In part one of this series, I discussed the declining productivity growth rate in US manufacturing through the lens of Michael Porter’s 1990 text The Competitive Advantage of Nations, and started to explain how the rising additive manufacturing (AM) industry should be viewed in that context.As I detailed, Porter views the rate of productivity growth as the telltale sign of how competitive a given geography’s industry is within its overall international field of business activity.I say “geography” instead of nation because, as I mentioned in that first post, Porter’s ideas apply whether we’re talking about a nation’s industry, a region’s industry, or even an individual firm’s activity.
This is because of one of Porter’s signature concepts, the industrial ‘cluster’, which you’re likely familiar with to some extent, even if you’re unfamiliar with its author.If It’s All About the Cluster, Why Focus on the Nation? Although the cluster is the primary ‘unit’ of analysis, the national environment still has singular significance for analyzing competitive advantage.This is true regardless of the existence of globalization.
Porter, in fact, fully conscious that he was writing in an era when globalization was becoming more or less the “natural” state of the world, nonetheless argued that national business environments were more important than ever in determining industrial success: “As globalization of competition has intensified, some have begun to argue a diminished role for nations.Instead, internationalization and the removal of protection and other distortions to competition arguably make nations, if anything, more important.National differences in character and culture, far from being threatened by global competition, prove integral to success in it” (p.
30).While the reference to “differences in character and culture” might raise concerns that Porter is setting the stage for an argument based on some form of xenophobia, he is in fact referring to differences in business culture between one nation and another that he and his team of researchers have identified, based on social norms largely dictated by historical processes.A typical example is Porter’s observation that, in Italy, “[t]he company itself is often like an extended family” (p.446), a point he returns to again and again in his analysis of Italy’s increasing importance to international trade in the post-WWII era.
What, Then, is the Cluster? An aspect of Porter’s thinking that, on its surface, seems counterintuitive is his insistence on focusing on microeconomic issues (firms and, especially, industries and industry segments) to answer what was always, prior to him, treated exclusively as a macroeconomic question (“What makes a nation competitive in a specific industry?”).We can understand why this isn’t counterintuitive precisely by defining the cluster.The quickest way to think about clusters in proper terms is to think of nicknames like “Silicon Valley” and “Wall Street”.
I realize the latter comes from the name of an actual street, but of course it is used as a phrase to discuss the New York financial cluster, just as Silicon Valley refers to the cluster of semiconductor and software giants headquartered in California’s San Francisco Bay Area.The ups and downs of Silicon Valley and Wall Street affect the US as a whole, and vice versa, but if we want to understand the history of US dominance in chips or finance, then the primary task is to study the evolution of economic conditions specific to Northern California and Manhattan over certain timeframes: “Competitive advantage is created and sustained through a highly localized process” (p.19).
That physical reality grounds Porter’s thought.The nation comes in mainly as the key shaper of what Porter calls the ‘diamond model’, a deceptively simple framework that has become inextricably linked with Porter’s cluster theory.Image courtesy of Harvard Business School He also includes “[t]wo additional variables…chance and government” (p.
73), which sit outside the diamond but play a crucial part in shaping the diamond’s potential for success or failure.If they’re not included in the diamond itself, it’s because Porter views them as far less continuous influences on an industry’s trajectory than the core four variables.I say the diamond model is ‘deceptively simple’ because each pillar contains its own complex interplay of variables.
Factor Conditions, for instance, comprises five different categories: ‘Human resources’, ‘Physical resources’, ‘Knowledge resources’, ‘Capital resources’, and ‘Infrastructure’ (pp.74-5), and as you can see, each of the five is itself a topic of great complexity.Thankfully, my objective here isn’t to do what Porter did in his book: address a different industrial segment or national economic environment one by one and describe each of its pillars in detail.
Instead, I want to explain why AM is a technological field particularly well-suited to bolstering existing industrial clusters—and helping build new ones—in an era of comprehensive digitalization.The Inherent Synergy Between AM & Industrial Clusters I first became interested in the concept of industrial clusters sometime about four years ago, around the time when the Biden administration released its National Strategy on Advanced Manufacturing, which included, among other things, this statement: “To address these [supply chain] vulnerabilities and improve supply chain decision-making at all levels, technology hubs and industrial clusters should be expanded and better connected so that they can effectively utilize common information platforms and market intelligence.” Early in the next year (2023), China’s State Council announced adoption of “a guideline on accelerating the development of advanced manufacturing clusters”.This led me to contextualize the similar announcements within the framework of “a new Cold War”, which is an idea that has returned to the news cycle lately against the backdrop of the AI arms race between the two superpowers.
All that aside, over the years I’ve come to see that viewing the AM industry in terms of the clusters concept is most valuable insofar as it emphasizes the fact with the greatest direct impact on AM industry activity: the AM industry is a very tiny element within the much, much larger ecosystem of the broader manufacturing sector.It might seem trivial to point this out, but in my experience it’s far too often ignored, and ignoring it ensures you’ll miss what’s driving AM adoption.If you look at the geography of the AM industry, the first thing you’ll notice is that it’s concentrated in an extremely small number of places.
This state-of-affairs might be slightly less true than it was a few years ago, but overall it still holds: AM activity is concentrated in the areas of the world that have already been leaders in manufacturing activity for decades.The list of nations that are top 10 in manufacturing output globally changes slightly from year to year, usually in the bottom half of the list, but until some major change takes place (like rapid industrial growth in India), the top four (in order) will be China, the US, Japan, and Germany.For the top four nations in AM, the only difference is that Japan and Germany swap places.
Only two nations currently in the top 10 in global manufacturing output aren’t in the top 10 in AM: India (#5 globally in manufacturing) and Mexico (#7).The Netherlands and Taiwan are the “replacements” for India and Mexico in the top 10 list for AM activity, at least according to the source I’m working from.Even so, the Netherlands and Taiwan shouldn’t surprise anyone, since both are hotbeds of high-value advanced manufacturing more generally.
Meanwhile, India has been working to ramp up its AM activity for years, and there are signs that AM demand is rising in Mexico, as well.In terms of Porter’s diamond, the relationship between the manufacturing sector at large and the AM industry provides a perfect example of ‘related and supporting industries’: successful AM applications are those that add value in existing manufacturing supply chains.Similarly, AM’s geographic concentration goes beyond its prevalence in the existing leading manufacturing nations: within those nations, AM is concentrated in existing manufacturing clusters.
In the US, for instance, the six states with the largest numbers of manufacturing workers are California, Texas, Ohio, Illinois, Pennsylvania, and Michigan.All those states are also AM leaders, largely because existing manufacturing strongholds drive demand.Detroit’s auto manufacturing cluster stimulates Michigan’s AM industry; the needs of the aerospace/defense and biomedical hubs in Southern California have led AM companies to grow their presences there; Austin is a rapidly growing advanced manufacturing hub, which explains the cluster of AM companies in nearby Pflugerville, etc.
AM & Industrial Upgrading There is nothing new at all about the Western misconception that China’s advantage in manufacturing is the result of low wages and a sacrifice of quality in favor of artificially low prices.This general idea is one of the myths Porter was most concerned with dispelling in his book, except that at the time, the competitor Westerners were complaining about was Japan (p.7).
Long before Porter was writing, and even before the US was the world’s dominant power, at the end of the 19th century and beginning of the 20th, the British Empire engaged in a campaign that led to all products originating from the German market being labeled ‘Made in Germany‘.This was an attempt to associate German exports with inferior standards, at a time when Germany was just beginning to become a major global manufacturing force.The plan backfired horribly as, soon enough, ‘Made in Germany’ came to be viewed as an indicator of high quality.
As Porter repeatedly reiterates, competing on low wages and a race to the bottom in prices applies only to limited categories of highly commoditized, low-margin goods and almost always works only in the short term.Inevitably, for the types of goods that support this model, another country with an even cheaper labor pool will come along and unseat the market leader.Xi’an BLT’s AM complex.
Image courtesy of BLT Instead, as I briefly touched on in part one, sustainable long-term productivity growth comes primarily from industrial upgrading, which depends upon a nation’s commitment to and competence at constant innovation.In a recent post about the National Advanced Manufacturing Conference that China held last month for the first time, I referenced China’s latest Five-Year Plan: “As for the latest Five-Year Plan, which covers this year through 2030, China views its objectives through the lens of the “New New Three.” In contrast to the “Old Three” (apparel, home appliances, and furniture) and the “New Three” (EVs, batteries, and solar), the “New New Three” are AI infrastructure, especially chips; robotics; and next-generation pharmaceuticals.The overlaps between all three of those targets are notable, as is the overlap of all three with China’s constantly accelerating AM prowess.” That is industrial upgrading: from the cheapest tier of consumer goods, to new generations of high-value products that all support the energy transition, to the highest tier of manufacturing.
As Porter notes, nations “will be competitive where they possess unusually high quality institutional mechanisms for specialized factor creation” (p.80), i.e., the underpinnings of industrial upgrading.That doesn’t mean, though, that nations require a heavily government-led intervention in order to effect the changes involved in upgrading: “Government efforts to create advanced specialized factors often fail unless they are closely coupled to industry, because government entities are notoriously slow or unable to identify new fields or the specialized needs of particular industries” (p.81).
In fact, Porter argues that domestic rivalry — robust competition in the home market — is the characteristic most likely to lead to industrial upgrading: “A number of local competitors in vigorous competition stimulates the rapid development of skilled human resources, related technologies, market-specific knowledge, and specialized infrastructure” (p.134).Too much direct government involvement directly contradicts that goal, as it tends to create a favored group of firms whose market position depends on arbitrary advantages.In this sense, the relative lack of industry concentration, a state-of-affairs that many AM market leaders have long viewed as an industry weakness, is on the contrary an industry strength.
It is a good thing that OEMs are forced to compete with each other by maintaining or enhancing quality while reducing or at least not increasing cost, that materials suppliers are building business models based on aiming for the highest possible standards, that software companies can only survive by diligently incorporating feedback from their most sophisticated customers, and that service providers stand out by attracting the most knowledgeable personnel.This set of attributes forms the value proposition the AM industry can bring to the table as it seeks to strengthen ties with the broader manufacturing sector.Industrial Upgrading & AM Clusters At scale, AM-enabled distributed manufacturing could help reinvent how clusters work—in a way that optimizes industrial upgrading.
Perhaps the most important key to understanding Porter’s perspective is that the cluster, above all, functions holistically: “Sustained competitive advantage in an industry grows out of the self-reinforcing interplay of advantages in several areas, creating an environment which is difficult for foreign competitors to replicate.The national system is as, or more, important than the individual parts” (p.131, emphasis added).
So, first of all, geographic concentration will never stop being one of the most important factors in determining competitive advantage.Secondly, though, if a manufacturing firm can leverage distributed networks of producers to accentuate its physical footholds in various clusters, the formula starts to change.The firm can streamline the long-run capital commitment required to maintain the footholds in the long-term, and, when it comes to entering new markets, may be able to branch out with a much lower level of investment than would’ve been required otherwise.
Additionally, one of the home market’s biggest assets, in Porter’s view, is that it tends to be where an internationally competitive firm’s most significant R&D activity takes place.Distributed manufacturing can enable R&D results to flow more freely between far-flung divisions within the same business.It could also make workforce development, arguably the most important element of industrial upgrading, easier to manage remotely.
It’s hard to imagine the manufacturing sector can ever remove hands-on training as the primary part of the training process, but companies are already seeing success with hybrid training courses (it is central to how Apple’s US advanced manufacturing training initiative works, for instance).If you can train workers in-person in brief sessions and then supplement that training with distance learning, then the concentration of knowledge and experience at your core cluster becomes an asset that can spread to more peripheral operations without thereby diminishing in strength.Again, there is simply no way around the fact that you need to have “boots on the ground” in the leading hubs, or at least one of the leading hubs, within your home market.
You don’t want to be a US defense firm aiming to grow your market share without a significant presence in the Midwest, Southern California, or Texas.But if you can cultivate AM as an organizational strength and use it to implement a distributed production strategy, it unlocks more opportunity to replicate elsewhere the capabilities you’ve developed in your core operations.These aren’t tasks you can complete quickly and with minimal effort.
They are, in fact, among the most difficult things an economy could attempt to accomplish.But if the US (and other similarly declining industrial powers) is serious about reshoring, these’re the tasks required.Only more difficulty results when you try to act like a problem is less challenging than it actually is.
It is a case, however, where feeling overwhelmed is a good sign that you’re on the right track: Porter writes, “Competitive advantage emerges from pressure, challenge, and adversity, rarely from an easy life” (p.174).Featured image courtesy of Pittsburgh’s Neighborhood 91 Subscribe to Our Email Newsletter Stay up-to-date on all the latest news from the 3D printing industry and receive information and offers from third party vendors.
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