Should you follow Warren Buffett in metal 3D printing?

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[vc_row][vc_column][vc_column_text]That was certainly true of aerospace parts manufacturer Precision Castparts, which Berkshire Hathaway (NYSE:BRK-A) (NYSE:BRK-B) acquired for an eye-popping $32.3 billion in 2016. It remains Buffett’s largest acquisition ever — and that’s before including the company’s debt, which put the real price tag at $37.2 billion. That was a hefty price to pay for a company churning out just $1.5 billion in annual earnings in a historically cyclical industry, and Buffett garnered a fair amount of criticism when the deal was announced. But the Oracle may have seen growth opportunities the rest of the market was largely overlooking — in combining the leading market positions of Precision Castparts in titanium alloys and technically complex engineered metals with the up-and-coming potential presented by metal 3D printing.[/vc_column_text][vc_single_image image=”2695″ img_size=”full”][vc_column_text]

Buffett’s long-term play

The ink dried on the deal at the end of January 2016. By the end of the year Precision Castparts would gobble up Atlantic Precision, a start-up in the metal 3D printing space focused on direct metal laser sintering (DMLS). The technology fuses metal powdered alloys used in additive manufacturing machines to create complex shapes with fine geometries. What was the reasoning?

One of the promises of metal 3D printing is to simplify the process for building complex metal parts and fittings in high-performance industries, such as aerospace, where Precision Castparts generates 70% of its annual sales. For example, additive manufacturing could significantly reduce the number of parts needed for various components of a jet engine, and make repairs and maintenance easier. Or it could reduce the time and cost of manufacturing titanium parts for landing gear, thus reducing weight on an aircraft and boosting fuel economy.

The acquisition of Atlantic Precision may not seem like much on its own, but zooming out provides a more complete picture of the overall strategy being deployed by one of Buffett’s newest wealth-building toys. Precision Castparts acquired primary titanium products supplier Timet for $2.9 billion in 2012 and nickel-alloy manufacturer Special Metals in 2006, which provided the technical capabilities to engineer titanium- and nickel-alloy powders. Couple that with DMLS technology, and one could argue the aerospace parts manufacturer is building an integrated technology stack to meet growing customer demand and curiosity in metal 3D printed parts.

Of course, although Precision Castparts is a leader in the space, it’s hidden in the vast portfolio of Berkshire Hathaway. There are better ways for investors to directly buy into the promise of metal 3D printing –not least because similar strategies are being deployed by other engineered-materials manufacturers with a strong focus on the aerospace industry.[/vc_column_text][vc_single_image image=”2696″ img_size=”full”][vc_column_text]

How to invest in metal 3D printing

A company needs three things to hack it in additive manufacturing with metals:

1. Powdered alloys
2. A process and/or machine for the specific part being built
3. Technical know-how of the required performance criteria of the part (temperature tolerance, stress and strain response, and the like)

The first two seem trivial, but there’s an avalanche of money being spent on research to determine which types of powdered alloys and processes result in the best-performing parts. The third requires a company directly involved in the fabrication of metal parts and knowledgeable about the end customer’s needs. All three ingredients for success are important, but the industry won’t go very far without a technology ecosystem supported by the first two.

Good news: Metal alloy leader Allegheny Technologies (NYSE:ATI) and industrial conglomerate General Electric (NYSE:GE) recently created a joint venture to develop and commercialize a manufacturing process for creating meltless titanium alloy powders for metal 3D printing applications.

Meltless titanium could result in a step change in how the world interacts with titanium.

Today, nearly all titanium is manufactured using the Kroll process. It involves feeding titanium dioxide into giant reactors, temperatures near 1,000 degrees Celsius, and messy reactions that produce gobs of carbon dioxide emissions and unwanted byproducts. But it works well enough, so industry tolerates the negative aspects.

On the other hand, processes that make meltless titanium alloys from titanium dioxide offer advances in nearly every step (and fewer steps altogether), from reduced temperatures and emissions to higher yields of the intended product. These processes can also create smaller particles and superior titanium alloys not accessible with the Kroll process, which could open up a new age of engineered materials and expand titanium applications far beyond the aerospace industry — or create the spark needed for the metal 3D printing industry to explode.[/vc_column_text][vc_single_image image=”2697″ img_size=”full”][vc_column_text]General Electric has been a leader in meltless titanium research for decades with relatively little to show for it, but years of investment are now starting to pay enormous dividends. And it has been a leader in the metal 3D printing for the last decade, manufacturing everything from jet engine turbines to locomotive engines — no doubt aided by GE Aviation and its locomotive business. It owns Arcam, which commands roughly 70% of the metal powder market for additive manufacturing. It’s also a major investor in the leading metal 3D printing machine start-up, Desktop Metal, which sells industrial-focused machines (despite what its name might suggest).

And now General Electric is linked up with the much smaller Allegheny Technologies, a leader in producing technically complex metal alloys. The under-the-radar company has long been a key supplier in the aerospace industry — and to the metal 3D printing efforts of General Electric and others — and brings a strong manufacturing reputation to the joint venture. That will be key to scaling meltless titanium production to commercial levels, especially considering Arcam’s 70% market share is backed by just 750 metric tons of annual capacity.

Alcoa spin-off Arconic (NYSE:ARNC) is also retooling its business to capture market share in the fledgling metal 3D printing space. The company already boasts customer relationships with leading manufacturers in the automotive and aerospace markets; is a leading supplier of aluminum, titanium, and nickel alloys; and recently began offering metal powders for additive manufacturing applications.

And similar to General Electric and Allegheny Technologies, Arconic is investing in new processes that will go hand-in-hand with metal powders to create value for its customers. The company’s Ampliforge process is being developed in-house to “improve production speeds, reduce costs, and achieve geometries not possible through traditional [manufacturing] methods”.

Investors can also invest in metal 3D printing by owning the additive manufacturing companies selling the machines in the first place, although that’s currently limited to ExOne(NASDAQ:XONE). Aside from being located in Pittsburgh like Allegheny Technologies and Arconic, the company doesn’t present a compelling opportunity in the space. While it has also tried its hand at selling metal powders, the revenue ramp has been painfully slow. That has made the lumpiness of machine sales (i.e. each metal printer is very expensive and relatively few are sold each year) more profound.

The company is slowly making progress, but it might be some time before ExOne turns a profit. Making matters worse, its technology may not even be the winner when the dust settles, which presents a technical risk that metal powders largely avoid, since powders will be needed no matter which process comes to dominate the space.

Should you follow Warren Buffett in metal 3D printing?

That technology risk brings up an important point: The metal 3D printing space is still in a very early stage. The winners and losers have yet to be determined, although interested investors won’t find better ways to directly invest in the emerging opportunities than General Electric, Allegheny Technologies, and Arconic.

Of course, the conglomerate presents the same obstacle as Berkshire Hathaway and Precision Castparts. That is, additive manufacturing has relatively little influence on the overall financial performance of General Electric today. But given its dominance in the overall metal 3D printing supply chain, few companies are better positioned to capture growth opportunities in the space.

Allegheny Technologies and Arconic also generate relatively little of their sales or earnings from additive manufacturing today, but both boast long-standing customer relationships that could be a difference maker down the road.

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AM Chronicle Editorial Team

The AM Chronicle Editorial Team is a collective of passionate individuals committed to delivering insightful, accurate and engaging stories to additive manufacturing audiences worldwide.