How Smaller Companies Can Bring Manufacturing Closer to Home

Global pandemics, trade wars, and geopolitical conflicts pose challenges to the manufacturing industry. A recent survey among manufacturing executives revealed that 44% of respondents consider supply chain risks among their top three concerns.

In response, manufacturing companies plan to regionalize (parts of) their production with a view to increasing their resilience to external shocks — 43% of respondents already have specific relocation plans. European retail chain C&A, for example, intends to produce 800,000 jeans per year in a German factory, and Walmart has committed to spending an additional $350 billion through 2030 on items made, grown, or assembled in the U.S.

However, relocating production to countries with high labor costs is expensive. Companies cannot replicate the labor‐intensive production setups and technology used in countries like India, China, and Vietnam. To be cost-effective reshoring requires investment in automating and digitizing production processes. A number of European bicycle manufacturers, for example, are currently relocating frame production to high‐cost countries using fully automated processes — V Frames in Germany and Triangles in Portugal being cases in point.

But while large‐scale producers can distribute required heavy investments across high volumes, small‐scale producers do not have this luxury. They cannot fully utilize asset‐heavy production processes, leading to high machinery costs relative to their volume. A new production model, Production as a Service (“PaaS”), is emerging as a solution to this problem

A New Production Model

“As-a-service” models decouple utilization of equipment from ownership. They first gained scale in IT, when software providers shifted to a subscription model for their products. Content consumption (for example, Netflix or Spotify) and mobility (such as Care by Volvo and TIER Mobility) are among the most visible applications of the model.

In industrial settings, as-a-service models have already appeared at the level of individual production components. Since 2020, for example, Trumpf and Munich Re have joined forces to offer use of a laser cutting machine as a service. Other instances include ALD Vacuum Technologies (which supplies heat treatment), Kaeser (compressed air), and Rolls Royce (power).

PaaS expands this approach to the scope of an entire factory. The fully realized concept has three elements: flexible production, asset sharing, and financial transformation.

Flexible production.

In a limited number of product categories, factories can make multiple different products on the same manufacturing process — an injection molding producer can produce wine storage boxes and industrial pallets on the same machine using different tools. In most cases, though, products require specific processes which limit the ability to switch production to other, completely different products. But factories can still produce variants of the same product. For example, Porsche has developed the Multi Product Line, a highly flexible body‐in‐white production concept that can produce hang‐on parts for Porsche, but also for other, non‐Porsche brands.

Asset sharing.

By sharing a factory small‐series producers, which do not have sufficient volumes to fully leverage the capacity of highly automated production equipment, can enjoy some of the cost benefits that come from scale. To be sure, sharing facilities with unrelated companies creates compliance, antitrust, and intellectual property risks. Protection mechanisms are needed, like those commonly found at suppliers serving multiple competing customers. For example, critical products must be protected from sight when customers visit the site and sensitive data must be strictly separated.

Financial transformation.

As-a-service models decouple equipment utilization from ownership, as external investors finance and own the production assets. In many cases external investors may be reluctant to assume all the risks associated with the assets, notably underutilization. In many cases some of the risks can be allocated elsewhere — for example, insurance companies can take risks through risk transfer products, such as a technical availability guarantee, or users can provide utilization guarantees.

PaaS factories are not yet fully evolved. However, there are some examples of production facilities that are almost there, notably the Smart Press Shop in Germany.

The Smart Press Shop

Sports car manufacturer Porsche needed access to an updated press shop in order to benefit fully from technological innovations in the production of chassis parts. But press shops require high utilization to distribute investment costs across as many parts as possible. As a small‐series producer, Porsche did not bring enough volumes to fully utilize a new press shop all by itself.

The automaker decided to take an unconventional approach. It established the “Smart Press Shop GmbH & Co. KG” as a 50‐50 joint venture with Schuler, a press manufacturer, supported by additional debt financing provided by a consortium of banks. The Smart Press Shop (SPS) is a highly flexible press shop, specializing in producing small lot sizes efficiently. Many smart features enable flexible production, such as fully automated tool change‐over, a laser blanking line, and many others. The flexible production system in combination with the joint venture structure enables the Smart Press Shop to offer spare capacity to other automakers (even outside the VW Group).

Through the combination of flexible production and sharing, the Smart Press Shop is capable of meeting Porsche’s quality requirements at competitive costs. The SPS has been fully operational since June 2021 in Halle (Saale), Germany, and acts as an independent supplier to the market. As of today, it produces body parts for Porsche Macan and Panamera, Bentley and expects to become a Tier 1 supplier for other OEMs very soon. “We made production-as-a-service tangible in the Smart Press Shop and proof that PaaS can be realized today, even on a larger scale,” says Christian Hoedicke, managing director of the Smart Press Shop.

The Payoff

PaaS yields multiple benefits for all involved parties.

Users.

All asset users can reduce the upfront investment into production and tied‐up capital (turning CapEx to OpEx). The freed‐up capital can then be used for innovation. In addition, small‐scale producers profit from economies of scale through sharing, which enables a factory to operate larger assets.

Producers.

Providing ongoing services yields multiple advantages for asset producers, including recurring, predictable cash flow and more customer touchpoints to strengthen customer relationships. Moreover, customers in a PaaS setting assess a service provider’s performance by evaluating production output, not machine functionality, which can lead to improved customer satisfaction.

Investors.

PaaS creates a new asset class for external investors, with the production equipment providing tangible collateral. External investors would get access to investment opportunities in otherwise non‐investable assets and can diversify their portfolios in light of increasing market uncertainty. Moreover, the risk‐return profile can be tailored to investor expectations through risk‐sharing structures. Market analysis reveals that outside investment in plant and machinery through the PaaS model could potentially amount to $72–98 billion annually, including  $22–26 billion in the U.S., the same again in China, and $5–7 billion in Germany.

More generally, PaaS makes reshoring economically feasible by addressing scale challenges through sharing, which efficiently provides high levels of capacity utilization. This in turn reduces the length of supply chains and associated CO2 emissions. In addition, sharing. Consequently, PaaS contributes to a more sustainable manufacturing industry.