Journalists & editors love centenaries and plausible-sounding round number anniversaries: it’s an easy way of making press out of something that happened ages ago, and with the logistical advantage of being a date in the (near-ish) future you can prepare for in advance.
And so it goes with blog posts: only there, the longstanding tradition is to celebrate the 1000th post / 1,000,000th visitor / whatever by posting something really great. In practice, however, this is typically no more than a long list of links to various non-sucky articles you’ve posted, presumably hoping that by so doing they’ll get some kind of celebratory PageRank boost from Google.
Anyway, the (otherwise totally meaningless) milestone here is that this is the 100th Funding Startups post: and following a thoroughly nice lunch at the Griffin in Claygate with Mike Scase (who incidentally helped design the Amstrad CPC464 for Alan Sugar), I thought I’d post on something he seemed to find interesting… the mystery of manufacturing.
1. Asleep at the wheel?
First, the economic context as viewed from my contrarian swivel chair. When the recent long period of (apparent) financial stability fell to pieces in the Credit Crunch, commercial banks realized that they’d been caught napping. Their balance sheets were awful because for decades they’d been lending large amounts of money at relatively low interest rates - acquisitions, management buy-outs, and all kinds of spurious stuff. Leveraging had vastly changed high-level business funding models: presumption of access to stratospheric levels of debt had even become part of the syllabus at business school.
But now things had changed, and the banks wanted their ball back. One group hit badly by this were the distributors…
2. Piggy in the middle, carefully sliced…
The distribution sector was unhappy about this change in the landscape: numerous large empires had been founded and built up on the model of holding large inventories while giving 60 days’ credit to trade customers. If the banks now won’t let you hold stock or sell much on credit to small trade buyers, what are you supposed to do? Looking at that big liquidity hole in your accounts where all that soft money used to be, it would surely be hard not to conclude that your business bubble had just been popped.
Moreover, now that distributors don’t hold a lot of stock, it’s often the case that bigger customers go directly to manufacturers, forming a direct-from-the-source relationship, shrinking the market in the middle. At the same time, there’s a lot of sideways pressure on distributors from Internet wiseguys also looking to disintermediate them, by replacing their service with a teeny-weeny webbed-up warehouse in Wareham. So if the banks won’t fund your inventory or let you give much credit to trade customers, bigger customers want to cut you out, and web-based micro-disties are trying to eat your lunch, what’s the future of distribution? Really, when everyone wants to take a slice out of what you’ve got, it’s not easy being piggy in the middle.
3. Just In Time(berlake)…
From the point of view of manufacturers, distributors are very often the primary sales channel, their basic “route to market”. But if banks won’t let distributors hold much of anything in stock, it falls to the manufacturers either (a) to finance the stock themselves; or (b) to find clever fast ways of creating stock on demand (the whole “Just In Time” phenomenon). Yet because the whole idea of working capital has become little more than a vague, distant memory, banks have placed manufacturers under arguably even worse pressure than the distributors: hence option (a) [financing the stock themselves] is very rarely practical.
However, even if you are able to devise clever, lean manufacturing models based around small, fast batch sizes – option (b) is the starting point for manufacturing right now - the process of manufacturing continues to be just as capital intensive as ever. You still need to design & prototype (even though 3d printing has made shape functionality testing much easier), build injection moulds (expensive, clunky, and slow), verify functionality, check for standards conformance, adapt for manufacture, assemble, test, pack, ship, and – last but not least – pray like crazy that people do now buy whatever it is you’ve spent so much time making, i.e. that the market for your product hasn’t silently evaporated while you’ve been away with the (development) fairies building it.
4. Finally, we get to “The Mystery of Manufacturing”…
Though I blog about “Funding Startups”, when it comes to funding manufacturing startups I’m entirely mystified. How on earth does anyone do it? There’s no money in distributors, there’s no access to working capital or overdrafts, and there’s only regional development support if you happen to be opening up a decent-sized factory in a region with high structural unemployment… which, frankly, ignores the reality of how most pragmatic modern manufacturers would structure their operations (typically around Far East subassembly and local late assembly for customer flexibility). As far as I can see, the main reason that James Dyson moved production to Malaysia was that his company would be stuffed otherwise: having outsourced much of the Midlands to Shenzhen, what’s our local alternative? It’s like that, that’s the way it is.
As a result, for UK manufacturing startups the only feasible source of funding is typically angels and VCs: but almost all of these have little or no interest in actually building things, preferring to channel their money into mobile apps and social media pixie-dust. It’s no secret that manufacturing doesn’t have anything like that ‘iGlamour’, for how can it compete with neon-look 3d demo buttons on a sleek black handset? Hence, “the mystery of manufacturing” is simply… circa 2011, how on earth is it possible?
So… a hundred posts down the line, it should be clear that I’m starting to flag somewhat. I continue to look at companies such as AlertMe and Nest.com to try to figure out what the secret of their funding success was. However, apart from Pilgrim Beart’s reasonably generic advice to founders to delay inward investment as long as possible, I don’t really see what there is to learn about the realpolitik of funding manufacturing, what microeconomic levers there are out there left to pull.
Ultimately, slicing through the tangled Gordian knot, there’s a high chance that there is in fact no mystery here: that is, the UK has no “mystery of manufacturing” simply because it has no manufacturing. Should people like me abandon the UK and start afresh in Taiwan or Shenzhen, planting the IP seed of their business into a richly loamy cultural soil that not only understands manufacturing but actually values it?
Could it be that I’ve been so caught up with solving super-hard tech development puzzles that I’ve sidelined the properly big question – is this the right place to run a manufacturing company from? That is, might the real mystery of manufacturing be ”why do I persist in banging my head against this particular wall?” Or, rephrased as a Zen koan for philosophical heavy metal fans, “what is the sound of one head banging?“