Bits, Atoms, and the Future of Manufacturing

(Updated 9 Feb 2010 with new estimates of value captured by Chinese manufacturers.)
(Updated 12 Feb 2010 with cost estimates for the iPad.)

Wired's cover story this month proclaims that "In the Next Industrial Revolution, Atoms Are the New Bits".  As I address this "revolution" in the last chapter of my book, and as we are thinking hard about manufacturing issues as the LavaAmp moves forward, I have a few observations about the topic.

Chris Anderson, the Editor of Wired and author of the piece, asserts as the core of his story that

The tools of factory production, from electronics assembly to 3-D printing, are now available to individuals, in batches as small as a single unit. Anybody with an idea and a little expertise can set assembly lines in China into motion with nothing more than some keystrokes on their laptop. A few days later, a prototype will be at their door, and once it all checks out, they can push a few more buttons and be in full production, making hundreds, thousands, or more. They can become a virtual micro-factory, able to design and sell goods without any infrastructure or even inventory; products can be assembled and drop-shipped by contractors who serve hundreds of such customers simultaneously.

To summarize (and oversimplify) Anderson's article, the future is about innovators -- individuals, really -- having access to manufacturing for small runs that can be scaled up as needed.  Design will be digital, and as the appropriate machinery continues to increase in capability and fall in price, manufacturing will increasingly be digital too.

In a full snark-on mode response at Gizmodo is Joel Johnson, with a blog post entitled "Atoms Are Not Bits; Wired Is Not A Business Magazine".  The snark distracts from some otherwise interesting analysis, which you can read and which I will get to below.  The comments on the post are unusually perceptive and many were made by people who are clearly plugged in at a professional level to the atoms-and-bits manufacturing story.

The summary of Johnson's argument is that small production runs equal small money, prototyping is not manufacturing, labor is cheap in China -- so what?, and some/all of the small production available now may be the result of oversupply due to the recession.  Many of these points are probably cogent.

But even when it comes to demonstrably successful examples of bootstrapping from rapid prototyping to international sales, Johnson is skeptical.  Wired's Anderson points to Aliph, makers of the Jawbone line of headsets, as an example of a virtualized business (ie heavy on creativity and IP, but with minimal capital infrastructure) that supports his case.  Johnson shoots back with this:

It's great that hobbyists can make ever more complex items, sell them on the internet, and have a small business. But the same process used by Aliph to manufacturer Bluetooth headsets (and bear in mind it takes 80 people just to coordinate this!) is exactly the same outsourcing process used by Apple to make iPhones.

Here Johnson makes a very interesting point, but is so full of kvetch that he trips over it and misses the significance of his observation.  Of the 80 or so people working at Aliph, only 8-10 will be actually working directly on engineering or manufacturing.  At least half the full count will be in sales, marketing, and customer service, with the rest distributed in IT, administration, and support, and finally with a few (probably 5-8) executives atop the whole thing.  The interesting bit is that those 8-10 people are able to coordinate the same sort of production infrastructure used by Apple and its many hundreds (thousands?) of staff in engineering and manufacturing.  

When it comes to manufacturing labor and cost, there are a few other observations that are worth pulling into this discussion.

• First up is an article from The Economist last week about the results of recent teardowns on smartphones.  The numbers from iSuppli are interesting: of the four leading phones they took apart, the cost of components falls in a very narrow range of $170-180.
• Next is a blog post from Slashdot a couple of months ago pointing to stories about the value breakdown on the retail sale price for consumer electronics.  The post refers to some analysis by Edmund Conway at The Telegraph suggesting the value added for an iPod assembled in China is only "a couple of dollars".  On a ~$200 widget that, let's call that $2, or 1%.  That number should hold for anything resembling a smartphone, which means assembly labor plus overhead (and local profit) adds only about $2 to the phone, too.  (Update 2: iSuppli evidently already has done a teardown on the iPad, and "manufacturing costs" are about 5% of the total component costs.)
  
• Minimum wages in China range from ~$.4 to ~$.7 per hour, so that $2 in labor would pay for several hours total time.  This has to be an overestimate, by a long way.  I'll bet the assembly doesn't require more than a few minutes of labor per unit, with the rest going to overhead and profit.  Another issue is that Apple is probably paying Foxconn and its employees above minimum wage in order to retain trained labor, keep IP inside the company, and keep down the "fair day's wage" complaints from shareholders and critics in the US.  But that is just a guess, of course.  (Update 1: In a February 8th column at the NYT, Roger Cohen reports that a watch manufacturer in Dongguan is pulling down 5-8% of the retail price of various brands.  Wages are running $150-200 per month in that part of China.  I don't think this changes the numbers I've used above and below.)
  
• With so little labor involved in the assembly, what other options are available to manufacturers today?  At the US minimum wage, spending that same few minutes assembling a doodad in the States would add a few more dollars to the cost -- not so much.  I'd pay that difference to know something was made here in the States.  The overhead on the factory is another matter, though.  It could be that paying for the real estate and the rest of the capital equipment makes assembly in the US uncompetitive.  (Though it would be the construction of the factor and the initial installation of the equipment that made the difference in cost -- the material cost of the building and the equipment would be roughly the same in China.)
  
• That said, there is plenty of industrial land in Detroit laying fallow at the moment.  Tax breaks to build assembly plants in depressed US cities could probably bring a lot of those jobs home.  Yes, they would be minimum wage, but there are a lot of people here waiting for any job.
  

If you add the value of the software to the cost (say ~$30 on an iPhone), then you dilute the value of the assembly labor even more.  Thus even more of the value of the object is in bits rather than atoms and their arrangement, and the difference in wages between China and the US is diluted further still.  Even the arrangement of the atoms is really about bits, since all the sub-components of an iPhone roll off of manufacturing lines with minimal labor involved.

Around the office, we have been pondering many of these issues as they relate to biological technologies and the LavaAmp in particular.

We continue to refine the hardware design of the LavaAmp, and it looks like we have the production hardware down to 5 or 6 components, 4 of which are injection molded plastic.  The labor will only be in assembly of the final box, as all sub-assemblies should all come off automated fab lines of one kind or another.  All the real cost is in the design and tooling -- once we get up and running the per unit costs should be quite reasonable.

The reason that this is worth a larger discussion is that Biodesic is exploiting all of the trends and resources that Anderson writes about, however we are building not a consumer electronics widget but rather a tool that will facilitate the manipulation of biological systems.  As the boundary between bits and atoms blurs in one area (consumer electronics), the resulting improvements in design and manufacturing capabilities create opportunities for further blurring the boundary between bits and atoms in biology.  The LavaAmp should enable many more people to query DNA in their environment, and possibly even to play with PCR assembly of genes and genetic circuits, which is an experiment I am keen to try.  Trends like this will continue to put technologies into the hands of an ever wider range of people around the planet.

If you work with this sort of technology on a daily basis, what I wrote above comes as no surprise.  But that describes a very small minority of hardware and wetware hackers.  Many more people will come to realize it soon.  New manufacturing realities and the resulting new tools are about to contribute substantial change to our economy.