3D Printing: Are we there yet?
Why a technology developed in the 80s still is not ready to be capitalized upon
Envision a machine that can print any object imaginable from kitchenware to spare parts for your bicycle – meet the world of three-dimensional (3D) printing. 3D printing technology allows anyone to produce tangible 3D objects from a computer aided design (CAD) model. 3D printers construct objects, layer-by-layer, using a variety of materials. Eventually, every home could have a 3D printer and the way consumer products are distributed and consumed could be radically altered. Yet, while this technology is hailed as remarkable, like any utopian vision of the future, these ‘revolutions’ take time.
Currently there are two dominant players in the 3D Printer industry – Stratasys and 3D Systems. The two companies have minimal cash flows but are faced with a rapidly growing market. The 3D printing industry currently has revenues of $1.4 billion and is expected to grow to $3.0 billion by 2016. Currently, the main consumer for 3D Printers and 3D printing services are those used in professional and industrial applications. Stratasys is unique from 3D Systems as it has remained predominantly positioned towards serving large industries rather than attempting to serve the consumer market. However, Stratasys is starting to show interest in courting a consumer-like market with the 2011 launch of their “low-priced” “Mojo” printer line. Considering their lacklustre cash flows and recent disappointing earnings announcements, Stratasys needs to be very judicious about where it spends its money. It both needs to survive the coming years, but also maintain its strength so that in 20 years when the revolution truly flourishes they have generated a sustainable competitive advantage that allows them to dominate the market. With an emerging technology there is always danger that a start-up can disrupt the major players, Stratasys will need to make specific, well-timed decisions over the next 20 years to ensure it wins. A framework to help guide Stratasys is an understanding of the future of this industry and the three phases it will play out in:
Phase 1: Mass Customization Revolution in Industrial Manufacturing (Today)
3D printing allows near unlimited product variability that would be impractical through traditional manufacturing. A company using 3D printers can manufacture low-volume batches of different products at the same cost while companies using traditional manufacturing rely on large batch sizes to generate efficiencies. Looking into the future, this trade-off is unlikely to change, but companies may be driven to choose customization to match their customers’ individual needs and wants. The new generation of consumers are growing up among mature industries that offer hundreds of similar products with minor differences. In mature markets where overall sales growth has essentially flat-lined, companies can drive sales by creating and expanding product families. Take for example the Honda Civic product family that consists of seven models, each one offering a slightly different feature to appeal to different customer requirements. While Honda is selling more cars now than ever in its past, it typically sells less of any individual product due to high consumer selectivity. 3D printing allows companies like Honda to enhance the value of their products by introducing more customization options than their competitors.
In the short run, manufacturers in most industries are likely to adopt 3D printing in some form to reduce operation costs and improve efficiency. Manufacturers typically aim to reach economies of scale by producing large volumes of a product in order to offset fixed costs such as tooling an assembly line, investments, overhead, and many others. 3D printing eliminates the need to retool a line, stretching economies by extending the cost of one production line over many products. Additionally, the costs of producing small batches of a part using traditional manufacturing methods would be substantially greater than producing it with a 3D printer. Manufacturers in the aerospace or medical industry also require parts of increasingly greater complexity that are difficult, inefficient, or in some cases even impossible to produce with traditional manufacturing. As manufacturers become aware of the benefits created between 3D printers and traditional manufacturing processes, they will adopt 3D printing as a complimentary solution to their operations.
To navigate this phase Stratasys needs to be disciplined in its spending and only focus on value added segments of the market. The consumer market should be entirely as currently there is no appropriate infrastructure to support any mass consumer adoption of this technology. Further, this technology is so far from the mind of the average consumer, that any notion of brand building in a B2C environment is frivolous. Overall, investment in this segment is a waste of money – Stratasys should exit and leave the market for 3D Systems. When Stratasys re-enters the consumer market it will have a fully formed, well integrated solution that will be rapidly adopted.
Given this projection, Stratasys should halt sales of its low end product line – the Mojo. The Mojo is an “in-expensive” professional printer that encroaches on the consumer market where there are many obstacles. The consumer market is in its infancy and realizes little value from what 3D printers currently offer. The average cost of a consumer 3D printer is around $5,000 and is limited in what it can produce – a small variety of parts such as jewelry and action figures. Additionally, Stratasys’ current technology is specifically ill-suited for the consumer market. Its printers balance on a fine line between print speed and print quality. Printing high detailed, smooth parts can easily quadruple the print times; however, without the additional focus on quality, the part will not meet consumer satisfaction.
Rhetorically, the first mover enjoys the strongest market advantage, but in the 3D printing industry this may not necessarily be true. Choosing to launch too early may cripple a company by securing capital in insolvent inventory while attempting to appeal to a new and undeveloped customer segment. In such an environment, it will be beneficial for Stratasys to allow other companies to take these risks and make mistakes before claiming market share by introducing products and services that avoid those mistakes. While the consumer market is growing at a high rate in terms of unit sales, the dollar growth rate is considerably less attractive. Stratasys should continue to develop its professional and industrial printers through R&D and M&A’s to increase technological capability and to decrease prices. Through this, Stratasys will make investments that generate sales today while developing its competitive technology for the future.
In general, Stratasys should change strategies to match the current 3D printer growth phase. Through phase one, Stratasys needs to improve sales of its professional and production printers to mid-to-large sized companies. A powerful way to do so is by creating an in-house pro-bono consulting branch aimed at analyzing potential customers’ operations for areas where 3D printing can enhance output or save money. The branch will consist of engineers and commercial consultants who will travel to clients and offer their professional insight into company specific benefits offered by 3D printing. Furthermore, these consultants will double as a full-time sales force, dedicated to convincing clients that they need Stratasys’ 3D printers to move their businesses to the next level. It’s reasonable that Stratasys can drive enough sales of its printers whose margins lay at 53% to receive a healthy return on this project –all the while enhancing business awareness and overall brand equity for Stratasys.
Stratasys’ competitor, 3D Systems, is currently establishing a consumer printer base that will leave the company overextended should the consumer market fail to provide expected growth. The investment made into its consumer line will turn into capital tied up in a fairly illiquid inventory, presenting a strain on its cash flows. Therefore, 3D systems will have fewer resources to operate a competitive consulting service. There is always the possibility of Stratasys missing out on an incredible opportunity if the consumer market exceeds early growth expectations; however, if this occurs, 3D systems may find it more economical to focus on the consumer market and allow Stratasys to easily capture industrial market share.
Phase 2: “Retail”izaiton
The true value of a 3D printer lies in the objects that can be printed. Things such as replacement car parts, furniture fixture, and other small or unique items just became simpler for consumers. This value is what will drive the sale of 3D printers, but it will be bound by the 3D printing technology. Within five to ten years, 3D printing used by manufacturing will hit a specific level of quality and general awareness leading to adopting by centralized retail services targeting other engineering firms and small manufacturing companies. The retail locations will offer customizability including options for all choices of material and sizes to the customer. Similar to the FedEx Office business model, customers will find this service attractive because it offers the highest quality object – printed from a machine that is far more expensive than what is affordable to them. Rather than directly compete in such a business, Stratasys should partner with an existing retailer to leave a viable exit strategy open. As production 3D prints require post-production finishing, experienced staff will be required to deliver effective c
ustomer service – limiting the ability for Stratasys to use a franchise model. Alternatively, as 3D printing technology improves and consumers no longer value retail locations, Stratasys will have difficulties liquidating these stores. Given the goal of staying mobile for phase three, Stratasys is best suited to cap the upside in this retail industry by partnering with an existing retailer, saving the real capital investment for later. Stratasys should sell printers to a location such as Wal-Mart, employee qualified staff to tend the locations, and then lease back the retail space and printers over the next five to ten year period to sell 3D prints.
Additionally, when 3D printing material costs become low enough, traditional retailers may adopt 3D printers to replenish stock, and promote customized product sales (i.e. printed shoes with customer’s name). Wal-Mart could use 3D printers to produce specific products as they are sold and replenish shelves as they empty, reducing its reliance upon traditional supply chains. However, the dependence on the price of 3D printing materials is very firm. A retailer will not give up significant margins for the sake of variability, and will only switch to 3D printers if the added sales generated from this variability overcome the lost margins.
Before these retail changes occur, Stratasys should investigate expanding its Redeye manufacturing service. The Redeye service allows customers to send in 3D CAD images to be printed by Stratasys using a top-end printer, with the part being shipped to the customer. Consumers may be more willing to purchase a 3D printer if they are given the opportunity to see the technology demonstrated. One such way to access consumers would be through this Redeye service, while another would be to establish a 3D printing “factory” in New York City. This facility would also double as showroom location for Stratasys where the public would be able to see the printers working and handle printed objects. While the rent in New York City will be higher than an industrial park, the value added for Stratasys will be the additional mindshare gained. Stratasys will become the first name to arrive in consumers’ minds when they hear 3D printing.
Finally, Stratasys should invest in additional products and features for their current 3D printers. While it is too early to sell the consumer printers themselves, it is not too early to invest in certain secondary markets that will bolster the competitive advantage of its products. Success in this market will not be determined who has the fastest printer, or the largest document library – it will be determined on who has the full ecosystem required to deliver value to the consumer. Therefore, this full ecosystem is something that needs to be built over the next 20 years, so that when the revolution hits consumers choose Stratasys.
There are two key value adding sectors Stratasys should invest in. First, Stratasys should begin development of an extensive software suit to solve all of the customer’s needs. Currently, a Stratasys printer ships with printing software, but, the CAD development is done on other software. Secondly, Stratasys should begin developing a CAD file library to offer extensive production selection. While there are many companies that host online libraries containing CAD files available to the public, they are currently free to access. Since this is free it does not make sense to acquire one of these companies, rather Stratasys should develop its own incorporating public domain.
Development of this CAD library can be handled in house, and at a fairly slow rate, to be released around the same time phase two begins. However, development of the Software will require a significant time and cash investment. Regardless, Stratasys has the time (20 years) to invest in the code and programmers to make this happen. By developing a vertically integrated system during phase two, Stratasys will be primed to explode in phase three.
Phase 3: 3D Printing Utopia
While the traditional focus on 3D printing highlights the idea of 3D printers invading the homes of consumers, this is a rather abstract thought in the current development of the industry. Upon successful adoption of 3D printing technology in phase 2, consumers may begin to find that they can print almost anything and everything from the comfort of their home. In this 3D printing utopia, consumers will find a wide variety of product CAD files and 3D printers available. The enhanced convenience and the unique feature selection offered will lead to thorough adoption of 3D printers by consumers. Therefore, the company that offers a complete 3D printing package will be strategically placed to dominate in this market.
Upon consumer household penetration, 3D printers will likely deliver margins at a fraction of the 53% Stratasys enjoys today – future competition and low unit-prices demanded by consumers will be major contributors to driving down profit margins. Since sales of 3D printers will offer little to the bottom line themselves, companies rely upon the razorblade model. Using this model, Stratasys can enjoy profits from repeat purchases of high margin consumables (i.e. 3D printer material) and licensing/sales of intellectual property (i.e. downloadable CAD content) driven through its customers’ necessity for these products after purchasing a printer.
Stratasys’ stock price has skyrocketed, rising almost 400% from two years ago, signalling a sudden awareness of the enormous potential 3D printing has to offer. Whether this sudden awareness is hype or not, it is imperative for the company moving forward to conservatively predict industry trends and follow a strategic plan that aligns with those predictions. Overestimating the 3D printer market can set a company back further than if it had originally underestimated the growth. That is not to say that Stratasys should aim to underestimate the market, but instead the company should take realistic view, focusing on projects that offer profitability in the near term, rather than prematurely investing in future sales.