Automation's Brave New Niche

A small machine called a replicator produced items seemingly out of thin air in the science-fiction series “Star Trek: The Next Generation.” Today’s rapidly evolving 3D printers may be a long way from conjuring a cup of Earl Grey tea, but they can whip up the cup.

The market for 3D printing, or additive manufacturing, is growing fast with the machines used to make everything from plastic models of consumer goods to end products such as dental fittings and aviation components.

“Modeling and prototyping are still the biggest application (for 3D printing), but the fastest-growing application is making parts that go into final products,” said Terry Wohlers, president of consulting firm Wohlers Associates. “That’s what’s really exciting. Aerospace and medical companies in particular (are using the technology).

Overall spending on 3D printers is forecast to reach $1.5 billion this year, up 15% from 2011, according to Piper Jaffray analyst Troy Jensen. He expects the market to grow 16% a year, to about $5 billion by 2020.

Wohlers Associates believes 3D printers and services will generate $3.7 billion worldwide in 2015 and pass $6.5 billion in 2019.

Shares of leading 3D printer companies Stratasys (SSYS) and 3D Systems (DDD) have been on a tear this year as investors have embraced their growth stories.

Stratasys of Eden Prairie, Minn., and 3D Systems of Rock Hill, S.C., are the top performers in IBD’s machinery-materials handling and automation industry group. The 10-stock group ranked No. 51 on Friday out of 197 industry segments.

In addition to the top 3D printing companies, the group includes makers of forklift trucks and hoists like Cascade (CASC), Columbus McKinnon (CMCO) and Nacco Industries (NC).

It also includes Perceptron (PRCP), which makes non-contact measurement and inspection systems for industrial and commercial applications. HollySys Automation Technologies (HOLI) is a provider of automation and control technologies and applications in China.

But it’s 3D printing that’s driving interest in the industry group.

1. Business
The technology for three-dimensional printing has been around since the late 1980s. What’s exciting people now are new applications, improved quality and lower-cost equipment.

“In the commercial market, the declining prices of the printers is stimulating new applications and greater usage of the machines,” said James Ricchiuti, an analyst with Needham Co.

Advances allowing the printers to use different and better materials has enabled more end-use parts, such as for dental fittings, hearing aids and medical applications, he says.

Low-cost 3D printers are attracting hobbyists who want to tinker around with the technology, Ricchiuti says. “It’s still very early to see how this technology fares in the consumer market,” he said.

Additive manufacturing is the process of building a solid 3D object by joining materials, usually layer upon layer. The systems read blueprints generated by computer-aided design models or 3D scanners to create parts that could be difficult or expensive to make any other way.

The automotive, aerospace, architecture, consumer goods and health care industries are all early adopters of the technology.

In the health care field alone, 3D printers are being used to make custom-fit hearing aids, as well as orthopedic and dental implants like crowns, bridges and caps. More than 500,000 3D-printed dental implants now are in patients worldwide, IBISWorld reports.

3D printing also is being used to produce models to help surgeons plan for complex surgeries.

2. Market
The “bread and butter” for 3D printer makers is high-end and mid-range machines, Wohlers says. Last year, manufacturers sold 6,050 machines costing $5,000 or more. Such 3D printers typically sell for $15,000 to $500,000.

The emergence of compact, low-end 3D printers costing $1,000 to $2,000 in the last few years has opened up the market to consumers. Last year, about 23,000 machines costing less than $5,000 were sold, Wohlers says.

Many of them went to do-it-yourselfers who make crafts, jewelry and other items. Schools also bought a lot of those cheaper machines, he says.

3D Systems started shipping a new product in May called the Cube home 3D printer. It retails for $1,300 and can print plastic objects as big as a 5.5-inch cube.

3. Climate
3D printers help companies cut the time it takes to develop new products and produce one-of-a-kind or limited-run items. This, in turn, reduces the time to market for new products and speeds delivery of other products.

If 3D printers can offer a competitive advantage to manufacturers, analysts argue, they’re likely to stay in demand despite the macroeconomic uncertainty.

But 3D printer sales have been cyclical. Industry unit sales were flat in 2008, down in 2009 and up the past two years.

Those slack years opened the door for industry consolidation.

The most active acquirer has been 3D Systems, which has purchased more than 20 companies since late 2009. Its biggest deal was buying Z Corp. and Vidar Systems for $135.5 million cash in January.

Stratasys has been conservative on the acquisition front, but is expected to close its merger with Israel-based Objet within weeks.

If the 3D printing market continues to grow as it has, 3D Systems and Stratasys themselves could become acquisition targets by industrial giants. Hewlett-Packard (HPQ) already has a reseller relationship with Stratasys.

“The next level for some of these companies would be an acquisition by a major corporation,” Wohlers said.

A host of smaller companies could be in play as well, including Stockholm-based Arcam; EOS, a Germany-based laser specialist; EnvisionTec, also in Germany; and San Jose-based Solido.

4. Outlook
Production materials act as a critical hurdle in the adoption of 3D printing as the market shifts from making models and prototypes to finished end-use products. Traditional manufacturing can choose from thousands of plastics, metals and other materials for producing goods. But the 3D printing space has only a couple hundred materials, Wohlers says.

Also, 3D printer companies look to those materials as a profit center, much like HP and other 2D printer firms view ink and paper. The prices for materials used in 3D printing have to be competitive with materials used in traditional manufacturing, Wohlers says.

Currently, the plastics and metals used by 3D printers are much more expensive than what’s available elsewhere. But the materials are sized and formatted to fit the printers.

If Stratasys and 3D Systems “cling to this old way of thinking” about printer consumables, he cautions, they could be outpaced by other companies selling cheaper materials.

A risk for investors: the 15-minutes-of-fame factor. The hype over the technology may be getting ahead of the 3D printer market growth.

“It’s never got so much attention before,” Wohlers said, pointing out recent coverage by USA Today, the Wall Street Journal and CBS Radio News. “The press can’t seem to get enough of it.”

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