Last updated August 21, 2024
For those who operate in the physical world, it’s difficult to ignore the surge of companies aiming to reinvigorate critical industrial sectors. I’ve noticed that many of these companies are tackling similar looking industries, with similar economic dynamics, and similar technological strategies. I have found the macro “why now” for industrial revitalization to be clear and well documented, but have struggled to pull the thread through to the true operational problems the companies in this space are trying to solve. What does it actually mean to “rebuild the industrial base,” and how can any startup impact such an enormous effort? The below is an ongoing attempt to understand these “new industrialists,” explain what makes them work (or not work), and whether they fit the venture model that has enabled them to proliferate.
Most people have an intuitive understanding that much of the manufacturing in the world has been outsourced to other countries, or in other words, the US doesn’t really “make stuff” anymore. This isn’t entirely true. What is true is that our industrial output decelerated in the 21st century and has completely stagnated for the last 15 years.
Moreover, most leading indicators point not only to stagnation, but imminent decline. Manufacturing entrepreneurship is on a steep and steady 50 year downward trend.
And investment in our industrial capacity has also flatlined for the last 15 years.
Industrial underinvestment has hurt some sectors more than others, such as metal parts manufacturing, which supplies key components to aerospace, defense, and automotive industries.
Further, like many of our traditional industries, our manufacturing workforce is aging into retirement, taking with them key skills and knowledge built up over decades, exacerbating our industrial decline. Between 2000 and 2016, US manufacturing employment decreased by 5 million people. Over 95% of U.S.-based manufacturing companies employ fewer than 500 people, and many will likely exit the market as their founders retire, driving a skilled labor shortage expected to exceed 2 million in 2030.
Of course, none of this is news. Harvard Business Review wondered whether the US could ever regain industrial prominence back in 2009, detailing the fragility of the Kindle 2(!) supply chain as proof.
The long term trend has resulted in an increasingly outsourced industrial manufacturing sector, and a complex, globalized supply chain to connect new sources of manufacturing output to the large US consumer base.
A good supply chain always goes unnoticed until it breaks down. Most people experienced this during the pandemic when they ran out of toilet paper, or when we collectively needed to ration N95 masks. Maybe you noticed used car prices were at historical highs because new car production came to a halt. But for the most part, a few years post-pandemic and the consumer’s interaction with supply chains is back to normal…for now.
However, this is undoubtedly not the case for business owners. High quality supply chains are the backbone of globalization, and thus the lifeblood of most physical goods businesses. Safe and open seas enable global free trade, allowing global specialization where discrete regions benefit from labor or technological advantages in the supply chain. The result is a network of components manufactured and assembled in the most cost competitive geographies at stage of production.
The operative phrase is “cost competitive.” It is not intuitive, but shipping raw materials and intermediate components all over the globe is actually incredibly efficient. This study (as highlighted in a recent Brian Potter piece) demonstrates why growing cotton in the US, shipping it to Bangladesh, only to have the final T-shirt shipped back to the US for sale is the most economically rational thing to do.
Shipping across the world and manufacturing in Bangladesh represents a tiny fraction of the overall cost of the T-shirt due to the low cost of ocean freight and the cost of labor in Bangladesh.
Efficient? Yes. Resilient? Not so much. It is hard to fully understand the risk even in this simplified supply chain. The hypothetical T-shirt manufacturer is vulnerable to all of the geopolitical and environmental risk in Bangladesh, along with the challenges of procuring and maintaining equipment, labor and energy. Then there’s also the complexity of unpredictable congestion at global and domestic ports, and the challenge of interfacing with a supplier with minimal incentive for transparency.
I first experienced the critical importance of the global supply chain at Bowery Farming, where we built highly automated indoor hydroponic farms. These farms required a diverse range of materials, from hairnets to custom control panels. I remember our second farm was delayed for months because a few parts shipped from Europe were stuck at port. This happened multiple times, for multiple farms, and multiple suppliers. Sure, sometimes delays were for key robotics parts, but other times it was just steel or plastic trays.
You can imagine the level of disruption this causes when you’re building a large capex project, particularly one that is developing a relatively new or innovative technology. You’ve already invested millions, you’re staffing up a team, training them, and you’re trying to pre-sell the product. So the clock is ticking on your returns math, and your sales team can’t go into meetings with confidence around timing or volumes. Not to mention you’re a venture backed company with venture backed expectations of blistering growth.
That’s…a lot of risk.
It's the type of risk that not only changes the execution and financial health of the business, but it’s also the type of risk that can metastasize into declining morale, a potentially more insidious issue, as you keep pushing back dates for reasons that feel out of your control.
In short, we live in a world of efficient supply chains, but not particularly resilient ones. For companies building nationally critical products, or businesses developing new and innovative technologies, supply chain resiliency can be the difference between success or failure.
The geopolitical risks inherent in a globalized supply chain are well documented, so I won’t go too in depth here. I think the most succinct explanation of where geopolitics and supply chain resiliency intersect is the notion that “designed in California, made in China” will likely not last another 10 years. China alone has more manufacturing output than the US and Europe combined, output that no longer pertains to low end items but instead to high value products like electric vehicles, solar cells, batteries, and even semiconductors.
As an investor evaluating the US, you might say that we (or the world writ large) has an existential supplier risk. This supplier might uncover an epidemiological crisis (Covid), face a rapidly diminished labor force (aging population), choose to move upmarket into value added products (semiconductors), or decide that our values are diametrically opposed to theirs and conclude they’d be better off without us as a customer altogether. All four could potentially happen at the same time.
China recently concluded its Third Plenum, a conference held ever five years to map out the country’s economic priorities and strategy. The Third Plenum resolution emphasizes self sufficiency in not just the industrial sectors of old, but also “new quality productive forces” whereby China will be the leading source of science and technology innovation, particularly in AI, semiconductors, automotive, and aerospace.
China’s ambition to eclipse the US in all technological development is clear and consistent. The US goal to “de-risk and diversify” from Chinese manufacturing has not been as clear or consistent, but may be the only item Republican and Democratic parties can seem to align on. This posture has most recently materialized in the CHIPS Act and the Inflation Reduction Act, and is clearly articulated in Jake Sullivan’s latest speech on US industrial policy.
There are, of course, other factors breaking down international supply chains. Russia’s invasion of Ukraine, increased piracy in the Middle East, and the rise of populism (and thus anti-globalism) across the developed world, and the retrenchment of the US navy all play a role. However, onshoring and nearshoring manufacturing is largely a phenomenon driven by an understanding that a supply chain dominated by one vendor is a fragile one, particularly when that vendor views itself as your successor in the market.
It is sometimes difficult to fully internalize the consequence of geopolitical developments that challenge much of how the world has worked for the last 80 years. But that is exactly the point. Everyone alive is so far removed from a world without a seamlessly integrated global economy that we can easily overlook the signs of change.
Most of my experience over the last several years has contextualized the push for American reindustrialization as a response to, as described above, fragile supply chains reliant on an actor with an opposing world view. However, I have yet to see economic growth placed at the center of this argument. Perhaps we are too far beyond the days of manufacturing-led growth to imagine it, but resilience and growth can actually be complementary rather than accepted tradeoffs.
In 1969, Jane Jacobs published The Economy of Cities, her second book after her debut work Death and Life of Great American Cities laid the foundation of modern urbanism that we take for granted today. Written prior to the stagflation that defined the US throughout the 1970s, The Economy of Cities ultimately is a treatise on how entrepreneurship, particularly in manufacturing, is critical to economic growth, and how its absence ultimately leads to economic stagnation and decline.
Core to Jacobs’ theory of economic growth is the combination of entrepreneurship and a term she calls “import replacement.” The recipe for growth works as such:
Jacobs believes that the entrepreneurial drive to replace import work is the force behind America’s greatest economic centers. She notes that we are taught in school that New York City grew rapidly once the Erie Canal opened in 1825, but that if the canal indeed incited economic growth, Jersey City would be our nation’s economic capital, not New York. After all, it had equal access to the Atlantic Ocean and had the added advantage of being on the mainland, a benefit Alexander Hamilton believed would one day make it the biggest city in the world. Instead, just prior to the opening of the canal, NYC had begun to eclipse Philadelphia, then the nation’s most productive city, in manufacturing output. Growth was not preordained, but rather developed from within.
Further, Chicago underwent rapid import replacement in the 1830s and 40s, leading to 7x increase in population in the mid 19th Century. After World War II, 1/8th of all new businesses from 1945-1950 were started in Los Angeles, coinciding with its largest period of population growth in the 20th century. Jacobs reinforces this dynamic at the company level as well, noting that the Dodge brothers began their careers by building engines for Ford before developing their own automobiles, work which they then exported. Motorola began by producing batteries and car radios for Chicago area police at the height of Al Capone and Prohibition Era crime before becoming a leading radio manufacturer for the government in World War II.
We can find Jacobs’ theory of economic development in our own world of software, whereby many companies are developed to address the needs of rapidly growing industries, previous employers or internal company operations. Notable examples are Paypal with Ebay, Palantir with Paypal, Salesforce with Oracle, Netsuite with Oracle, Yammer with Geni, and Slack with Tiny Speck. So many of the most prominent B2B SaaS companies today are solving problems created by work that would have been considered new or non-existent 10 years ago.
As I’ve detailed below and in keeping with Jacobs’ theory, it is not surprising that many of the new industrialist companies have emerged to address “import work” at two key companies, SpaceX and Anduril, and are largely concentrated in the same geographic area.
Why does any of this matter? The emergence of new industrialists is not simply about addressing fragile supply chains, or even the “national interest” in the context of a powerful adversary, but rather an opportunity to build a more resilient and sector diverse economic base, and develop the foundation for new areas of economic growth.
Put simply, new industrialist companies are aiming to increase the total capacity and economic viability of manufacturing processes critical to our industrial sectors where demand is projected to outpace supply over the next 10 years. Instead of selling SaaS or acquiring existing facilities, they are building and operating their own manufacturing facilities. Each of these companies sells well known products into established markets, focusing their innovations on the process, not the finished product.
Before going any further, it’s worth mentioning that I spent 5 years at a company that, although structurally different from the new industrialists, was founded with the mission of leveraging technology to rethink an industrialized process. As a result, I have a healthy skepticism about claims of traditional industries being “outdated.” At Bowery, we built large indoor vertical farms growing pesticide free produce shipped to the grocery store within a day or two of harvest.
However, the more time I spent with “outdoor” farmers, particularly when I was leading our seed breeding effort, the more I learned that farming was quite technologically advanced, but perhaps not in the mostly software defined way I was used to. Did I meet 60 year old guys who could look at 100 leaves of arugula and describe the health of each one individually? Yes. Are there any 20 year olds today aspiring to build up a lifetime’s worth of intuition like that? No, probably not. But I did see automated, computer vision enabled tractors and planters, environmental sensors and data, and warehouse management systems smoothly orchestrating workflow. I also observed shockingly efficient human-in-the-loop methods of harvesting and weeding for particularly difficult to mechanize crops. Yes, there are plenty of farmers that are still farming the same way they may have 50 years ago, but the notion that the entire industry had it all wrong was…all wrong.
I am on net optimistic about this emerging wave of industrial focused companies, but I have also developed a few heuristics for evaluating these new businesses.
It’s difficult to keep track of the phrasing du jour for companies building physical products or software for physical industries. 5 years ago it was Hard Tech, 2 years ago it was Deep Tech, and now I’m hearing Frontier Tech. Whatever the term, New Industrialist companies are a subsector of this emerging industry, and the markets that they operate in have a specific set of defining criteria:
All New Industrialist companies are manufacturing products destined for mature end markets. These are tried and true subcomponents of finished products in key industries such as construction, robotics, aerospace, and automobile manufacturing. These subcomponents have been in production for decades, and can range from rebar, to wiring, to control panels.
Buyers care about quality, cost, and speed.
New Industrialist companies are either attacking markets where the existing manufacturers in the space are either a long tail of mom and pop shops, or a collection of highly diversified, often international, behemoths. In the former category, employee headcount can often exist in the range of 5-100, and in the latter, from 5,000+.
Somewhat unintuitively, many of these businesses are tackling industries where the machinery most responsible for production automation is efficient and has a robust supplier and manufacturing base. Said another way, many of the critical processes that could be automated, have been automated. In instances where there are exceptions to the rule, the complexity of the product necessitates manual handling.
However, most of the automated equipment in these industries is siloed, engineered to perform a specific task, and lacking any connectivity or communication with other systems.
Due to the complex yet siloed nature of the existing machinery in these markets, labor is often far more specialized in a typical manufacturing facility. Specialists develop deep expertise in operating specific machinery, and hone their intuition for optimizing output over time. As a result, the quality of output can vary depending on which specialist is operating which machine during a given production run, a dynamic particularly pronounced in markets dominated by mom and pop shops.
Unsurprisingly, the average age for operators in the markets of the New Industrialists skews older. This is common amongst mom and pop shops, where both owners and operators in some industries have an average age in their late 50s and early 60s. For this reason, several private equity firms, such as Re:Build, have identified this dynamic as an opportunity to roll up several manufacturing businesses and find efficiencies through combining and simplifying back end processes.
New Industrialist markets are often characterized by low NPS competitors, largely due to unreliable delivery times and a lack of communication or transparency into timing and cost. This is a particularly salient dynamic amongst operators who are used to operating at tech company level speed, with instant and accurate quotes and delivery estimates. Communication can be slow and comparatively manual, requiring multiple phone calls and email exchanges trading PDFs of critical documentation. For mom and pop shops, the same person usually handles admin, customer service, sales, and sometimes even operations. Operators are stretched thin and don’t have time to invest in customer service. At large enterprises, many buyers are too small to warrant best in class customer service.
While these industries are often somewhat automated, most of the new industrialist entrepreneurs believe that manufacturers have underinvested in software as the critical connective tissue orchestrating and streamlining the soft costs of operations. This can range from opportunities in QA/QC computer vision to cookie cutter verticalized systems of record.
Similarly, the new industrialists meet the above market dynamics with almost identical value propositions and high level operational strategies, regardless of sector or finished product.
There’s a saying in manufacturing that you can get something cheaper, faster, or with better quality, and you can usually get 2, but you can’t get all 3. There’s always a tradeoff. The new industrialist companies operate in markets with mature products and minimal delivery time transparency and communication. Most of the companies below focus primarily on delivering products 10x faster. Nearly every one of their websites has language to the effect of “get X in weeks not months.” Maintaining the bar for quality is a given, but in the markets that these companies are tackling, speed matters more than price. As one former SpaceX procurement manager recently noted, “A reliable manufacturing partner is a better business partner than a pool of eight from which you take the lowest bidder each time but don't have fantastic delivery records.”
Aside from speed, the second most critical factor contributing to low NPS is lack of transparency and communication. More specifically, this includes ease of information sharing, pricing and timing transparency, and proactive communication around delays and mishaps. All of these features can be bucketed under high quality customer service. Like any high performing CX org, best in class customer service is delivered through a mixture of software and service. Buyers are stretched thin and are trying to evaluate their options thoroughly yet quickly. As a result, most of the new industrialist companies highlight their ability to easily consume design files and provide rapid price quotes and delivery timelines.
Each company focuses very narrowly on a specific end product vertical. However, within each vertical, they also promise the ability to iterate through designs and testing, working hand in hand with customers through the initial product development phase. Again, this approach serves to fill the customer service gap in the existing market and fits the market naturally given the largest manufacturers will always focus on large volume runs, and many of these new industrialists will begin by servicing the growing number of new aerospace, defense, and automotive startups. However, to build large businesses, these new industrial companies will need to learn to scale to large scale manufacturing runs.
Despite claims of automating 50 year old processes, the reality on the ground is that most, but not all, of the new industrialists are driving operating efficiencies by connecting or enhancing existing automation equipment rather than completely inventing their own. Many of these industries have already automated the low hanging fruit and have developed networks of sophisticated, high quality equipment vendors.
To be clear, working with and integrating existing automation is a positive sign and demonstrates an understanding of the often non-obvious tradeoffs between effort and impact in manufacturing.
Soft or indirect costs can be thought of as labor costs incurred for all of the work outside of the actual physical manufacturing of a product, but that still should be included in COGS. This may include production scheduling, data entry, machine programming, machine setup, maintenance and QA/QC. Although soft costs may take different shapes across each vertical, almost all of the companies below are driving operational efficiencies first by building software to handle previously un-productized soft cost workflows. This might look like developing an ERP or Manufacturing Execution Software (MES) in house, or building proprietary QA/QC software.
All companies have processes and internal knowledge. However, the software industry has an almost overwhelming buffet of tools with which to document and disseminate internal information. Further, the labor markets for software engineering, design, and product management are so mature that there exists a near infinite amount of documentation around best practices free on the internet.
The manufacturing markets of the new industrialists benefit from no such ecosystem. Specialized knowledge is passed down through an apprenticeship model that is suffering from a dearth of apprentices. As a result, nearly all of the new industrialist companies purport to codify key operating knowledge. However, most of the companies below are too early in their development cycle for me to accurately assess how this effort is accomplished in practice.
The notion ultimately is to obviate the apprenticeship model altogether, and enable anyone to quickly learn to become a machine operator. This significantly widens the potential labor pool, reducing the barriers to scale.
At the highest level, the new industrialist thesis is predicated on 2 core beliefs: 1) demand for key subcomponents in the aerospace, defense, robotics, and automotive sectors will far outstrip domestic supply in the next 10 years, and 2) technology can be used to upgrade existing methods of manufacturing to expand production capacity and drive better economics.
Operationally, this is the north star for the new industrialist model, and as we’ll see below, will be necessary for venture scale returns.
We now have a high level understanding of the types of opportunities driving techno-industrial entrepreneurship, and how the new industrialists are tackling them. However, before diving into the specific list of companies, it’s worth taking a step back and laying out the common pitfalls that these companies may encounter.
Although each market has its own unique characteristics, I have seen several common strategies in this space that are worth avoiding.