A version of this article appeared in the Winter 2021 issue of strategy+business.
Angelo Yu had a problem. It was late 2019, and US President Donald Trump had spent much of the previous two years tweeting increasingly bellicose denunciations of the Chinese government. At the same time, the White House had been progressively ratcheting up tariffs on Chinese imports to the US. This looked like bad news for Yu’s startup, Pix Moving. Based in Guiyang, a city 1,000 kilometers (620 miles) northwest of Shenzhen, the firm makes the chassis for a new class of autonomous vehicle. The tariffs made everything more expensive.
A lesser entrepreneur might have had to raise prices for his first customers. Not so Yu. He had a solution: Pix Moving was using only the most modern “dematerialized” manufacturing techniques. Rather than exporting cars, Yu explained that his company “exports the technique that is needed to produce the cars.” Vehicles are not loaded onto container ships and sent to their destination. Rather, the company sends design blueprints over to colleagues in the US, who use additive manufacturing techniques to print components locally. From those components, the finished product can be assembled. Yu’s approach could skirt around customs inspectors (and tariffs). Additive manufacturing lets him build wherever his customers are, trade conflicts be damned.
Pix Moving reflects how manufacturing will change as we move further into what I am calling the Exponential Age, an era in which exponential technologies are changing the way business operates. I define an exponential technology as one that can improve, at roughly a fixed cost, at a rate of more than 10% per year for several decades. The 10% threshold is important because it means the technology becomes 2.5 times more powerful every ten years. A decade is only two traditional business cycles.
The Exponential Age is challenging our assumptions about globalization. On one level, Yu’s story reveals a highly globalized economy in action: a car can be designed in Guiyang and assembled in California with remarkable ease. But it also represents an inversion of globalization—a return to the local.
For decades, supply chains have been getting longer and production processes more international. The various components of a car might be manufactured in a dozen countries and assembled in more than one. In the future, however, manufacturing can happen near to the consumer. Thanks to 3D printing, components can be produced locally; although the design might come from anywhere, the finished product can be crafted in a local workshop and handed to a customer who lives close by.
It wasn’t meant to be this way. Thomas Friedman’s bestselling 2005 book, The World Is Flat, declared itself to be a history of the 21st century. Its argument: the world is entering a third phase of globalization. The first, which began with European exploration of the Americas, is most frequently associated with colonialism and the globalization of trade between countries. In the second, which got going in the 19th century, the focus shifted to the activities of transnational corporations—culminating in the monolithic industrial firms of the postwar era. In Friedman’s third phase, globalization would reach a new level—with flows of trade, labor, and information becoming ever more international.
Yet following the global financial crisis of 2007–09, globalization started to lose its luster. It had grown in tandem with the financialization of national and global economies—as trade grew, so too did the importance of borrowing and lending, often through increasingly complex financial instruments. When the financial crisis hit, the pain was not limited to investors; it spread into the “real” economy. In richer countries, many felt that globalization had led to the offshoring of blue-collar jobs to the emerging economies of the developing world. After 2010, there was an increasing turn toward nationalism in many countries: key examples are the Brexit vote in the UK and the election of Trump in the US. Although globalization remains a potent force in the world economy, it is also increasingly unfashionable.
A return to the local
The recent rise of nationalism is a story that most readers will be familiar with. Less well-scrutinized, however, is the way exponential technologies both create the rationale for more borders and provide the tools to build them. We often assume that the more high-tech a society becomes, the more global and borderless it will be. And until recently, that has often been true. But no longer. Many exponential technologies lead to a return to the local. These breakthrough technologies favor the near over the far.
Exponential technologies create the rationale for more borders and provide the tools to build them. We often assume that the more high-tech a society becomes, the more global and borderless it will be. And until recently, that has often been true. But no longer.
It’s not just the 3D printers relied on by entrepreneurs like Angelo Yu. Exponential technologies also facilitate the local production of energy and food, in a way that would have been prohibitively expensive until recently. And new technologies, and the businesses built on them, often need large numbers of people interacting with one another in close proximity—something only cities can offer.
As the 21st century unfolds, the localizing potential of technology will only become more powerful. The coronavirus pandemic that began in 2020 showed how fragile global supply chains could be. But if it was a virus in 2020, in the future it could be war or extreme weather—exacerbated by anthropogenic climate change. The result is an era in which, once again, geography matters, with economic activity set to become increasingly local.
There is an irony here. The economic paradigm that brought about the Exponential Age—globalization—has fostered technologies that will lead to a return to the local. But our political and economic systems were not designed to cope with the new age of localism. As so often happens, gaps emerge. Between the economic policies advocated by our political institutions and the actual workings of an increasingly de-globalized economy. Between the countries that can adapt to the new age of insularity and those that can’t. And between the creaking nation-state and the newly empowered cities, whose influence has been turbocharged by new technology. The world is not flat. It is very, very spiky.
Those of us born in the late 20th century inhabit a world of global trade that Adam Smith and David Ricardo could only have dreamed of. The supply chains of this global world touch every part of our lives. As we progress even further into the Exponential Age, the tendency toward global trade in physical commodities is being inverted. There would be no need to exchange all those goods if you could source everything that you needed locally. In the case of food, we wouldn’t go to all that effort if it was straightforward to grow food—whether tomatoes or bananas or pineapples—in rainy Britain. And the new technologies of the Exponential Age create that very possibility.
Farm at the table
High-tech entrepreneurs have started to bring farming closer to where the food will be eaten. Urban vertical farms, popular in Japan and spreading elsewhere, are unusually efficient. In this setup, the traditional field is chopped up and assembled in indoor stacks. A modern vertical farm may run to 12 or 13 stories high, each with a floor area of a few dozen square meters. This method increases the productivity of each square meter of “farmland”: when built vertically, 40 square meters of growing area can concertina to nearly ten times that. Using AI systems to control lighting, water, and heat drives even more efficiencies. Computer-controlled intensive farms do not require pesticides or other chemicals. Some require substantially less water than traditional farms. Soil is eliminated in favor of hydroponics (in which the roots dangle in water) or aeroponics (in which a nutrient-dense solution is misted onto the roots). Rather than using ordinary greenhouse lights, with their wide spectrum of colors, some vertical farms’ lights shine only the precise wavelengths to which the vegetables respond. Not even a photon of light is wasted. The farms’ energy costs decline, and by using renewable energy (often supplied via solar panels on the roof of the building), their carbon footprint drops even further. Provided one has the resources to invest in the technology, these farms can be built more or less anywhere.
Historically, food needed to be transported from rural farms to urban centers. But the new technology of urban farming means this does not have to be the case. With their smaller footprints, farms can be closer to the mouths they feed—sometimes even in the city they serve. Montreal’s 15,000-square-meter Lufa Farms greenhouse, the world’s largest, sits directly on top of a distribution warehouse. A tennis court is less than 300 square meters; Lufa would easily fit 50 of those. The proximity of Lufa to its consumers allows for fresher produce, cultivated for nutrition. And many urban farms are following this template: built close to the retailer, so that the tomato practically rolls from its vine into your shopping bag.
As of 2020, vertical farms had a tiny share of the food market. But the market for high-intensity vertical farms is growing at more than 20% per annum, on the march up our exponential curve. The effects of this shift could be staggering. If, in the 20th century, that ancient human problem—that you can only eat what is nearby—was solved by globalized logistics, then the 21st century offers an alternative solution.
The energy trade
Today, you can use technology to transform what is actually nearby. But there’s another solution that is even more radical. New technology reduces our dependence on certain classes of commodities altogether. Let’s turn now from kale to coal. For a hundred years, we have moved around vast quantities of fossil fuels to meet our energy needs. Cargo ships laden with coal, then tankers with oil, and finally refrigerated supertankers for natural gas all move prehistoric energy from its source to giant power stations. Apart from the handful of nations with energy self-sufficiency, fossil fuels drive a large portion of world trade. They are so essential that the United States has kept an almost permanent military presence in the Persian Gulf to ensure the flow of crude oil continues unabated. But renewables can now put every nation on a path to energy independence. Once wind turbines are installed or a solar farm is deployed, they require few raw materials. Such power supplies are fast becoming ubiquitous.
This shift to renewable energy drastically reduces the amount of “stuff” that needs to be carted around. In 1998, the UK consumed 63 million tons of coal, three-quarters of which went into electricity generation and a third of which was imported. A mere 21 years later, coal demand for electricity had reduced by 94% and imports were down by 70%. This is combined with a wider trend, in which we get more out of the electricity we use. Between 1999 and 2019, British GDP increased 75%—yet the amount of electricity the economy uses declined by 15%. We literally create twice as much wealth for every kilowatt-hour of electrical energy we use.
And this is only one example; dozens of countries, from the US and Germany to Uzbekistan and Ukraine, have had similar experiences. The shift away from fossil fuels and toward renewables reduces global dependence on fossil-rich nations. Solar energy, thankfully, is much more equitably distributed. Although not every nation is rich in fossil fuels, solar energy is possible everywhere. The most solar-rich nation, Azerbaijan, only gets four times more sunlight per square mile of land than the most impoverished, Norway. That may sound significant, but it is a relatively minor variance. The equivalent disparity between the haves and have-nots for oil is more than a million to one.
This shift is being charged by not only new forms of electricity, but new methods of energy storage. In an age of green energy, storage systems become more important—after dusk, solar farms become useless, and so you need a way to store large amounts of electricity. And many of the new methods of storage bring electricity closer to home. Our electric vehicles can hoard electricity that could also power our homes and offices through so-called vehicle-to-grid systems. The average electric car stores about 50 kilowatt-hours of electricity, enough to run the typical British or American home for five days. It will become commonplace for our electric cars to lend their stored electricity to our homes when it is dark. Britain alone is forecast to have as many as 11 million such cars by 2030. If each owner were willing to share a bit of the surplus energy stored in their cars with their neighbors, it might cover the whole country’s needs.
My friend Simon Daniel is an inventor whose work reveals the power of these newly localized storage systems. His first success was a folding keyboard he designed in the 1990s, just as the PalmPilot, an early pocket-sized tablet computer, was taking off. His latest adventure is to string together thousands of batteries to make a gigantic virtual power plant. For Moixa, his company, to buy the batteries itself, it would need large amounts of capital, perhaps running into the tens of millions of dollars. Instead, he’s persuading owners of electric cars to connect to his network. Together, these idle car batteries form a giant virtual power plant. Daniel’s platform manages them and uses sophisticated algorithms to balance usage across the whole network. At last count, he had managed to combine 20,000 batteries in several Japanese cities. That’s enough to power 25,000 Japanese homes for a day. It is like alchemy—replacing a massive power station, smokestacks rising into the sky, with a web of cars, parked on driveways, keeping homes running as we sleep.
These trends—the re-localization of commodity production, plus our decreasing dependence on some commodities—mark a radical shift. Soon, we may be able to fulfill many of our material needs without relying heavily on international trade. In the Exponential Age, manufacturing is becoming less about putting shoes, phones, car components, or prosthetics onto standardized six-meter containers and shipping them around the world. Instead, manufacturing is taking the shape outlined by Angelo Yu. The idea is shipped across the globe, but the building process takes place at a printer or fabricator close to the point of consumption. This new paradigm could make much of the global network of factories, logistical supply chains, and offices redundant. They become liabilities. This increasingly localized world of manufacturing is driven by the new norms of the exponential economy.