By James Saft
(Reuters) – It may be the biggest thing to hit the global economy since the assembly line, and how you play it might just determine your success as an investor in the coming decades. Additive manufacturing, or 3-D printing, has the potential to radically change how products are designed, where they are built and what labor and material inputs are used. If it takes off, it could radically change global trade flows, delivering a huge boost to the indebted and aging developed world, while threatening the fundamentals which underpin manufacturing success in China and some other emerging markets. 3-D printing is a process under which highly customizable products are literally sprayed into existence using something not too dissimilar from an ink-jet printer. Originally used mostly to provide build prototypes, it is now being used for actual production, notably by a unit of EADS which is working on developing 3-D printing-produced aircraft parts. The advantages are huge: easier customization, lower labor costs and, potentially, a severing of the reliance on a supply chain, a feature of manufacturing since the days of Henry Ford.
WHO BENEFITS – GEOGRAPHICS The global supply chain system, with parts of a product built in Asia or Europe for final assembly in the U.S., for example, has built up in response to the huge economies of scale needed in old-fashioned manufacturing. Build a factory in high-wage Germany, for example, and make it work through excellence and with huge investment in equipment to make production economic. Or build in low-wage China or Vietnam and arbitrage low wages Since 3-D printing may not need these economies of scale, look for production to move closer to the end consumer. Also, because so much of the value a 3-D printing operation is in its intellectual property, look for companies to favor places that offer better legal protection of IP rights. That makes this great news for the U.S. and terrible for China. And though Germany and Japan offer better IP rights, they may well suffer because both have such huge sunk costs in the existing global supply chain system. So broadly, this is dollar and U.S. asset positive, while being a negative for the emerging markets and other places that have done well out of the existing system. “America’s dominance in this field will be a feature for a very, very long time,” George Magnus, senior economic adviser at UBS in London said. “If not the end of outsourcing, it is a big shock to the outsourcing system.” A U.S. manufacturing renaissance based on 3-D printing would also, of course, be hugely positive U.S. debt, which would benefit from the improved fiscal position this implies. It really is hard to over-state what a lucky break this could be for the U.S., playing to its strengths and compensating for its weaknesses. It may also not be all bad news for China, Japan and Germany, all of which face tough demographics in coming years. As 3-D printing requires less labor it may offer a way to pay for all of those retirement benefits and retire all of the debt that now looks worrisome.
SECTORAL WINNERS Playing the sectoral winner and losers is even more speculative, as this is going to be a long process rather than simply an event. That said, the rule of thumb is that successful implementation of 3-D printing in a given industrial space will be a threat to incumbents with a strong franchise. Those existing manufacturers and component makers will have huge sunk investments that they needed to achieve economies of scale, and will have to decide if they will switch, and adapt new techniques, or accept managed decline. This implies a lot more volatility in the value of manufacturing shares, with big winners and big losers. That may actually be an argument for investing broadly in sectors that implement 3-D techniques, on the theory that profitability will rise in the sector and that returns will rise overall to compensate for volatility and a temporary increase in the need for capital. On this view, trying to pick winners and losers within a sector may be too risky, with the big call being how well a given sector is to using 3-D techniques. Again though the ability to customize and to innovate that is engendered by 3-D techniques means that a there will presumably be Apple-like category-busters, with new products at high price points, which arise. Finally, one group that will undoubtedly be hurt by the rise of additive manufacturing are those companies that provide logistics and shipping to the existing supply chain. Why pay to ship a fly a part around the world when you can spray one on site? I have to emphasize, again, that this is all highly speculative and will play out over a huge distance of time and space. It will be a long road, and there will be a lot of money made, and lost.