The Re-Industrialisation Paradox?

The (Irrational?) Revival of Manufacturing in the West - In Search for Opportunity

Introduction

Because research is somewhat dead and commodity - thanks again DeepResearch - I’m switching things up a bit and will release some tentative theses from now and then. These are half-baked ideas flying around in my head, trying to connect the dots across journals, podcasts and articles I encounter on a daily basis. These ideas are not set in stone and intentionally released in a less definitive manner and I’m encouraging you to interact with these ideas!

Reading time: 6 minutes.

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The Revival of Manufacturing

We live in a once-in-a-lifetime power-shift on a global scale. What has been a world order unilaterally dominated by the financial and military power of the US is seemingly fading into a fractured, multipolar and less stable world - and a less desirable one for sure. And with that, seemingly overnight with the US elections and the administration’s inward-looking perspective, decades of globalisation and its effects became apparent - not only in the US but also here in Europe.

We seemingly forgot how to make physical things at scale. In a quest to search for higher margins in a software and service economy, we willingly off-shored the “dirty work” to perceived “cheaper” economies, ultimately leaving us exposed not only to economical rivals outproducing us into dependence, but also to potential adversaries that are already seeking conflict on our continent without physical means to defend ourselves. And now, there is no global power with shared values collaborating and protecting us.

And this leads us to the re-industrialisation paradox: venture capital (yes, you my friends) is fleeing en masse into the traditional low margin, CAPEX heavy businesses that most investors learned to despise in favour for the reliable and repeatable SaaS playbook.

This rather unexpected turn of events prompts a critical question: where is the true venture opportunity within the manufacturing context, or rather is there any for venture capital (in Europe)?

With China’s advanced manufacturing dominating and outcompeting us, there seems little room to build anything relying on economies of scale. China has proven to be just too good at directing capital flows into strategically important verticals as the rise of its solar and EV industry demonstrate, with advanced semiconductor nodes being one of the few exceptions.

Why China Has Already Won by David Galbraith

And no, China is not dominating because of cheap labour, but rather because of its talent and capability depth in integrating complex hardware and software systems at scale:

All in all, China’s true manufacturing advantage isn’t cheap labour. It’s the compound effect of decades of accumulated expertise, built through relentless repetition and deep specialisation. Western policymakers now hoping to “reshore” industry face a difficult truth: the knowledge of how to manufacture—efficiently, reliably, at scale—has withered. - Nicolas Colin

So is the re-industrialisation movement purely a defensive reflex to a long overdue wake-up call, doomed to burn capital resulting in a potentially more sovereign Europe, but less so an economically wealthy one? I preface that I don’t have the definitive answers to this, but I’ve tried to map some high-level opportunity spaces below. If you know of others, let me know in the comments.

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The Manufacturing Opportunity Space

Opportunity 1: Decentralised Production

So if economies of scale are no grounds for competition, why not make the fragmentation of Europe a strength: optimising for production of goods that are only economically attractive if produced decentralised in the first place - brought to you by Ian Rountree.

The requirements for successful decentralised production are quite simple, with even one of the following criteria fulfilled having the potential to make an economic case:

1. Material density and bulkiness: Goods that are so heavy and/or hard to transport, that logistic costs will kill any margins from economies of scale; think of an “economic gravity well” of a production plant, where leaving the radius comes with a hefty logistics penalty. Thinking here of steel, cement, minerals but also complex and large machinery.

2. Timing matters: Goods with an inherently fast time of decay, where any time-lag induced through logistics makes the product unusable. Thinking here of bio-reactors that produce organisms or (artificial) organ transplants, and things like unstable and decaying elements like isotopes for medical applications.

3. Co-location of production and consumption: Very much adjacent to the previous point. The producer and the consumer of the product are the same entity or in another way co-located. Integration as a cost-reducer or margin enabler.

4. Avoiding regulation: If the transport of the produced good triggers some regulation or other exogenous rate limiting factors, than co-location can remove a lot of friction. Thinking here of anything that goes into the area of recycling but also small-modular reactors for data centers avoiding public lobbying and grid integration.

Opportunity 2: Economies of Knowledge versus Economies of Scale

Another twist to avoid economies of scale is to look into manufacturing paradigms that are capped in scale by their nature, but require strong accumulation of knowledge to work in the first place.

Essentially, these are all the exotic and novel manufacturing paradigms out there in the wild, like in-space manufacturing, self-driving wetlabs, synthesis of novel high-performance materials, chemicals and drugs but also manufacturing of quantum processors.

Here the value-add is not driven by purely scaling up an existing technology stack in a clever and efficient way, but to make it work in the first place. To explain it on the example of quantum processors: We’ll only need a few commercial quantum processors, but the few ones have to meet extremely high requirements regarding manufacturing quality, dominating quantity in value creation.

If you can think of other examples, I would love to hear about them!

Opportunity 3: AI-first Production

Quite the obvious one, but with AI-first production I don’t mean simply integrating some demand forecasting software, but truly re-thinking the organisation of value-chains, processes, collaboration and everything beyond.

Just as lean production has been a novel manufacturing paradigm that propelled Japan’s rise, AI might hold similar promises and it is yet an undecided race who will win. In the case of adopting lean production, European companies were much more compatible than their US counterparts keeping especially German automotive competitive in contrast to the American.

Organising production around clever use of compute, networking infrastructure and AI as orchestrator on top across entire value chains and enterprise structures will be decisive to the next generation of manufacturing champion. But where to start?

Today's parallel is striking, but in a different way than many assume. While computing and networks—our age's core technologies—are becoming mainstream, their newest iteration, artificial intelligence (AI), is emerging not as a new technology but as a (potentially) revolutionary approach to organising production around now-mature computing and networks. Just as lean production was not a new core technology but rather a profound reimagining of how to organise around standardised parts and assembly lines, AI represents a fundamental rethink of how to harness computing and networks. - Nicolas Colin