An engineer reports back from their latest trade show visit with a bright idea about how a 3D printing system is going to completely redesign a component that weighs a tonne and costs a couple of limbs too.
Their company’s procurement team hit back immediately: “How much floor space does it take up? How many people do you need to operate it? What’s the depreciation? The service costs? The materials costs?”
Much to the engineer’s dismay, all of these factors will be used to amortise the cost of the machine into the projected cost per part, before they get the nod to order the machine.
“In most cases, the equipment is bought and depreciated over a period of time,” Jabil’s VP of Digital Manufacturing John Dulchinos explains. “While the depreciation schedule is supposed to approximate the economic life of the equipment, it tends to underestimate. You depreciate it over five, seven, ten years, and then you’re essentially running that asset for free because you’ve depreciated the economic life of it, and you can see an uptick on your margins on that.”
Increasingly, though, an engineer might hear another question when they take their wish list to their company’s financial bods: “what are the subscriptions costs?”
While the aforementioned calculations will still be required to take up a hardware subscription, the user won’t ever own the machine so doesn’t get the benefit of running it ‘for free’ further down the line. On the flip side, they can adopt the technology at a significantly reduced upfront cost, maintenance and support services are typically included in the monthly or annual fee, while new and additional machines can be added to the package as and when required.
“We think we need to be very flexible, so we offer a subscription,” Chris Prucha, CEO of Digital Light Processing (DLP) vendor Origin, told TCT last year. “As customers get more systems, the cost of the subscription comes down and the beauty of it is as they scale production they can just add [build] modules. We [also] offer the ability to remove systems to scale down elastically with their demands.”
The outlier in subscription packages like this is materials. Users can access the company’s portfolio of materials, but the cost is not included in the subscription fee, meaning as manufacturers scale, the vendor gets the added revenue from materials sales.
The money we pay every month is a fixed cash flow, so we know what we’ve got to pay, we know what we’ve got to turnover.
ETH Zurich spin-off 9T Labs is coming to market with a similar idea. Its Red Series composite printing platform has been designed to output end-use parts with customers able to onboard more build and post-processing modules as they ramp up production. With technology development still ongoing, updated hardware will also be seamlessly swapped in for older machines.
Colin Cater, Sales Manager at UK reseller Tri-Tech 3D, noted how companies who take out finance options on 3D printers, typically SMEs, have to part exchange old machines for upgraded ones. While the likes of Origin and 9T include those trade-ins at no extra charge, Prucha did also acknowledge that customers who require their production workflows to be certified by an independent body would have to go through that process each time they brought on new and updated hardware platforms. This may be one of the reasons why the likes of Desktop Metal and HP, for example, offer subscription models for their Fiber and Jet Fusion 340 machines respectively, but not for their larger platforms designed to produce end-use parts. Another reason may be that the larger manufacturers these machines are targeted at have a greater understanding of the demand for their products and a better grasp of procurement - compared with start-ups integrating AM for the first time - and therefore would rather purchase equipment outright.
“A lot of manufacturers are used to paying for professional services and reoccurring components separately,” Prucha explained. “For production companies, there will be a purchase option on the [Origin One] system. You get a little less flexibility than the subscription model, but the advantage there is many factories are used to ‘capexing’ [referencing capital expenditure] equipment. They’re already doing forecasts, so they can procure the right number of systems from the beginning.”
Another company occupying the DLP market is 3D Systems, an industry veteran who, like many fellow seasoned vendors, has a more traditional business model in which customers pay for the machine and own the machine. Carbon’s business model, meanwhile, runs on cycles of three years, at which point customers must choose whether to extend their subscription or hand back their 3D printing equipment. That’s a strategy that, with its competitors catching up to the size and variety of Carbon’s material portfolio, didn’t compute with 3D Systems’ Dr Ulrich Koops at TCT Show last year:
“[For the Carbon M2], it’s £30,000 a year, renting, and you have to sign for three years. That’s [almost] £100,000. Or you can get four Figure 4s and you can keep them.” (Ed. The Carbon M2 Standard subscription price is £45,000 per year).
But it’s a model that sees Carbon replace broken parts and implement hardware updates at no extra cost. And it’s a model that works for Byrnes Dental, a company harnessing 3D printing in the shape of two Carbon M2 machines to produce surgical guides and models.
“I never own the machine, but the money we pay every month is a fixed cash flow for us, so we know what we’ve got to pay, we know what we’ve got to turnover. It’s a lot of money, that’s the pressure for us, but it’s our responsibility,” founder Ashley Byrne told TCT in 2018. “That, in the modern world, is a little bit easier to handle than having this £200,000 up-front cost which you’ve then got to make work.”
In the current climate, with the COVID-19 pandemic adding to existing economic concerns because of Brexit, it is understandable why companies might be hesitant to commit to such hefty investments. In fact, many are being advised against it. Just last month, global procurement consultancy GEP published a blog suggesting companies postpone or cancel capital purchases to cut costs amid a looming recession.
At the end of the day, there are no free lunches.
It should come as no surprise, then, to see vendors react. HP announced its first hardware subscription model in March, Desktop Metal in November, and MakerBot VP of Product Development Johan-Till Broer told TCT a subscription offering ‘had its advantages and is being looked into.’ 9T Labs CEO Martin Eichenhofer emphasised a key motive for its model is to allow customers to make ‘two-year decisions rather than ten-year decisions’.
Though in the fortunate position of being a billion-dollar business, Jabil takes the cost of each hardware investment seriously, treating every 3D printer purchase the same way it has 25,000 times in the buying of CNC equipment: how much output per square footage of factory space and how much revenue on that output? Initially, the company had a ‘level of resistance’ to subscription models because ‘that’s not the way equipment is bought in the manufacturing sector.’ But today, it has ‘no fundamental preference’.
“You can make both capital and subscription models look very attractive or very unattractive depending on what the numbers look like,” Dulchinos reasons. “What makes more of a decision point for us is what do the capabilities enable in the kind of parts you can make? 3D printing applications can be relatively short lived. You might have a six-month programme or a one-year programme and that’s the end. If you don’t have something to backfill, then you’ve got an idle piece of equipment that isn’t generating value for you. So, which has the best likelihood of seeing other applications that would use that technology? That would probably be the tiebreaker.
“At the end of the day, there are no free lunches.”