A New Model for Innovation and Manufacturing
A Paradigm Shift – What’s in It for Industry?

Production models significantly impact innovation, domestic manufacturing capacity and the resilience of supply chains. Since the Second Industrial Revolution in the late 19^th and early 20^th centuries, industry has oscillated between centralized and decentralized models of R&D and production, based on various market and regulatory incentives, technology advancements, and other critical drivers that can be broadly categorized into two primary models:

• Vertically integrated models: exemplified by Kodak and IBM in the mid-20^th century, placed most aspects of product research, development, scale-up and commercial production under one roof and in one location
• Horizontally integrated or decentralized models: examples include the U.S. auto and computer hardware industries starting in the latter half of 20^th century, relied on a network of third parties, including startups, for product innovation and overseas manufacturers for production

In recent decades, the rise of offshoring hardware innovation and production has led to fragile supply chains, presenting challenges across the sectors but particularly for companies with horizontally integrated operations. While vertically integrated models offer production control and schedule certainty, they often involve high capital investment, a challenge in high interest rate environments like today, and can stifle innovation. To meet future challenges, we must blend the benefits of both approaches into new models.

Centralized versus Decentralized Models
The first Industrial Revolution in the 18^th and 19^th century ushered in the age of the factory as a center of production, but research and development (R&D) and other functions, like design, routinely occurred elsewhere and were often performed by other individuals or organizations. The early 20^th century saw the rise of large, vertically integrated corporations that unified R&D, manufacturing, design, and supply chain management under one roof. Companies like Ford in the automotive industry and U.S. Steel in metallurgy controlled all major stages of production, from raw materials supply to manufacturing output to commercial sales. This vertically aligned model gave these firms significant control over their supply chains and allowed them to take advantage of economies of scale, reducing production costs and maximizing their impact and influence on the world stage. By the mid-20^th century, many large corporations continued to build on this approach and created their own research labs; Bell Labs, Eastman Kodak and Xerox exemplify this approach.

It was at this point that many large companies of this era invested in building their own industrial complexes to house all functions in a centralized location. This model had many advantages:

• Centralizing operations empowered companies to tightly control every aspect of their production and supply chains
• Integrating all stages of production streamlined processes and reduced costs, generating economies of scale and giving companies unprecedented control over product quality and output performance
• Housing R&D facilities on-site fostered collaborative initiatives across the value chain, facilitating interaction between departments and business units focused on product development and efficiency

This closed-system approach consistently expedited production and refinements to products. Maintaining in-house R&D enabled companies to safeguard and manage their intellectual property, ensuring that innovations remained secure from unauthorized use by competitors. It also empowered companies to direct their R&D efforts towards specific objectives, guaranteeing that developments effectively addressed their products and markets.

The last decades of the 20^th century saw a decline in large vertically aligned corporations. This pivot was driven by several factors, including:

• Changes in the regulatory environment, such as enforcement of anti-trust laws
• Free-trade agreements and changes in U.S. corporate tax law made operating overseas or contracting with overseas suppliers more attractive
• Improvements and standardization in global shipping infrastructure lowered the cost and timelines involved in shipping materials or goods across the world
• New communication technologies enabled across-the-globe collaboration and frequent interactions irrespective of time zones and location
• Better access to an expansive, and often lower-cost, global workforce

Decoupling R&D and Manufacturing: Facing New Challenges Together
The new global economy favored companies that were flexible, cost-efficient, and highly responsive to quickly changing technologies and market demands. The result was a decoupling of R&D and manufacturing from the core brand in many corporations. In many industries, third party Original Equipment Manufacturers (OEMs) were involved in contract manufacturing of most components and often the product, so that the brand company simply ‘badged’ the finished article prior to sale. Under these conditions:

• Off-shore manufacturing shifted production to suppliers overseas. The entity owning the technology and brand (e.g., Apple or Dell) ceased to be the manufacturer of the physical product
• Supply chains became globalized and more complex; for example, the automotive industry includes several tiers of suppliers (OEMs), all operating within a tightly controlled, fragile system that often depends on ‘just-in-time’ (JIT) inventory and parts management
• Large in-house R&D labs began to decline as fundamental R&D shifted back to university labs

However, recent years have also highlighted the vulnerabilities inherent in a global, JIT economy, for example:

• Supply chain disruptions during the COVID-19 pandemic and in subsequent years underscored the risks associated with relying on lengthy and intricate overseas supply chains
• Advancements in automation and manufacturing technologies—such as robotics, additive manufacturing, and AI—now enable more cost-effective production onshore
• Shifts in trade and tax policies contribute similarly to attractive domestic production
• Many companies recognize the value of greater control over intellectual property creation through R&D and the benefits of domestic manufacturing operations to enhance resiliency in supply chains

A Dynamic New Model
The American Center for Manufacturing Innovation (ACMI) is pioneering a third approach that combines the benefits of both centralized and decentralized models. ACMI’s Industry Ecosystem model brings together companies on a shared campus to facilitate collaboration, innovation, and growth. It has elements of the large single-company model of yesterday, bringing together R&D, scale-up and production in the same geographic area. However, ACMI’s tenant model cuts capital costs and minimizes risks, allowing agile operations and flexible shared joint development agreements. This approach reduces barriers to integration and collaboration when appropriate and mutually beneficial. The four enabling elements are:

• Capital costs: ACMI utilizes institutional real estate capital, with a material cost advantage over companies securing project funding themselves
• Specialization: Companies are freed to focus on their core value proposition, instead of on the complex process of land acquisition and development
• Agility: Companies benefit from enhanced flexibility, allowing them to adapt more quickly as markets evolve
• Innovation: The ecosystem approach, which incorporates a wide range of industry, academia, and government stakeholders, fosters the sharing of ideas, and encourages commercial partnerships to scale emerging technologies

When abstracted to a systems level, the capital investment required is equivalent between an industrial ecosystem, like ACMI’s, and a vertically integrated operator. The advantages are, however, evident in:

• Enhanced cross-system equipment utilization and efficiency at scale in an overwhelming number of scenarios
• Promotion of innovation
• Reduction in the capital expenditure required for each individual company to achieve vertical integration
• Establishment of a diversified group of producers, each driven by self-interest, whether it involves optimizing operational efficiencies or innovating to gain an advantage

ACMI’s Industrial Ecosystems offer the opportunity to optimize for both efficiency benefits of clustering (as opposed to a decentralized approach, not exclusive to vertically integrated corporations) and technological development benefits of an open system. While these ecosystems may not attain the production-focused efficiency of a fully integrated operation, theoretically, they can come close to achieving it.

In Summary
An Industry Ecosystem, like ACMI’s Exploration Park at NASA Johnson Space Center, combines the cohesive integration and synergies of a centralized model with the adaptable nature and reduced risks inherent in decentralized structures. So, while the Industry Ecosystems are new, they leverage aspects of highly successful concepts from the past. When manufacturing and R&D converge in a shared geographic location, synergies occur. ACMI’s approach stands out by shifting the responsibility for innovation, production, and distribution from individual companies to a shared tenancy model. This transition offers greater flexibility, reduces capital expenses, and fosters future innovation. It is an essential component for revitalizing American manufacturing in key sectors for national defense and economic prosperity.

John Burer is the founder of ACMI Group, an organization focused on manufacturing innovation and domestic supply chain resiliency. Consisting of three segments, ACMI leverages private capital to support national security priorities, to invest in emerging technologies and to rebuild the American industrial base through targeted industrial development.

Prior to ACMI, John spent 20 years in the financial services industry in several roles across multiple industry sectors. John began his career with Goldman Sachs’ NRG Investment Banking group in New York. Subsequently, he worked in Investment Banking with Raymond James, Leveraged Finance with ORIX, Structured Lending with SunTrust Robinson Humphrey and Capital Markets with Regions Financial Corp. From 2012 to 2022, he was a commercial banker serving Austin-based middle market businesses with both BBVA Compass and Regions Bank.