Winning vs. Incumbents with the Total Cost of Ownership

This essay builds on our previous analysis of Techno-Economic Paradigms and cost physics. You can read the full analysis here.

For anyone under 65, manufacturing seems simple: America designs, Asia builds. The conventional wisdom is that you can't compete with incumbent manufacturers who have spent decades optimizing their operations and building massive scale advantages.

But this arrangement is historically anomalous. For most of the 20th century, America was the factory of the world. At its peak in 1945, the US produced half of the world's industrial output. During the 1950s and 60s – one of America's greatest periods of prosperity – we manufactured 40% of the world's goods.

But with today's convergence of intelligence and automation, a reversal is on the horizon. As we explored in our previous essay, we're entering a new paradigm where automation and intelligence are fundamentally rewriting the underlying cost physics of manufacturing. But these advantages don't arrive all at once - they compound over time as technology matures. The winners won't be those who wait for complete transformation, but those who find ways to start winning today while building toward these emerging advantages.

How do you compete with entrenched incumbents while building these new capabilities? The answer lies in understanding Total Cost of Ownership.

Total Cost of Ownership

The key lies not in trying to immediately match incumbents' scale advantages, but in finding markets where other factors matter more than pure unit costs. By understanding Total Cost of Ownership (TCO) – the full system cost of delivering products to customers – new manufacturers can find powerful footholds even in markets seemingly dominated by incumbents.

The Total Cost of Ownership can be broken down into two categories:

The distinction matters because while direct components can be immediately quantified, secondary components often have larger long-term impacts on business success. A purely unit cost focus misses both categories – but it particularly undervalues these system-level effects that compound over time.

As shown below, there's an "opportunity zone" between TCO and unit costs where new entrants can compete effectively, even before reaching maximum scale efficiencies. This window allows entrants to win customers and generate cash flow while marching down the cost curve.

Companies can capture this opportunity through two distinct approaches, each targeting a different aspect of TCO:

The Direct Path: When your combined product cost and direct TCO components (duties, freight, inventory costs, etc.) are lower than the incumbent's total landed cost. This is the most straightforward win - pure mathematics showing that you deliver better economics even before considering secondary benefits. This may be the case for companies with:

• Long supply chains create significant working capital carrying costs
• Products facing duties, tariffs, or complex logistics
• Frequent market price changes make long lead times expensive

System Path: When your ability to reduce secondary TCO components creates enough value to overcome any remaining gap in direct costs. This approach is particularly powerful in markets where your product represents a small percentage of the customer's overall costs, but your capabilities solve critical business problems. This may be the case for companies where:

• Production delays cascade into massive downstream costs
• Quality validation and compliance create significant overhead
• Fast market feedback and iteration speed create competitive advantages

History validates this approach. Edison's electric lighting business exemplifies this dual-path strategy. Initially, he targeted customers like Ansonia Brass & Copper who valued system benefits enough to pay premium prices - reliability and fire safety were worth far more than the cost difference versus gas lighting. Hinds, Ketcham & Co. similarly valued the improved color-matching accuracy that electric lighting enabled for their printing operations. These early customers, willing to pay for system advantages, funded the scale and innovations that steadily drove down Edison's unit costs. By 1885, just five years after starting, Edison's costs had dropped over 85%, allowing him to compete directly on price while maintaining his system advantages. This combination - starting with system benefits then building direct cost advantages - proved unbeatable.

Modern companies follow similar strategies. Hadrian provides a clear example of this in aerospace manufacturing. They're winning contracts through both direct TCO components (by reducing inventory carrying and working capital costs through 10x faster lead times) and secondary components (higher quality control, better production visibility through their Flow system, and tighter customer feedback loops). The value of these advantages is particularly acute in aerospace, where a single delayed or defective component can halt final assembly lines costing hundreds of thousands per day. Following the historical pattern, they're expanding methodically: first mastering aluminum components, then moving to more complex materials like titanium and Inconel, while gradually extending into new industries like defense and medical devices.

What makes this approach particularly powerful is how these advantages compound. TCO benefits allow companies to win initial customers and generate cash flow even before reaching full economies of scale.

This creates an essentially unbeatable position: better economics across the entire cost stack while maintaining the systemic advantages in speed, quality, and responsiveness that won early customers. The incumbent, meanwhile, remains trapped by the limitations of their fragmented, offshore model.

The Way Forward

For companies looking to compete against incumbents, success requires understanding both the destination and the journey. Cost physics shows us where technology is taking manufacturing - toward automated systems that eliminate the labor arbitrage advantage that drove production offshore. But these advantages compound gradually as technology matures. TCO analysis helps us find the right battles to fight today - markets where we can win through either direct cost advantages or system-level capabilities. The key is choosing paths that not only generate immediate victories but position us to capture the emerging cost advantages as automation improves.

The roadmap for execution is clear,

Choosing A Path:

• Direct Path requires clear sight to unit cost advantages through scale and automation
• System Path requires unique capabilities that solve critical customer pain points
• Some markets offer opportunities for both - start with the path that matches your current strengths

Use these initial victories to fund your march down the cost curve. As you scale, expand into adjacent markets that value similar advantages. The goal is building toward an unbeatable position that combines both direct cost leadership and system-level capabilities.

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This is the moment when new industrial giants will emerge. The combination of understanding TCO - knowing where and how to compete today - with mastery of shifting cost physics creates an unprecedented opportunity. The next generation of great American manufacturers won't win by simply copying incumbents or waiting for future advantages to materialize. They'll win by finding the customers who feel the pain of the old system's limitations today, delivering immediate value through their chosen path, and using that foundation to build toward fundamental advantages that incumbents cannot match.

The stakes are enormous, and for the first time in decades, we have the opportunity to build the companies that define the next century of manufacturing.