail sector nearly stalled out for over a decade due to productivity gains from e-commerce that met demand without increasing employment:
All of these effects were a result of a switch in consumer behavior from shopping with traditional department stores to shopping online with e-commerce:
And job functions changed as a result:
If and when innovative disruption occurs in manufacturing, the effects will be just as imminent.
The manufacturing sector tells a different tale
Now, let’s compare what we’ve seen in the retail space to manufacturing (apples and oranges, we know, but please stay with us). After the rapid technology improvements in manufacturing in the 90’s and the temporary influx of trade imports with China, employment dropped precipitously since demand slowed and supply was easier to meet:
But as you can see from the chart, despite all of the talk of automation risk within manufacturing, a small increase in employment over the last seven years demonstrate something different. The contemporary claims of rapid technological improvement in manufacturing, especially automation that replaces people, doesn’t appear to be taking place. The gains in employment were mostly driven by the re-shoring of large consumer goods, “The automotive industry has brought the most jobs back to the U.S., followed by makers of electronic components and appliances. Those are industries, according to the report, “focused on products whose size and weight suggest offshoring never offered great total cost savings.”
If manufacturing is being disrupted by new technologies, we haven’t seen a large scale cumulative effect, so if there has not been rapid technological advancement in manufacturing, what’s happening?
A: The cumulative gain in manufacturing employment that we see in the chart above hides huge disparities between manufacturing sectors. Some sectors have fared well, such as Oil and Gas, while other sectors are slowly contracting year after year, like Machine Tools. Since MachiningCloud is a cutting tool software geared towards CAD/CAM programmers and machinists, let’s look at what’s happening with machining tools specifically, an industry that’s contracted for the last three years consecutively. The US Department of Commerce published a report, Made In America: Machinery, and depicts the disparity between major manufacturing sectors:
The gains from the top performing industries offset the losses from the bottom tier by a small margin as this World Bank chart on manufacturing value added depicts.
According to Dun & Bradstreet, “the US metalworking machinery industry consists of about 6,500 companies with combined annual revenue of about $31 billion,” but,
“The US industry is fragmented: the largest 50 US companies generate about 30% of revenue…International trade in metalworking machinery is substantial because of the high value of the products, mainly for machining centers and cutting tools.”
The International Trade Administration branch of the Department of Commerce explains why the machine tools sector is so important:
“The United States is a major supplier of manufacturing technology products. In 2015, U.S. companies exported over $8.1 billion worth of machinery to foreign markets. This, however, was down from approximately $8.5 billion in 2014, and is the third year in a row since 2012 to experience year-on-year declines.
There are a number of global economic factors that are responsible for this decline. To begin, according to Gardner Media, world production and consumption of machine tools have fallen over the last three years. As one of the largest sectors and bellwethers for manufacturing technology, machine tool sales are indicative of a country’s production capacity. Much of this has been a result of the slowing Chinese economy, whose machine tools consumption declined from $40.8 billion in 2011 to $31.8 billion in 2014.”
A look at this specific sector gives us deep insights into major problems within manufacturing: growing disparities between the winners and losers of globalization. In a nutshell, the winners are manufacturers who’ve invested and adapted to new marketplaces and the losers are the manufacturers who’ve underinvested and lost market share.
To be competitive internationally, large manufacturers invested in new technologies, and due to their scale, operate profitably with thinner margins. Since large producers can make investments in technologies that improve operational efficiency, they gain the ability to endure slumps in demand by exporting to growing foreign markets. For those who got the short end of the globalization stick, cost cutting has been the answer to weathering these lean times, and the cost cutting mindset only solidifies their losses. Small and midsize producers have experienced market share decreases, and many shops shutter or sell for pennies on the dollar. The manufacturing industry isn’t “evolving rapidly,” it’s consolidating seismically. As IndustryWeek noted:
- The auto industry is now a global industry where five multinational companies have 50% of the world market. The top 10 auto manufacturers control 70% of the world market. The 50th largest auto producer has one tenth of 1% of the world market.
- There are currently 50 oil and gas producers in the U.S. producing 2,736 million barrels of oil per year. Exxon merged with Mobil Oil (Exxon Mobil, IW500/1), and Conoco merged with Phillips (ConocoPhillips, IW500/22). Along with Chevron (IW500/2) and Occidental Petroleum (IW500/48), these four giants have 70% of all oil produced in the U.S. (1,919 barrels).
The Oil and Gas and transportation manufacturing industries account for the lion’s share of employment growth in recent years. But those sectors won’t be able to float the entire manufacturing industry much longer, at least not without some serious technological breakthroughs. With oversupply in Oil & Gas and decreases in demand for new cars, there’s a good chance those small gains in manufacturing employment won’t persist much longer.
In retail, consumers were willing to sacrifice the experience of shopping in person for the convenience of shopping online. Consumers demanded more convenience, so all Amazon had to do was connect people with products they wanted to buy. For Walmart, this relatively easy task of digitizing consumer sales wasn’t embraced since they’d risk cannibalizing their storefront sales, but consumers shifted regardless. Walmart didn’t ride the digital wave, and as a result, they missed it.
With little more than lines of code, these startups-turned-industry giants like Amazon forged an enormous new marketplace that provided windfalls of revenue in a short period of time. But as the Dun and Bradstreet description noted in manufacturing, “The US industry is fragmented,” couple that with slow domestic growth and you have a recipe that is unfavorable for would-be-startups who could provide a much needed boost for small and midsize American shops that are falling behind. For everyone but the largest producers, dealing with the manufacturing equivalent of Walmarts are still the norm. No easy/fast/huge opportunities for manufacturing startups like an Amazon are obvious, but that doesn’t mean something like what happened in retail won’t happen in manufacturing. Disruption is just further off.
To prepare for future breakthroughs, manufacturers are starting to digitize all the information they can within reason, especially the large players who have the funding to invest. The small and midsize players need to use their time wisely because another evolution is due and they might not make it. The expectation is that as technologies advance, lines of code (software) will become sophisticated enough to revolutionize manufacturing, but problems in the near future persist.
A fundamental shift
The future of manufacturing rests largely upon the flexibility and efficiency gained from fully digitized workflows (normally, flexibility and efficiency are inversely related). What this means is that large manufacturers will develop flexible enough operations to out compete midsize manufacturers who rely on lower overhead and more flexibility as a competitive advantage. But once large manufacturers create seamless digital workflows, they’ll see gains in productivity explode (from more flexibility and efficiency). Fortunately for small and midsize manufacturers, designing and programming seamless digital manufacturing workflows is still in its infancy.
Collaborative standards, like GTC, and innovative startups are trying to move the process along in manufacturing, but they face serious obstacles from industry incumbents who leverage these standards for their own benefit instead of offering their data to their customers for their own use. Manufacturing vendors still squabble over proprietary software vs open platforms, open standards and cross-platform integrations. As manufacturers cut costs, they often hold their “IP” (intellectual property) closely, which prevents other companies from using and improving upon it, like you see with the Open Source movement among technology companies.
The worry is that ceding control to customers will only thin margins further, which stands in stark contrast to billionaire technologists like Elon Musk who open sourced all of his Tesla patents and have a mindset that’s more akin to, “What’s good for the gander is good for the goose.” Without a free and open internet, Amazon couldn’t exist. By putting up walls, industry incumbents prevent would be disruptors from using existing infrastructure to create best of breed solutions that have the potential to elevate the entire industry.
Barriers to Innovation
There are still manufacturing vendors who are intent on selling the same stuff with new labels and building walls around their products in an effort to reduce costs and pad margins. This protectionist stance is happening because manufacturing vendors still think they can hoard data, holding out hope that their customers won’t demand it. People on the shop floor think it’s normal to hack, retrofit and adapt software and hardware together – it should be easier, more seamless.
Instead of incumbent vendors discussing what manufacturers can do, manufacturers should be demanding what vendors should do. New solutions have to work with old ones, and they should especially work with anything else on the plant floor without much hassle. We’d all derive more benefits from the best solutions to specific problems that work well among other best of breed solutions, just like we see in consumer tech today when you use a Camera app to take a picture, a Photos app to store it and share the pictures to Facebook or through text message. But the lock-in from major vendors that prevent those seamless workflows won’t change in manufacturing until people on the plant floor recognize that there’s a war going on over their data and demand more interoperability and transparency from vendors. Until then, the future of manufacturing rests in the hands of Walmart-like incumbents who throttle the industry as opposed to handing it over to the people who matter the most on the plant floor.
In manufacturing, technology advancements are happening underneath the hood, especially for large producers, but for most manufacturers, the car is still driving the same and gas is running out. Advanced infrastructure is still in development and it needs to speed up. As next generation technologies mature, startups that mix, match and combine the new tech in novel ways will produce breakthroughs. When future breakthroughs in hardware and software become mainstream, affordable and easy to use, manufacturers who’ve fully digitized their operations will leverage their troves of data to improve efficiency and operate with more flexibility, outcompeting their more traditional competitors handily, just like Amazon did with storefront retailers. Innovation will become mainstream when more manufacturers demand it.