By Lauren Hepler – Contributor, Silicon Valley Business Journal, Aug 9, 2018
It was the late 1930s, according to Silicon Valley lore, when two young Stanford graduates set up a primitive electronics shop in the garage behind their $45-a-month Palo Alto apartment. From the roughly 12-by-18-foot makeshift lab — really more of a shed than a garage — emerged something called a Model 200A audio oscillator. The product would soon help creators Bill Hewlett and David Packard forge a new tech hub in their orchard-covered hometown.
Silicon Valley’s most famous origin story might sound dated in a place where parking spaces alone now rent for several hundred dollars a month, but manufacturing is still alive and well in the region — albeit in a very different form. While tech heavy hitters like Apple and present-day HP are well-known for offshore manufacturing, the Bay Area’s own manufacturing industry has expanded in the last decade to address increasing demand for custom R&D projects, rapid prototyping and easily accessible industrial space for fast-growing startups.
“The good news now is the Bay Area is booming,” said Rock Magnan, president and CEO of Fremont-based warehouse and logistics provider RK Logistics Group. “The bad news now is the Bay Area is booming.”
Last fall, 35-year-old RK Logistics was seeing enough demand from local manufacturing clients like Tesla to expand with a new, 50,000-square-foot Fremont factory, the company’s 14th outpost in the region. While there’s no shortage of potential customers in industries like automotive, medical devices and retail, Magnan said growth is still tempered by the day-to-day realities of doing business in Silicon Valley — namely, wages up 20 percent in the last two years and real estate costs that have surged 35 percent to 40 percent in the last 18 months.
“There’s a shortage of warehousing space,” Magnan said, adding that clients are now evaluating space as far away as Modesto. “There’s a shortage of employees. Most of our workforce is coming in from the Central Valley now.”
Add to those local development dynamics a global debate about the future of American manufacturing and trade, and Silicon Valley supply chain players are racing to keep up with increasingly technical customer demands as their own industries shift. Technologies like robotics and on-demand logistics services are quickly changing the expectations of companies seeking manufacturing support.
Still, manufacturing is a vast and varied world. For decades, South Bay and East Bay cities along Interstate 880 have been home to hundreds of companies in logistics and industrial services. In the last five years, more high-tech contract manufacturers have clustered in the region to be closer to a new generation of hardware companies making everything from Tesla’s electric vehicles to smart home sensors or medical devices.
The thinking among suppliers pioneering robotics, artificial intelligence and other emerging technologies for factories of the future: Being close to R&D shops looking to quickly churn out prototypes is a good way to get in on the ground floor of a new startup or product line that could produce high volume later.
For manufacturing-centric businesses that have moved to Silicon Valley in recent years, like Germany-based Kuka Robotics, the region requires not just a shift in cost projections, but also adapting to tech clients who increasingly expect on-demand, end-to-end production services.
“It is really different from a lot of other areas and a lot of other manufacturing,” said Pete Bremer, operations manager for Kuka Robotics. “You could characterize it as the Amazon-ation of an industrial business.”
An industrial space race
For Kuka Robotics, setting up shop in Silicon Valley wasn’t just about rubbing elbows with tech luminaries. The company opened a 9,000-square-foot Fremont facility three years ago to offer custom robotics demos, training and on-call service for brainstorming and other R&D needs to potential customers in the automotive and electronics industries.
“We needed to be here,” said Bremer, who oversaw buildout of Kuka’s Fremont space. “Customers want to be able to interact with the robot.”
The company is one example of many that cities like San Jose and Fremont have tried to court as a way to diversify their local economies. Electronic contract manufacturers have been in the Valley since the days of the first semiconductor boom, specializing in necessities like welding, logistics and equipment support. Now, manufacturers pushing the envelope with precision services, automation and robotics are opening new R&D shops.
“At a minimum, what they will look to do is establish even a small presence here,” said Christina Briggs, deputy director of economic development for the city of Fremont. “Their competitors are locating here. The Teslas are here.”
As suppliers and advanced equipment manufacturers move in, cities are looking to grow long-envisioned innovation districts that promise streamlined permitting and unconventional zoning allowances. In Fremont, guinea pig neighborhoods include the area around the Warm Springs BART station, home to Tesla’s flagship auto plant and large facilities for companies like ThermoFisher. The Ardenwood district has also attracted big office leases from both Tesla and Facebook in recent months.
“We’ve allowed for both an office-type development to occur, but advanced manufacturing as well,” Briggs said. “You used to see those types very segregated.”
At the regional level, San Francisco manufacturing advocacy group SF Made has spearheaded the Bay Area Urban Manufacturing Initiative, which launched two years ago with the cities of Fremont, San Jose, Oakland and San Francisco. More than 20 smaller cities have joined since, with the group offering toolkits and policy recommendations for attracting manufacturers.
Still, comprehensive numbers on today’s manufacturing landscape are hard to come by, in part because of a tradition of competition between cities vying to bring new business to town. A 2016 report by the Bay Area Urban Manufacturing Initiative using 2014 data found that San Jose was still by far the biggest hub for manufacturing activity, with 1,200 companies and 65,000 jobs in the sector. At one-fifth of the size of San Jose, Fremont boasted 850 manufacturing tenants at the time and 26,000 jobs, though Tesla alone now claims to employ 10,000 factory workers in the city.
In Fremont, Briggs said space demands range from companies seeking small-scale demo or sales floors measuring 10,000 square feet or less to larger suppliers looking for 50,000 to 60,000 square feet for warehouses and prototyping operations. As a result, large brokerages like JLL and CBRE grown their presence in the market. One JLL report on California manufacturing found that the East Bay is seeing demand grow at the “fastest pace in nearly 20 years,” with more than a quarter of new projects under construction pre-leased and vacancy rates on par with the early aughts.
The question now: Who will be able to survive a budding cage match for industrial real estate — a scenario that might sound familiar to anyone who has tried to lease an office or buy a house in the Bay Area in the last few years.
“The epicenter for high-tech manufacturing and R&D is shifting north along the 880 corridor, toward Fremont and Newark,” according to the JLL report. “Competition for available space favors office and tech tenants that pay higher rents, and with few development projects in the pipeline, industrial tenants must be willing to relocate.”
Not unlike sky-high Bay Area housing and office costs spurring locals to look further inland, Magnan said suppliers are now confronting the question of how far is too far when it comes to customer proximity. As markets like Livermore approach cost parity with inner-ring cities like Fremont, even cities 50 to 75 miles away in Tracy and Stockton are approaching 80 percent of the cost in the Bay Area, Mangan said. And that doesn’t factor in traffic.
“What used to be a 40-minute commute is now a two-hour commute,” Magnan said. “Everything you gain in real estate costs, you give up in transportation costs.”
Growing in place
For RK Logistics, one key to making the math work for industrial space so close to Silicon Valley proper is striking a balance between big, high-volume customers and growth-stage companies just getting their supply chains in place.
With area clients like an electric motorcycle manufacturer and a purveyor of electric skateboards, Magnan said, companies are often ill-equipped to begin managing large volumes of inventory. Rapidly increasing sales, he said, can sometimes lead to unanticipated logistics nightmares.
“All the sudden, their products are being sold all over the place, but skateboards need new wheels,” Magnan said. “They’re into a spare-parts business they never considered.”
Inside RK Logistics
One way service providers like RK Logistics find their way to overwhelmed clients is through cities looking to keep startups growing in the Bay Area, rather than immediately outsourcing all supply chain functions. A key priority of the Bay Area Urban Manufacturing Initiative, Briggs said, is playing matchmaker between companies and cities with similar strengths. When small-scale artisanal manufacturers or nascent hardware startups outgrow San Francisco’s extremely constrained real estate, for example, the idea is that they can simply look south.
“Instead of looking overseas, you could just drive down the 880 corridor,” Briggs said. In addition to encouraging, “smaller-batch, IP-sensitive manufacturing,” she said, economic development looms large: “The bigger imperative we think, at a regional level, is around job growth.”
Aside from land costs, labor is perhaps the murkiest element of the Bay Area’s manufacturing rebirth. At RK Logistics, Magnan said the company — which employs some 800 people — is often short-staffed, due in large part to high turnover within the first year on the job.
“They haven’t replaced anybody,” Magnan said of the robots the company has implemented instead of forklifts and push carts. “We can’t fill the demand we have currently for good people.”
Such day-to-day reports have done little to supplant overarching anxiety about Big Brother scenarios. In Japan, for instance, Japanese robotics company FANUC since 2001 has been operating a facility “where robots are building other robots completely unsupervised for nearly a month at a time” — so self-sufficient that the building doesn’t require lights, according to an April report by CB Insights.
At Kuka Robotics, both large-scale manufacturers and boutique R&D users are increasingly interested in customizing robots, Bremer said. Applications range from simple welding where “there simply isn’t a human to do the job,” he said, to highly specialized use cases for car companies or other electronics.
In either case, Bremer said the goal is being brought in at the back-of-the-napkin stage of a new idea.
“We found it was critically important to be where the products are being designed.”
The hope, he said, is that Kuka will later be able to tap its production outposts in China and beyond to produce ideas spawned in Silicon Valley at scale — one illustration of the way high-tech’s tentacles now reach increasingly long and complex global supply chains.