With plans to 3-D print 45,000 fuel nozzles a year for its upcoming Leap jet engine, General Electric's (NYSE: GE ) ambitions for the printing technology have been received with much fanfare. After all, the manufacturing giant is pioneering the use of 3-D metal printing for highly complicated, mission-critical manufacturing applications, and it's proving to the world that 3-D printing could be a game-changing technology for such specialized applications. General Electric has undoubtedly become the 800-pound gorilla in the room of the 3-D printing industry, which only generated about $3 billion in revenue last year, according to Wohlers Report 2014. And because GE's 3-D printing plans are so monstrous for such a small industry, the company can exert its influence over 3-D printing companies and play by its own rules.
For instance, instead of buying metal powder from metal 3-D printing companies at a substantial markup, General Electric goes direct to the mills that supply the industry with the material. This approach effectively breaks the razor-and-blade model that 3D Systems (NYSE: DDD ) and Arcam (NASDAQOTH: AMAVF ) have built around their metal 3-D printing businesses and could set a precedent for other industrial 3-D printing customers to follow. Those recurring revenue streams that are generated from consuming materials could become threatened over the long term as the industry continues growing and material costs become a greater focus.
A whole different animal
The biggest difference between metal and plastic industrial 3-D printers is that metal 3-D printers are more open platforms in terms of the materials (metal powders) that can be used, while plastic 3-D printers usually come equipped with a RFID chip to prevent third-party material cartridges from being used. On the plastic side of the business, 3D Systems can lock its customers into consuming materials that cost as much as $300 per kilogram. As you can imagine, these consumable sales have become a significant driver to 3D Systems' overall profitability. However, on the metal side of the materials business, beyond suspending a servicing or maintenance agreement, there's effectively no way for 3D Systems or Arcam to prevent third-party metal powders from being used in their metal 3-D printers.
To gain more insight on the subject, I recently spoke with Steve Rengers, research and development manager at GE Aviation's Additive Development Center, or ADC, who helps oversee General Electric's 3-D printing R&D. Rengers said the metal powders that work with these machines are a commodity, so it doesn't make sense for a company that already buys millions of pounds of special alloys to pay a markup for materials that originate with suppliers GE has been doing business with for decades. In other words, General Electric leverages its buying power across a host of different businesses that rely on metal powders to ensure it's getting the best possible price.
Although General Electric is effectively cutting 3-D printing companies out of the equation by going directly to the mills for its metal powders, this reality has yet to show up in the numbers. In fact, 3D Systems highlighted during its most recent first-quarter earnings call that its metal powder revenue has been rising; the company said it expects the trend to continue, because the grades of metal powder it supplies, in terms of particle size and purity, are proprietary and specialized. While these factors may allow 3D Systems to remain differentiated for the foreseeable future, investors shouldn't expect this trend to continue indefinitely. New suppliers will likely eventually enter the marketplace and prove willing to accept less profit than 3D Systems or Arcam -- and what seemed like differentiated product ultimately becomes a commodity.
The truth of the matter
With 75% annual unit growth last year, according to Wohlers Report 2014, the metal 3-D printing segment remains an extremely important aspect of the industry's overall growth trajectory. 3D Systems' earnings call comments suggest that it and Arcam will likely continue benefiting in the immediate future from metal printing growth in terms of hardware and recurring material sales. However, for better or for worse, GE's massive investment in 3-D printing relative to the industry's size gives it considerable influence in how the sector operates.
Out of fear of being left behind, GE's 3-D printing plans are forcing other manufacturers to get involved with metal 3-D printing. As more companies begin incorporating metal 3-D printing into their operations, the demand for metal powders will continue growing, meaning prices for that material will likely become an increasing issue across the industry. For 3D Systems and Arcam investors, the long-term risk is that their metal 3-D printing businesses become hardware-only businesses or highly commoditized, and the recurring revenue aspect of their razor-and-blade business models breaks down. This could certainly hurt the long-term investment thesis for those looking forward to high-margin consumable sales ultimately driving strong profitability growth down the road. The severity of this impact would also depend on the size of a company's metal 3-D printing segment relative to its overall business.
If others follow General Electric's approach of sourcing cheaper metal powders, which I suspect they will because it makes economic sense, five years from now the razor-and-blade model that many metal 3-D printing companies have employed may start showing some serious chinks in its armor.
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