By Olaf Groth, Mark Esposito and Terence Tse
The collaborative economy and commons are challenging the way companies are engaging with consumers and we experience a shift towards zero marginal cost society thanks to a new hybrid form of converging configuration, powered by the crowd. Supported by technological breakthroughs and disruptive creation, the intelligence of the “swarm” constitutes an opportunity to alleviate old structural imbalances, injustices and diseconomies, if managed with foresight.
From the Few to the Many: Swarm Economics
In recent years, we have been seeing a shift in how goods and services are consumed. Driven by global trends in resource shortages, sustainability, financial strain, wireless technology, social media, etc., fewer businesses and consumers feel the need or are able to individually purchase, own and maintain certain types of material assets. From Netjets to BnB to Zipcar and Buzzcar, consumers in the US and Europe have increasingly been taking to what is commonly referred to as the “Sharing Economy.” This is sweeping through many sectors. To be sure, there are many open questions of a regulatory nature. But this demand-side trend toward crowds sharing seems unstoppable.
On the supply side too, we are now on the verge of a paradigm shift. This shift pertains to how goods are designed, made and distributed across the globe. Over the next 20 years we will see a democratization of manufacturing that will allow consumers to build their own products in a decentralized and distributed fashion, and to an extent never seen before. To do this, they don’t need to be experts in any one of these activities. Rather, they will rely on the help of developers, some of them professional product developers, many of them hobbyists and hackers, to create designs for new products, and of other consumers to contribute complementary product components. Jointly, these manufacturing communities will hold most of the critical assets for experimentation and production.
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Disparate and diverse sets of producer-consumers will come together in forums online, responding to each others’ needs, offering ideas, designs, materials and reciprocal services to each other. They will form in small or large groups on a mostly ad hoc and irregular basis, depending on the needs in question, to help each other think through and make “stuff.” They will pay, barter and trade in currency, know-how, assets and channels. This type of ad hoc and agile cooperative but only very loosely structured manufacturing model will lead to new ventures with new patterns and behaviours of production and new ways of minimizing transaction cost. We have dubbed this phenomenon “Swarm Economics.”
The Driving Force Behind Swarm Economics: 3D Manufacturing
At the heart of Swarm Economics is the unfolding field of 3D Manufacturing, also called Advanced or Additive Manufacturing. Sophisticated printers add layer-by-layer of different types of print material to construct anything from simple rubber ducks to whole automobiles. Costs of printers have come down significantly in recent years, ranging from hundreds of thousands to just 150 dollars, depending on the complexity of the task they’re designed for.
This new field has been grabbing media attention for a while, maybe not surprisingly. It appeals to consumers, entrepreneurs and politicians alike. Consumers obtain more control and instant gratification, entrepreneurs get to develop new applications and business models, and politicians get to harness the technology as a means of on-shoring long-lost manufacturing jobs.
The stakes in manufacturing are significant. The value added as percentage of GDP in 2012 was $13% for the US, 19% for Japan, and 10% for the United Kingdom.1 In many economies, manufacturing, whether undertaken in large or small companies, constitutes a large chunk of economic activity. In some developing economies, this sector has been increasing, whereas in many industrialized economies, it has been stagnating vis-a-vis the services sector. In most countries, however, policy makers view manufacturing as a way to foster deep technical skillsets that are sustainably valuable in that they serve domestic and global sets of multinational corporations and hence attract investment. The numbers aforementioned only account for just the value of manufacturing activity itself. But manufacturing spawns services and solutions that sell, maintain or enhance products. Furthermore, it draws to it intellectual property (IP) and innovation. In California’s economy, much of which is characterized by break-through IP, this IP adds significant value in manufacturing. California manufacturing generates $229.9 billion, and it is also its greatest export activity that generates $159 billion in exports in 2011.2 In clean energy technology, for instance, many of the state’s inventions and innovations get integrated in Detroit, Spartanburg, Tokyo, Seoul, Wolfsburg, Stuttgart or Munich.
On an individual human level, manufacturing plays on the natural human instinct to make, to build, and to express oneself through physical representations of or additions to our world. The Makers’ and Do-it-Yourself (DIY) movements, for instance, have gained significant steam, especially in the United States. One of the movement’s most successful ventures, TechShop, posted 798% revenue growth in the last three years and was just named to Inc.’s list of fastest-growing private companies. “We’re just riding the wave,” says CEO Mark Hatch. “We’re responding to the demand.”3 Meanwhile for Etsy, the trading and e-commerce platform for makers based in Seattle, the volume of traded goods has increased its valuation to nearly double, $700 billion.4
It is no surprise then that stakeholders of manufacturing are excited about the prospects to empower individuals to design, make, and sell products to bring back jobs, spur innovation and increase productivity and fulfillment. Of course, many questions remain around 3D Manufacturing and the Makers’ / DIY movement, from environmental to safety to labour regulations. But with such heavy-hitting economic and political interests aligned, these concerns will get worked out and it is hard to imagine that the trend could be reversed altogether.
From Ant-Hills to Beaver Dams: How 3D Manufacturing Changes the Geo-Economics of Production
So far so good. But why should we care beyond this rather encouraging picture of bringing manufacturing back from the dead? 3D Manufacturing and Swarm Economics are not merely the wet dream of base-democratic San Francisco hippies and Silicon Valley libertarians. They are nothing less than a fundamental reshuffling of how manufacturing will work in the future. How manufacturing works will in turn determine where it happens, who makes it happen and at what costs.
Modern manufacturing has come to us in two basic waves: the early wave of craftsmanship that was common to the development of many countries around the world, started by individual master craftsmen, harnessed by guilds and cooperatives; and the later wave of industrialization rooted in Britain and continental Europe, perfected at scale in the United States during and after World War II. What followed was an efficiency and cost drive in the West that led to the much debated and bemourned outsourcing (offshoring and hence migration of manufacturing activity and jobs largely to Asia). As Asian economies became more affluent, more Western companies moved closer to the new consumers, partially to understand them better, partially because local regulations demanded it, which reinforced the trend. As a result, China now accounts for a fifth of global manufacturing, as opposed to Western industrialized economies.5
All of that will soon change; not for all manufacturing and not at once, but slowly and steadily over the course of the next 20 years. More and more manufacturing will be transformed from large centralized production facilities (ant hills) that are hierarchically managed to smaller, individual or cooperative-type operations (beaver dams), thanks to the empowerment of 3D Manufacturing and cloud computing.
How will this happen?
As printer technology and big data applications evolve, and as the maker-movement starts to acquire the requisite computing skills at scale, small businesses and individual producer-consumers will acquire 3D printers to help them produce smaller products or components of bigger products. They will utilize analytic applications to understand the hot spots of consumer trends, public and investor attention. Companies like Quid (www.quid.com) are already humming in that direction and will help them do so at much greater granularity. Then they will use design applications to test out and experiment with the right configurations of products against the needs that call for them. So enabled, they will also have the means to then search for and connect to others in the cloud and on special makers’ networks and communities to understand who has complementary capabilities. One maker’s cloud-based profile and capability specifications will match up with that of others to determine synergistic capabilities and the logistics required to bring both together.
Responsiveness to late-breaking consumer trends will be high, because connections will be immediate and direct, transaction cost and hence overhead will be low. Batches will be small, but in aggregate, will be able meet consumer demand at volume. There will of course be lots of trial-and-error, heartbreak and backlash as consumers complain about inadequate quality, safety and reliability. New regulations will need to be put in place to safeguard without stifling this new economic growth horizon. Because of this, it is unclear at what pace and in what direction this swarming mess will evolve. But one thing is more or less certain: the days of the mega factories that crank out homogeneous products for indiscriminate users using undifferentiated labour are numbered.
The New Heat-Map of Production in 2030: Goodbye, China Offshoring!
Those that believe that this is yet another idea dreamed-up by the want-to-be avant-garde ivory tower dwellers for a mostly affluent western and northern elite audience starved for the next sci-fi gadget may want to reflect on this a little further. There is no reason this can’t happen across the globe and across rich and poor economies alike. In Asia, Africa and Latin America, poor farmers and merchants may lack basic infrastructure, but they do own cell phones. They have leapfrogged western/northern stages of industrial capabilities once and they can do so again. In fact, it would be much more beneficial to them to invest in 3D printers than to pay manufacturers in China and their satellite big-city distributors for the goods they wish to sell.
And there are precedents: in Africa and Asia, mobile banking and payment services like M-Pesa have empowered the “un-banked” consumers, some of whom have consequently become merchants as they have harnessed the power of new platforms that alleviate traditional barriers to financial transactions. Why would poor rural farming communities be able to pool their resources to procure joint harvest machines or cell phone-charging stations for a few hundred dollars at a time, but not afford a 3D printer for $300?
If that is so, then why would we need to continue to put all of these factories in China to make simple household items, toys and tools? Why would we need to search for new manufacturing hubs around the world to take over from China as it evolves into a higher-end innovation economy? Wouldn’t a wireless connection, access to the cloud and a printer-box that is barely the size of a washing machine in the hands of a local merchant, suffice? Why embark on the next round of offshoring in what is becoming an endless odyssey of low-cost labour searches? Could this be the end of the centralized, hierarchical mass-manufacturing and shipping paradigm? The container killed labour in industrializing economies. Now the 3D printer could kill the container. Local craftsmanship could be back with a vengeance!
Make no mistake about it, we do of course still need large facilities and more centralized production for certain types of goods; for example, where one hub is needed to aggregate and assemble complex technical systems. It is hard to see how Swarm Economics could replace the need for assembly lines for aircrafts in Seattle or Hamburg, for shipyards in Korea, or any type of highly restrictive clean room type operation like semiconductor fabrications in Taiwan, any time soon. But the part suppliers of these large operations might very well be impacted.
So, in sum, we will see the emergence of a much more distributed, decentralized production paradigm, even if for simplicity’s sake, only the smaller products are impacted at first. Hence, large portions of economic power will migrate away from those with large capital and other bulk production factors to those with specialized craft and know-how in what could become a crafts-paradigm on steroids. Instead of products being pushed out from the monolithic centre to the distributed periphery, we will see a pull of print materials and designs from those dispersed periphery locations and a push of products back into the center through the cloud.
Here then are some implications:
As a result, cheap manufacturing hubs like China will lose their edge in low-end manufacturing more quickly and will get pushed further up the manufacturing value chain. Trade and investment negotiations across borders will take on a very different character as these value chains get reconfigured and actors figure out their new power relationships. As that happens, confusion of what products are made where and how that will change customs duties and value-add taxes will increase. At the same time, within the swarms of individual consumer-producers, liability and service obligations will need to be figured out. Determining the who, why and how for handling these issues will be messy, given the lack of formal organization and overhead, until cooperative agreements about those aspects are reached and certain standards become clear. Labour will become more fragmented into individual contributors that form cooperative swarms around consumer preferences. Unions become communities. That will mean less order and hierarchy to rely on and more entrepreneurial initiative on the part of the many. But at least the many will no longer have to fear the offshoring odyssey.
In this environment, manufacturing innovation can happen in a myriad of spaces. The swarm determines where the weight of attention and skills should be placed, more so than centralized industrial policy. This is already happening to some degree with open source software, crowd-sourcing and open innovation challenges. Corporations have realized that they don’t hold all the smarts and wisdom they need behind their walls. They are increasingly making their borders more permeable to tap external pockets of expertise. The same will happen with the design and production of new products. With the help of the crowd, empowered Master craftspeople will absorb this piece of the corporate value chain too.
Slowly but steadily, the corporation as we knew it – the corporate citadel – will relax and resolve itself into external swarms. Corporations themselves could become networks of freely associated producers. After all, the main purpose of corporations was to pool capital and tools, create trust, lower transaction costs and share overhead. With those needs being met by a combination of 3D printing, crowd analytics and design, and hybrid digital-physical communities, what will be the role of the corporate citadel?
Some might go as far as to see the end of employment, the end of the salaried man and woman. And while they might find that to be a scary proposition, it doesn’t have to be. It could in fact mean the end of structural unemployment, because skill contributions are independent of time and space, i.e. age, location and corporate walls.
So, in sum, we could be seeing a shift along two geo-economic axes, both moving from centralized to decentralized mode: from low-cost manufacturing countries and regions to a distributed global base of individual craft-master businesses; and from the centre of the value chain, the corporation, to its edge – the producer-consumer. The latter might in fact lead to a further disaggregation of the value chain into a loose value web connected through new trust-maximizing and transaction cost-minimizing communities.
How to Prepare: Recommendations for Executives, Labour, and Policy Makers
We recommend a series of dialogues between the leadership of these constituents to more thoroughly understand this intentionally provocative vision. What are the risks and opportunities? Should this vision be promoted or mitigated?
• Exercise more detailed foresight and assess the global and regional shifts of economic activity and what they mean for social cohesion and local socio-economic development
• Study the requirements for a build-out of high speed data infrastructure through wireless networks to empower both major cities and rural villages
• Create programs to train Master crafts-producers in the foundations of the technologies, business models and operational-financial tools
• Craft blueprints for health, safety, liability and labour regulation for a new distributed manufacturing paradigm
• Incentivize the formation of online cooperative co-production communities with a framework of rules of conduct that creates status through trustworthiness, responsiveness and performance
• Develop corporate strategies that take account of the collapse of the value chain
• Draft communications plans that align economic stakeholders in the web to mitigate friction
• Institute secondary school programs to teach crowd-production and Swarm Economics
• Lay out negotiation approaches between economies to coordinate the labour, tax and customs regulations
• Swarm economics and the distributed production economy are not a revolution on the fundamentals of markets, or micro- or macro-economics. But they are a radical shift in how these fundamentals play out among the actors and countries involved. In our opinion, they constitute an opportunity to alleviate old structural imbalances, injustices and diseconomies, if we manage with foresight.
About the Authors
Dr. Olaf Groth is Global Professor of Strategy & Economics, Management & Innovation and Discipline Lead for Organization & Global Economy at HULT International Business School. As corporate executive and adviser, he has been involved in new initiatives and ventures in 30+ countries. He has been a Fellow for Competitiveness at Grenoble École de Management, Senior Fellow for Innovation at the Center for Emerging Markets Enterprise at Tufts, and a judge for GE’s Ecomagination Challenge. He has published through the World Economic Forum, Harvard Business Review, Huffington Post. He holds a PhD from the Fletcher School at Tufts University.
Dr. Mark Esposito is an Associate Professor of Business & Economics at Grenoble Graduate School of Business in France and Instructor at the Harvard Extension School in the USA. He serves as Senior Associate for the University of Cambridge Institute for Sustainability Leadership in the UK. He is the founder of the Lab-Center for Competitiveness and has worked with governments, the UN, and the NATO over the past 10 years on economic development and sustainability issues. He holds a PhD from the International School of Management in Paris/New York.
Dr. Terence Tse is an Associate Professor in Finance at the London campus of ESCP Europe Business School. He is also the Head of Competitive Studies at i7 Institute for Innovation and Competitiveness academic think-tank at ESCP Europe. He began his career in investment banking at Schroders and Lazard Brothers, and later as an independent consultant to a University of Cambridge-based biotech start-up and various major corporations. He worked as a consultant at Ernst & Young in London. He holds a PhD from the Judge Business School, University of Cambridge, UK.
References
1 .”Manufacturing, Value Added (% of GDP).” The World Bank. National Accounts Data, 2014.
2. “Importance of Manufacturing within California Economy.” California State Assembly. Committee on Jobs, Economic Development, and the Economy
3. Jeffries, Adrianne. “At Maker Faire New York, the DIY Movement Pushes into the Mainstream.” The Verge. N.p., 23 Sept. 2013.
4. Thomas, Owen. “Here’s Why Etsy Is Worth Almost $700 Million.” Business Insider. Business Insider, Inc, 09 May 2012.
5. “The End of Cheap China.” The Economist. The Economist Newspaper, 10 Mar. 2012.
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