INDUSTRIAL INKJET HEADS-
The Seeds are Sown; Gateway To a New Industry?

"What business are we in?" This rhetorical question is often tossed out by inspirational speakers at business seminars. Today, as we explore the potential for inkjet heads with Marco Boer and Mark Hanley, the question actually seems relevant.

A number of companies around the world currently produce inkjet heads to market to printer companies or use in their own systems. For most, it continues to be a good business. But going forward, within the confines of current markets, growth is limited. The long term future looks bright, however, if industrial print heads are seen as key to new applications that have the potential to spawn a whole new industry.

Key to a whole new industry? How did we get there!? Read on.

First, the present.

Marco notes things right now are not bad for the head vendors. "Unlike the consumer side where companies like HP produce heads for their own inkjet printers, on the industrial side, printer companies generally rely on heads from outside vendors such as Xaar, Spectra, Ricoh, and Konica. These companies make heads and sell them as components to other products. That's worked pretty well, but compared with the industry as a whole, it's never become a really big business. Because it's just components. At maybe around $200M worldwide, it's not large, but extraordinarily important because it has gated much larger businesses, such as the whole wide format market."

But now the problem we are facing is that what you can charge for the heads is basically tied to what can be charged for the printer. Typically the heads account for about ten percent of the retail price of the product, Marco says. As the price of wide format printers comes down, this has created downward price pressure on the heads, even as they need to be continually upgraded in terms of speed, quality of output on a broader range of substrates and other performance attributes.

So far, the demand for heads has grown so fast that volume compensates for head price declines. Head prices go down, but volume grows. So everybody is in good shape. This past year, 2004, has been a good year for most of the head companies. Unfortunately-or fortunately, depending on your perspective-it's attracting new vendors who want to get into it.

Some see it as a component business. The motivation of others is strategic. They feel it's important, so they invest in developing their own heads. A company like Samsung, for example, one of the world's largest corporations, is likely to feel that it is too big not to dabble in this. Samsung's strategic goals may remain unclear, but it feels that it has to be there, has to get into inkjet. And Samsung is big enough to make the investment without the promise of quick returns.

Now there is perhaps too much competition and current markets are limited. "We look around and see there are not a lot of large accounts left, only hundreds of little ones." Marco says. "There's no low hanging fruit. Only a few accounts on the order of Scitex Vision are good for ten thousand heads or so. And there are not many new markets left for today's applications. The China market, mostly for wide format, is strong, but now it's already established. Elsewhere in the world, perhaps? Maybe India?

On the fringes, yes, there are a lot of potential small accounts, and they are not necessarily small companies. It could be a company like Nestlé or Proctor and Gamble that might be looking at inkjet for in-house packaging systems. There may be a lot of these kids of prospects, but they need help. To capture them, the technology has to be easier to integrate, which is the argument for developing inkjet modules, a product that can be used out of the box.

In short, looking ahead, say for the next five years, the consultants see a slowing down of the market as it is currently structured.

There may be some wild cards out there, perhaps textiles, perhaps new geographic markets such as India. But in order to access them, too many pieces are needed in the infrastructure chain, and this is not expected to happen by natural evolution.

Three Paths to Growth
In response to these realities-more competition and downward price pressures-what are the options for the head companies? We see three general directions.

One is to move up the value chain. One way, as Marco mentioned, is to integrate heads into more self-contained modules so they are easier to integrate, a way to expand existing markets. This would open up lots of potential customers. Some might be big companies, but even a big company can have only so many packaging lines. To get into big numbers, head vendors need a lot of these kinds of customers, and in time they could add up to worthwhile volume. "If you can get, say, fifty Proctor and Gambles, then it becomes interesting," Marco posits. "But you have to offer usable out-of-the-box technology in order to allow users to get into those accounts."

Offering head integration consulting could help as well, but the talent pool in our industry is small and could limit the ability to scale up. Most of the industrial inkjet engineer expertise is in Japan and there would geographic hurdles in the way of consulting and servicing customers scattered around the globe.

Path Number Two is to engineer complete systems and figure out how to brand and market them. This path would be tough for companies like Xaar. They would be competing with their current customers, and would have to develop channels and a new level of customer support from scratch. That's why companies like Spectra, Xaar and Ricoh are moving toward modules instead.

Third, and the most interesting Mark and Marco believe, is to develop new applications, applications that are not printing related. Rather than printing, we find ourselves talking about various micro-pump applications. More on this later.

Betting Game
Moving ahead with one or more of these three growth strategies becomes something of a betting game, Marco believes. "A lot of the head vendors are getting into modules…Spectra was probably among the first …Xaar is getting into it with Omnidot. Everybody is looking at ways to supply more than just the head, but also the fluids, the electronics, the mounting brackets so it becomes more turnkey, so it becomes easier and these little users who didn't have the resources to do this can now do it."

Some of the larger companies in Japan have gone quite a way on this integration path. A number have shown concepts. Ricoh recently showed its module concept. Konica has dropped hints at conferences about a module concept. Others include Olympus with TTEC and Canon's subsidiary FineTech. One or more Chinese vendors may give it a try at some point.

Path Number Two looks best for the large printing system vendors based in Japan that also have developed heads. They may have developed the heads for internal purposes, and also have the resources to develop branded products. A huge conglomerate such as Samsung or Panasonic might best make the branded product bet, in addition to using its heads for internal purposes. Panasonic may have originally developed its heads to print DVDs. Epson has been working on ways to jet polymers and conductive fluids to make flat screen displays and printed circuit boards.

"We don't know how well developed their product and distribution programs are at this point," Mark cautions, "but it's important to know that companies like Canon and Ricoh have taken physical integration of inkjet heads way down the road, and that part they must know how to do. A lot of people don't appreciate the significance of this. This path for these companies is realistic because they are so large they can invest lots in head development without having to commercialize them.

Some inkjet technology vendors are already looking ahead to Path Number Three, new applications, among them Impika, Cabot, and Xennia. Manufacturers in Japan and Korea have a lot of sunk costs invested in inkjet heads. They are fortunate in that the firms are large enough to make the investment without the promise of short term payback. They stand ready to work this new market as it develops with minimal additional R&D investment.

"Time and money solves everything," Marco muses. "And these companies have both. It's just a continuum on where you bet, which button you choose to hit. "

What about ink as a path to growth? Ink plays a critical role in the business model of the printer vendors. And ink formulations are closely tied to head design. Most of the head vendors' business models include a plan to profit with ink sales, but according to Marco, this has never happened. Mark points out that the ink business tends toward cartridges and a system of selling rather than the ink itself. The trigger for ink volume is fixed arrays, and that's only just beginning.

Microdeposition
Now, Path Three: find incremental markets rather than-or in addition to-working existing markets. That's where microdeposition comes in. We see it just beginning to emerge. Jetting edible decoration onto food products has been around for a long time and might be seen as a primitive precursor of materials jetting.

Now we see Spectra, for example, launching a new "Materials Deposition Division." Mark explains. "A way to speak of it, or better understand it, is to envision fluid manufacturing or what we've begun to term 'liquid engineering.' This means making things, making functional components using fluids as the raw material and inkjet as a means of depositing the fluid. When you speak of printed electronics, you are speaking of manufactured products, whether an antenna or transistor, as discussed in I.T. Strategies newsletter Spectrum a while back (December, 2004).

"Further ahead is a new frontier, proteomics. Proteomics is an emerging application which allows you to take a skeleton of something and jet living cells onto it to grow, say a body part, in the correct shape. And there's 3D modeling, which everyone knows about. These are manufacturing techniques that used to be looked upon as a bit weird. But there's a suggestion in the air now that manufacturing using fluids is becoming an accepted avenue in its own right, and inkjet is becoming the preferred mode. Why? Because it is the mode where you can address each individual drop element, totally integratable with information flow. So from a manufacturing perspective, for very fine, low volume manufacturing, it's incredibly interesting."

Marco makes it graphic. "Maybe this isn't the best analogy, but it's a very simple one. Imagine a slurry wall, where people are pouring cement into a form. That's how things are done today in a lot of manufacturing, right? Now, with microdeposition, you have bricks that you can use to build any shape or form. The downside of the technology is that, because it is 'artisan,' it probably lends itself initially to very small scale stuff rather than high volume manufacturing. Today it's not going to be used to create a million flat screen display panels a year-that's probably a way off. But, if you want to make ten prototypes, that's here now.

"The point is to expand inkjet away from just graphics printing and into physical manufacturing. This is the concept behind microdeposition. It's not about representing some thing graphically. It's about creating the thing itself. It's moving the head business away from graphics, which has become somewhat static, to something that's much more interesting, more alive, more dynamic."

"The idea has gone abroad. The concept is spreading rapidly. Now the work has to be done," Mark adds.

So where do you make your bets here? Do you bet on microdeposition as the wave of the future? Or on modules? Do you bet on branded products? A lot of these things we've been talking about depend on channels. Someone like Xaar doesn't have distribution channels to sell branded products. Someone like Panasonic or Samsung does, but now it's too late for the consumer market. So they push on offset replacement. Panasonic has demonstrated a direct mail printing press with Miyakoshi, and so forth.

But this will be a tough road for them, since the established vendors like Xerox and HP are already there. So it becomes a distribution access problem for even a big company like Panasonic, no matter how slick its technology, without the established access channel. Presumably, it seems, building an access channel once established competitors are there is extremely difficult.

Leveraging the Technology
Ultimately, Mark and Marco agree, vendors will have to find something completely different. This brings us to "the new industry" model. But not directly. They circle around more or less as follows:

MB: Things will have to change. Looking at distribution, going indirect will happen because as average selling price goes down, you can't afford to go direct anymore.
MH: Everyone is in trouble if things are premised on this same fragmented market.
MB: You say that, but you may not have a choice. As the industry is now structured, that looks like the way most of it's going to be.
MH: By leveraging this technology, you make a difference to the users of infinitely greater value.
MB: Yes, but you may not be able to harvest that value.
MH: I'm just raising the issue. As things stand, what we're talking about is that when it's all over, the total value of the industrial Inkjet print systems market may only ever amount to $10B to $20B, which is no substitute for the office revenues of digital print vendors at $100B.
MB: But even as the head business is structured today, it's easy to overlook the fact that as prices decline a lot, you have people buying stuff that gets used less intensively. On the consumer level it's like cars and TVs today.
MH: I think you're a bit printer-centric there. If you're just supplying printers, or print heads for that matter, it's not going to be that huge. But what you're doing really is altering a bigger process. In the industrial market you're printing things that used to be manufactured, whether it's a package or a transistor. Printing is part of a larger manufacturing process. I think this kind of technology will enable small-scale, localized, more flexible manufacturing. This will give rise to an industry, a new industry which in itself will be larger and more localized.
MB: Hmm, yes, it would be like Acrobat for Adobe. Acrobat itself generates only around $400M in revenues. But the value that Acrobat creates is in the billions of dollars!! It's changed how people communicate, saving people billions of dollars.
MH: That's right. Acrobat and the PDF created an industry within an industry that didn't exist before. It has transformed parts of the print industry.
MB: Absolutely! And that's the same thing that will probably happen here.
MH: You're enabling the transformation of various parts of manufacturing, and that's where the bigger dollars will be.
MB: Ultimately, you're going to see things we cannot even dream of because we're just not wild enough. Cosmetic surgery-using inkjet to grow new body parts, things like that. But we will enable it because the price of entry will be so low.
MH: What it means is that the print industry transforms itself to become part of manufacturing industries in both its print and manufacturing functions. Both the graphic and deposition function, part of integrated manufacturing techniques. They are building the box of a different industry that is part channel, part machine, part user-accessible technology.

Profiting from an Enabling Technology
But how do the participants get revenue from all that, we ask.

Acquisition on good terms may be one model. Business history is filled with industrial evolution as one industry merges into another. When this happens supplier companies often get acquired. That's one option as this technology vector unfolds.

We look for role models, and return to Adobe.

Adobe may get only $400M in revenue from Acrobat, but based at least partly on this product, as a company its revenues have skyrocketed. By giving an injection of new life, an elixir, into PDF, it has sustained a huge base of customers for other things it does.

Mark runs with it. "It's an organic whole. And that will also be the case as we merge into this new industry. Whether printing graphics or doing programmed material deposition, you are actually enabling a manufacturing industry to come into existence and have a long life. You are creating an ecosystem in this new industry you serve that provides a customer base for you later on. The biggest single vector of change here is technology-print technology or deposition technology-however you want to see it. That's the vector of change. Just as PDF was the most important vector of change that enabled the graphics industry and Adobe to thrive."

But a note of caution. As Marco remembers it, when Acrobat was introduced no one understood it very well, and it took maybe ten years to grow into the product it is today. So it will be with microdeposition. It will take time for it to grow.

There are, however, major pull factors. One is a desire in the electronics industry-not a small business-to extend the functionality of electronics into large areas. This means flexibility, throwaway cost, and the path to liquid engineering. What's happening, as we noted back in our 2004 article on printed electronics, is a universal, long term historic trend which sees a technology first defining an industry and then in time merging into the industry it serves.

Unlike some industrial applications such as textiles, Mark feels we don't need to try to educate potential users about the advantages of microdeposition as a manufacturing technique. They are keenly aware of the technology and its possibilities. They are not going to apply it right away, but they know it will play a growing role in coming years. It's no longer 'printing,' but rather a precision deposition technology that is part of the industry it serves. It's a kind of archipelago of industries that do new forms of manufacturing, a market base that is much bigger than just inkjet products.

It's a vector of change, an enabling product. It can't happen right now. But there are a lot of people out there who know about it and that's something new.

Value Creation
Consider today's office printer market, where we have gotten to maybe around $100B and can't seem to get beyond it. The expectation, or hope, has been that it can grow to a second $100B. This appears increasingly unlikely. But now, as reframed by Mark and Marco, that doesn't matter! The market for industrial inkjet systems may become only single billions of dollars. But like Adobe, it represents a key technology vector on which to build a future business base. It's not the revenue. It's the value creation. Our industry is ceasing to be one, and is becoming, say, five industries!

Marco sees a parallel in the film industry, noting it's essentially done, no matter how you look at it. "So Kodak says they are no longer in the photo business. Photos are just one element of publishing, or rather one part of a broader "infotainment" business. So it's no longer just $30B, rather perhaps $250B.

Mark agrees, noting that the photo business has diffused into a lot of peripheral industries that are all connected by the image. So now Kodak has a choice, the potential to put their mark on a variety of industries rather than being fixated on this one thing that got them to where they are today. "Its fragmentation driven by technology vectors created out of a group of key developments. Digital photography, CCDs created the destruction of the film business and the creation of all the image-driven industries we see springing up today, just as PDF has done for publishing and inkjet will do for manufacturing.''

It looks like the consultants are acknowledging a "limits to growth" challenge. Once that is accepted, they see new life being created. Not problems, but opportunities-much more productive than just trying to squeeze continued growth out of today's maturing markets.