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Thursday, March 18th, 2010

The Next Industrial Revolution

In my previous post “The New Industrial City” I argued that cities should not turn their back on manufacturing but instead embrace it and seek to build a future where industry and “making things” still played a key role. But this would be an industrial city based on smaller scale specialty and craft manufacturing, not large scale, routinized production.

The January edition of Wired magazine ran a lengthy but incredible story of how this future is starting to take shape called “In the Next Industrial Revolution, Atoms Are the New Bits.” As the title implies, the author argues that radical changes in design and supply chains, along with extremely low cost fabrication technology that is coming online and business practices honed in the high tech world, make starting a manufacturing company today much more like starting a dotcom than an old school heavy industrial concern. But as with the internet before it, these new technologies are being exploited first and fullest outside the traditional manufacturing heartland, with ominous implications for the future of places that by right should own manufacturing.

One of the stories is that of Local Motors in Boston. They’re creating a $50,000 car called the “Rally Fighter” based off the kit car concept. One unusual aspect of this is that they crowdsourced the design and have released it under a Creative Commons license. The actual engineering and componetry under the hood are mostly off the shelf.


Image via Gear Heads

This is all being done in an extremely low overhead and capital-light manner:

Local Motors plans to release between 500 and 2,000 units of each model. It’s a niche vehicle; it won’t compete with the major automakers but rather fill in the gaps in the marketplace for unique designs. Rogers uses the analogy of a jar of marbles, each of which represents a vehicle from a major automaker. In between the marbles is empty space, space that can be filled with grains of sand — and those grains are Local Motors cars.

Local Motors has just 10 full-time employees (that number will grow to more than 50 as it opens build centers, the first of which will be in Phoenix), holds almost no inventory, and purchases components and prepares kits only after buyers have made a down payment and reserved a build date.

There are already obvious lessons to take from this. First, note the small scale, specialty nature of the product and firm. Second, the ability to get into what would have once been a formidable business using modern manufacturing and social-networking techniques. Third, while not a per-se high tech product, the corporate HQ is Boston, a traditional startup hub. Manufacturing is in Sunbelt Phoenix, likely chosen to be close to California where I suspect most of these cars will be sold. This reinforces the pattern of the tech hubs getting a high value but very narrow job base, with troubling implications for them. But also shows how the Midwest and other old school manufacturing bases are getting completely shut out.

The story does indeed seem to be playing out just like high tech all over again, sans the Silicon Valley “plan to take over the world or we won’t fund you” model. This is the type of “business model” led innovation I’ve often argued other places should attack. But again, the ecosystem for this new industrial economy is being built – and it is being built in places that are already winning in the high tech race:

A garage renaissance is spilling over into such phenomena as the booming Maker Faires and local “hackerspaces.” Peer production, open source, crowdsourcing, user-generated content — all these digital trends have begun to play out in the world of atoms, too. The Web was just the proof of concept. Now the revolution hits the real world.
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To see this model emerging in the real world, you need only visit TechShop, a chain of DIY workspaces that offer access to state-of-the-art prototyping tools for around $100 a month.
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This is an incubator for the atoms age. When TechShop founder Jim Newton went looking for an executive to run it, he quickly decided on Mark Hatch, a former Kinko’s executive. The analogy is apt: In the same way that Kinko’s democratized printing and, in the process, created a national chain of service bureaus, TechShop wants to democratize manufacturing. It now has two additional locations, in Durham, North Carolina, and Beaverton, Oregon, and has plans for hundreds more. One of the spots being considered is San Francisco, within the facilities of the much-shrunken San Francisco Chronicle. The irony is delicious: the seeds of tomorrow’s industry growing in the ashes of yesterday’s.

Only a coastal dweller could see locating a startup in San Francisco as irony, but I digress.

Note the list of places where Tech Shop is located: Menlo Park, CA; Durham, NC; and Beaverton, OR. The usual suspects.

Interestingly, some months ago I was forwarded an article about Tech Shop by an Indianapolis entrepreneur who is passionate about building a startup culture there. He was wondering if maybe a Tech Shop like facility could be built in Indianapolis. One of the other folks on the list, an Indy skeptic, said the region’s “state of mind” is so different from places like Portland and Raleigh-Durham as to make any uptake difficult. Undaunted, my friend decided to see if he could get anyone interested in a Tech Shop Indianapolis concept. He couldn’t.

This I think shows the challenge for the Midwest and other regions outside of the established tech zones. The problem is cultural. These places have a set of aspirations, established business practices, social structures, and idea of the good life that was formed in an era of large scale industrialsm. The new era is radically different. As the same mindset and business practices that led to the high tech era get applied with success to different, albeit related, fields, it shows that the true secret sauce isn’t “high tech” or anything else. It’s an entire approach to business for the 21st century:

In the mid-1930s, Ronald Coase, then a recent London School of Economics graduate, was musing over what to many people might have seemed a silly question: Why do companies exist? Why do we pledge our allegiance to an institution and gather in the same building to get things done? His answer: to minimize “transaction costs.” When people share a purpose and have established roles, responsibilities, and modes of communication, it’s easy to make things happen. You simply turn to the person in the next cubicle and ask them to do their job.
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Now, working within a company often imposes higher transaction costs than running a project online. Why turn to the person who happens to be in the next cubicle when it’s just as easy to turn to an online community member from a global marketplace of talent? Companies are full of bureaucracy, procedures, and approval processes, a structure designed to defend the integrity of the organization. Communities form around shared interests and needs and have no more process than they require. The community exists for the project, not to support the company in which the project resides.

Thus the new industrial organizational model. It’s built around small pieces, loosely joined. Companies are small, virtual, and informal. Most participants are not employees. They form and re-form on the fly, driven by ability and need rather than affiliation and obligation. It doesn’t matter who the best people work for; if the project is interesting enough, the best people will find it.

The importance of flexible, network-based approaches has been amply documented by AnnaLee Saxenian and others as well.

That’s the real shift that needs to happen. Most Midwest cities I know have some sort of a startup base and network economy but it is generally built around a pretty shallow talent pool of people. It’s as true in Chicago as it is in Cincinnati. Much of the rest of the community is oriented around traditional approaches, and outside of the biggest cities everything is almost entirely “smokestack chasing” based.

Cultures don’t get changed over night. It is going to be a journey. The key is to make sure you nurture the flame so that it can grow into something, and not end up having it flicker out as your key entrepreneurs and other people making the new economy happen end up leaving out of frustration or for other reasons.

The startups and tech culture that exists in pockets spread across the country may not be huge, but it is there. And with the internet and this new global, virtual supply chain, the playing field is more level than ever. You don’t have to move to California. The networked economy can potentially work in your region’s favor. That provides some room for optimism that some cities are going to get it right and one day join the club of new economy winners.

12 Comments
Topics: Economic Development, Globalization, Technology, Urban Culture

12 Responses to “The Next Industrial Revolution”

  1. cdc guy says:

    Great post, Aaron.

    In a phrase: Garage Shop 2.0.

    Back in my manufacturing days, there were a few “rapid prototyping” and contract-manufacturing shops that offered similar services. It was the early days of computer-controlled CNC manufacturing equipment. In Indianapolis, that kind of outsourcing never caught on because companies (typically Tier I auto or electronics suppliers) were too hidebound and proprietary; the engineering managers didn’t want to trust outsiders with their “babies”…exactly what you say is happening today.

    The kinds of light-manufacturing operations you describe might go well in transitional midtown areas where there are old multi-story (too small and too inefficient for modern scale uses) warehouse and manufacturing facilities.

  2. Jim Russell says:

    Clicking through to your post about Saxenian’s research reminds me of the greenfield/brownfield economic development discussion. Roughly, that could explain the diverging fortunes of Silicon Valley and Boston that Saxenian explored.

    I don’t think the transformation of the region’s culture is necessary. We could engineer greenfield zones, like what we now see happening organically in Detroit and more intentionally in Youngstown.

    Furthermore, it tends to be people not of the regional culture who are the ones embracing new business paradigms. Consider your own words:

    While famous as one of the bluest states, Massachusetts is socially conservative in many ways, and highly risk averse. This is the land of the suit and tie, and the difference between that environment and California casual was more than just a surface thing.

    How did risk averse Boston become one of the usual suspects in today’s post? Outsiders.

  3. Alon Levy says:

    If I were a Midwestern Governor, I’d ask myself, how much venture capital flowed into Japan in the 1950s? How much into South Korea in the 1970s?

    There are a lot of directions you can go in once you realize the answer in both cases is “hardly any.”

  4. Well, Boston may have gotten eclipsed by Silicon Valley, but it is still the #2 tech center, so it is hard to really call it a brownfield. But clearly the ability to start from scratch out west helped Silicon Valley. The fact that it was a greenfield with outsiders (many of them from the Midwest) played a role. But there have been lots of booming greenfield cities in America and none of them developed the unique Silicon Valley culture and business model. I think greenfield has something to do with it, but also the cultural model that grew up there was very unique.

  5. Alon, what about the South Korea and Japan models do you think are applicable to US states?

    I haven’t studied them in detail, but have some familiarity with Japan. The Japanese system involved many things that would appear to be very difficult to transfer to the US or the state level: keiretsu, lifetime employment, significant state aid to industry via MITI, a closed domestic market (even without any barriers, penetrating the Japanese market would be extremely daunting), and an artificially low yen.

    However, Japan never lost its commitment to craft, quality, and R&D. It also has an aesthetic sense respected around the world. This left them less vulnerable to offshore competition.

    Japan is not exactly a big success story these days though, despite its robust exports. However, a lot of the problems of Japan would appear to be demographic in nature.

  6. cdc guy says:

    “How did risk averse Boston become one of the usual suspects in today’s post?”

    MIT plus Harvard.

    There is no coincidence in the two top tech centers being near where a top engineering school/top business school pair exists.

  7. cdc guy says:

    The question is whether that’s still the success recipe for the 21st century, or whether tinkerers without a full formal education will drive a garage-shop manufacturing renaissance.

  8. Jim Russell says:

    Aaron,

    My point is that Boston had some “brownfield” characteristics that put it at a competitive disadvantage. Culture is one of the brownfield/greenfield variables (e.g. parochialism).

    That Silicon Valley was/is unusually immigrant-dominated is well documented. The region stands out from any place of innovation. But looking at that second tier “tech zones”, they are outsider driven.

    Boston became the #2 tech center in spite of the local culture. I think it is primarily a matter of attracting a critical mass of outsiders, not anything in the soil.

  9. Alon Levy says:

    Aaron: well, yes, MITI was one of the reasons. The keiretsu’s easy access to credit was another. Korea had something similar – the chaebol didn’t own banks, but the government lent them money freely. But there were more: those governments incentivized saving, not spending – as did the governments of Hong Kong, Singapore, and Taiwan, which did not engage in as much industrial policy. The education-to-income level was high, making manufactured exports more competitive. Some of those issues can be replicated in stagnant US regions; some can’t.

    Anyway, Japan’s problem is that it’s in a liquidity trap. The US is in the exact same situation right now. Demographics are a problem, but not a very big one. Korea has the same demographic issues, but it’s still growing quickly because it’s not in a multi-decade depression.

    CDC Guy: it wasn’t just MIT and Harvard. New England’s littered with universities; even poor small towns have universities that have existed for a couple of centuries. In the 1950s, it seemed quaint. Then the industrial economy started needing advanced science degrees and Boston rebounded. (The small towns just export their grads to Boston, mostly.)

    Jim: greenfield areas can be just as parochial as brownfield areas. The Bay Area is actually a good example: the local planners are currently wasting billions on gold-plated transit ideas, and refuse to consider any example of success elsewhere. When one person mentioned they did something different in Japan, resulting in less infrastructure to build, the local planner replied, “Asians don’t value life the way we do.”

  10. Jim Russell says:

    Alon,

    Like Aaron, you describe the same dynamic I describe. Bay Area parochialism helped to fuel Silicon Valley. The tech boom didn’t happen on established (i.e. brownfield) turf. Most of it occurred on farmland. It didn’t hurt that Stanford was located in the middle of this nowhere. But the proximity to a major urban center was also important in terms of foreign-born talent.

    As for parochialism, some places have more of it than others. However, everyplace has it. To the extent that is mitigated defines the ceiling of innovation. I’m skeptical that there is some indigenous attitude that needs to be corrected. I don’t buy the Max Weber thesis.

    Parochialism is anti-innovation. The local navel gazing is the deal killer. If you have too many insiders, then forget Google Fiber.

  11. Alon Levy says:

    Jim, the parochialism I’m describing in Bay Area planners doesn’t really distinguish Silicon Valley from San Jose, at least not anymore.

    I don’t buy the Weber thesis, either. My reason for bringing up Bay Area parochialism is precisely to argue that cultural deficiencies exist everywhere, and don’t seem to prevent success.

  12. Jim Russell says:

    Alon,

    While I agree that cultural deficiencies exist everywhere, I think the evidence is strong that they can and do prevent success (i.e. the success Aaron is describing). Sean Safford’s research is a good example of the cultural legacy cost effect.

    http://www.hup.harvard.edu/catalog/SAFWHY.html

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