Supersmart Manufacturing Tools are Lowering Prices on TVs,
Bulbs, and Solar Panels
Electronics manufacturers are finding it
increasingly difficult to stay ahead of low-cost competitors, says Willy Shih.
As technology commoditization begins speeding up again, it’s a
great time to be a consumer in search of a state-of-the-art flat panel TVs, but
less comfortable for manufacturers hoping to make a profit. That’s according to
recent research by Willy Shih, Robert and Jane Cizik Professor of
Management Practice in Business Administration at Harvard Business School, who
recently published a paper on the topic of technology commoditization in MIT Sloan Management
Review.
According to Shih, manufacturers are able to duplicate the
latest technology used in cutting-edge products much more quickly and cheaply
than ever before. The reason? Tools are being developed that have more
knowledge baked into them, meaning manufacturers don’t have to develop as much
custom technology to compete.
Sean Silverthorne: Can you explain what you mean when you
say that knowledge, particularly tacit knowledge, is now being embedded into
the tools and building blocks used to make products?
Willy Shih: Knowledge is one of the core resources in a
company, and translating that knowledge into processes that produce products
and services is how companies create value. There are two types of
knowledge—explicit and tacit. Explicit knowledge is something that is
documented and is something we can search for. Maybe we look it up in a
library, a recipe book, or an instruction manual for making something. As long
as you can write it down or clearly explain it so other people can understand
it and duplicate what you have done, it is explicit. Tacit knowledge, on the
other hand, is trickier. It is know-how that is carried around in the heads of
people that hasn’t necessarily been written down, and combines skills, prior
experiences, and ideas that are not easily expressed. “We can know more than we
can tell,” was how Michael Polanyi described it in his book Personal
Knowledge in 1958. Sharing tacit knowledge is obviously harder, and that’s
why it is often extremely valuable.
Knowledge gets embedded in tools when machine makers distill
specialized know-how that might be critical to making something into mechanisms
within that machine that allow the process to become routine and repeatable.
Let’s use an example. Many of us have seen glassblowers who manipulate a
glowing hot lump of molten glass and shape it into a bottle or some other
shape. That artisan skillfully extracts the glass from the furnace when it is
at the right working temperature and uses a variety of tools to blow, cut, or
deform it into the desired shape using skilled hands and air pressure from the
mouth.
These are skills that he or she developed over many years of
practice. Can she explain how to do it to an apprentice? Probably, but it will
take time and practice to learn all the tricks and perfect the art, making a
lot of mistakes along the way. Yet there are machines that do produce all kinds
of glass objects every day, from mason jars to windscreens for cars. What the
machine makers did was devise mechanisms to incorporate that know-how. By
carefully measuring and observing, they figured out the right temperatures and
pressures and devised molds or handling devices to produce the right shape, or
the right sequence of temperatures to heat, then cool and anneal the workpiece.
They took a process that used a lot of tacit knowledge that required a lot of
experience and practice to perfect and made it routine and predictable.
Production tools have always incorporated some amount of knowledge;
that is the very essence of what they are, after all: instruments for making it
easier to produce something. What the paper points out is the level of
sophistication of this knowledge embodiment has increased dramatically, making
it easy to make things that have long been very difficult or even impossible to
produce otherwise. All you need is the money to buy the tool, and you can go
into the business of making the widgets that the tool produces. And these days,
those tools are not only for production, but they are also the tools for
designing things—the computerized design and modeling systems for sophisticated
electronic and mechanical parts. They make it far easier to design things like
the automatic transmission of a car or a complex computer chip than what we
used even a few years ago. You don’t need a generation of experience anymore;
design and production are getting democratized and more accessible through the
widespread availability of such tools.
Silverthorne: What’s an example of this commoditization
occurring in practice?
Shih: We see much of this commoditization happening at the
level of many intermediate goods—components—that get incorporated into other
products. For example, the extremely complex process of making the flat panel
displays that go into television sets has been commoditized. As consumers,
we see this in the ever-decreasing retail selling price of flat panel TVs. The
screen sizes get bigger, the resolution moves from HD to Ultra HD to 4K, and
the prices keep dropping. This happens in spite of the fact that it costs $6.5
- $8 billion to build an advanced flat panel factory. We see the same
phenomenon in energy-efficient LED lightbulbs, which keep getting cheaper. And
solar panels.
One way to think about what is driving this style of
commoditization is economics. Most manufacturers gave up making their own
manufacturing tools long ago. They couldn’t afford to, as it was too expensive,
and the technology was getting too complicated and specialized. A company that
specializes in making tools, on the other hand, can spread those costs over
multiple customers. The latest generation lithography tool for making
semiconductor chips costs over €100 million [$116 million] apiece (and a
semiconductor fab needs multiple units), and has taken years to develop. Only a
specialist who can sell to many customers can afford to do it. And there’s the
rub—tool makers are motivated to sell to as many customers as possible—which
means everybody in the business or who they can convince to enter the business.
So, the capability to make that complex tool-dependent product becomes
accessible to everybody who has the money.
Many such cases have been worsened by government subsidies
designed to encourage manufacturing growth in specific areas. At the height of
the boom in LED manufacturing, Chinese local governments would pay for 100
percent of the cost of the metal organic chemical vapor deposition (MOCVD) tool
used to make LEDs, so naturally what followed was a dramatic over-expansion of
capacity and commoditization of the output. No flat panel display factory
anywhere in the world is built today without billions of dollars in subsidies.
The groundbreaking in Wisconsin that President Trump just attended is receiving
around $3 billion from the state. So that industry goes through frenzies of
overbuilding, which is inevitably followed by excess capacity and a collapse in
pricing.
Silverthorne: Over the next two to three years, what
products are particularly susceptible to being commoditized?
Shih: I think high volume, high tech hardware products
where the production process involves more machine/automation and less labor
are vulnerable, especially anything incorporating electronics. It’s also
instructive to watch industries China is subsidizing where there are dramatic
capacity expansions. It’s actually amazing how cheap (for the level of quality
you get) it is to buy a camera lens for a smartphone or things like image
sensors. I think components that support IoT will almost certainly face this
pressure. Again, we’ll see this primarily at the level of intermediate goods,
and that will pass through to lower selling prices on a range of products.
On the design tool side, I think the commoditization will be
more directly visible. One form it will take is the democratizing of
design—expanding access to more users who couldn’t afford to produce such high
quality work before. It used to take a company with a lot of resources to do
sophisticated engineering designs, but now a startup with a computerized design
system and a 3D printer can make amazingly sophisticated parts.
One interesting situation that I wrote a case on was the company
Rhythm & Hues, a well-known visual effects (VFX) company. The case question
was what circumstances led them to (1) win four Oscars for their work
on Life of Pi, (2) win a British Academy of Film & Television Arts
(BAFTA) award, and (3) file for Chapter 11 in the same 30-day period? Well the
design tools for visual effects incorporated more and more know-how, so
plenty of people around the world could acquire the capability for doing the
VFX work. The Hollywood studios lowered their costs by off-shoring the VFX
work, and Rhythm & Hues had to compete with lower cost regions and with
off-shore contractors who received subsidies. You didn’t need years of
experience and crafts skills so much anymore.
Silverthorne: What are the implications of this
acceleration for tech companies, and what can they do to protect themselves?
Shih: Companies need to understand their vulnerabilities.
If you are a company that uses tools with this kind of high embodiment of
know-how and you can’t protect complimentary assets like recipes or trade
secrets vis-à-vis how you use them, you are likely already facing or soon will
face commoditization pressures because there just aren’t many entry barriers
that can protect you. If your suppliers are in this position, it may actually
help you over the short term, but you really need to think, what is the
competitive moat around your business as those suppliers move downstream, potentially
into competing with you, as they struggle to earn some kind of return? If your
inputs are all becoming commodities and you don’t have a lot of differentiating
complimentary assets as part of your value chain, you will likely be impacted
next.
To me it’s a tough challenge. As the tools get better and
cheaper, it’s not enough to just crank out products with them. You have to add
value in other ways, maybe with differentiating software or wrap-around
services, or you have to move upstream to more complex systems or push the
frontiers of what’s doable. You have to have a major part of your value-add in
hard-to-replicate areas that require expertise or experience that you can’t
just buy off the shelf in some advanced design or manufacturing tool. An industrial
design firm was recently showing me some of the new software packages that can
provide “good enough” design solutions—solutions that formerly constituted
their bread and butter work. They have had to move up-market to more complex
work that requires much more client hand-holding. This is a dangerous
pattern—it’s Clay Christensen’s innovator’s dilemma.
It’s interesting to watch what Apple has done over the last
decade. They formerly were heavy users of commodity products, often made by
competitors. But they have shifted to designing more and more of their own
microprocessors and ancillary silicon chips as well as unique,
difficult-to-produce hardware. They recognized the commoditization and the
dangers of being strictly assemblers of commodity parts. And, of course, their
penultimate differentiation has been software. But, as Android software
continues to improve, they are facing highly competent competitors like Huawei,
Xiaomi, Oppo, and Vivo, who tap the power of the commodities marketplace.
Interestingly, Huawei is starting to follow Apple’s path as well.
Commoditization has a lot of benefits for consumers, but it’s really tough on
manufacturers.
by Sean Silverthorne
https://hbswk.hbs.edu/item/supersmart-design-tools-drop-prices-of-tvs-bulbs-and-solar-panels?cid=spmailing-21425667-WK%20Newsletter%2008-08-2018%20(1)-August%2008,%202018
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