Microfactories

n our last Changing World note we explored the the concept of Reindustrialization, that is, the concept of companies bringing factories home, rebuilding supply?chains, and gaining more control of their manufacturing. Another related topic: the emergence of microfactories. 

A microfactory is typically <10,000 square feet (~930 square meters), uses advanced robotics and AI for flexible manufacturing, and can produce multiple SKUs with minimal retooling. By simply changing a design file, it can produce a new style of product, or something entirely different (shoes one day, and t-shirts another, for example). The smaller footprint means microfactories can be placed near cities or regional hubs allowing for more agility, reduced transportation time and costs, and improved sustainability. As companies work on gaining more control over their supply chains, microfactories are expected to increase significantly over the next few years (see chart below).

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While sheer scale has historically been coveted for margin improvement, recent innovations are allowing for small-scale manufacturing to be more commercially viable:

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• Automation & AI: Robotics and computer vision (a branch of AI that allows computers to visualize and interpret the physical world) have reduced the labor component

• 3D printing & modular design: Products can be made from digital files, enabling on-demand, ultra-flexible production.

• Supply chain fragility: COVID, trade tensions, and shipping volatility made “just-in-case” more valuable than “just-in-time.”

• Consumer pull: Personalization, sustainability, and “made locally” have become competitive differentiators.

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Some of the industries and companies poised to benefit from this still nascent trend include: advanced automation and robotics companies that support modern manufacturing; manufacturers that need specialized components; and consumer companies that benefit from quickly shifting production based on the latest social media trend. Some companies that have been experimenting with microfactory processes include GE Appliances, which has been creating small-batch products for market testing, and Ford, which is using the microfactory concept to create specialized car parts. But others, including Adidas, which piloted, abandoned and then redeployed a microfactory concept with suppliers in 2019, and now defunct EV maker Arrival, show that microfactories are promising, but not proven. 

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For investors, the opportunity lies with the companies taking advantage of the fundamental shift in how goods are produced, particularly by leveraging benefits being offered by governments to foster homegrown growth and secure innovation, as discussed in the Reindustrialization note. Microfactories may aid in this process by reducing some initial CapEx costs, but as demonstrated by the failed experiments of Adidas and Arrival, this is a concept that will need to be further optimized to be viable. As we do at Somar, we’ll continue looking at companies one-by-one and gauge their opportunity, execution, and ability to provide transformative value to their customers, whether or not they are utilizing microfactories to do so. 

-Pedro Ramos