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The Declining Cost of Distance
The Declining Cost of Distance
The forces that propelled the growth of cities and discouraged businesses from locating far from urban centers is being reversed by digital technologies.
Technology Briefing

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Transcript

During the Industrial Revolution, the nature of technology created changes in where businesses operated and where people lived. With mass production as the dominant paradigm, manufacturers located their factories close to harbors and railroad lines so they could reduce the time and cost of shipping their goods.

Workers left farms and migrated by the millions to the cities that sprang up around these factories, and as the workforce swelled, the demand for land in the urban areas drove real-estate prices higher. Small apartments and small houses on small lots at high prices became the norm.

For employers, distance equaled dollars. The farther a company needed to ship its goods, the higher the costs. And for employees, proximity came at a premium; the closer that workers lived to the factory or the company headquarters in the city, the more they had to pay in rent or mortgage payments.

Meanwhile, as retailers opened stores in the cities to serve the "huddled masses," their wide selection and relatively lower prices driven by economies of scale forced small neighborhood shops to close their doors. However, at distances of 25 miles or more from cities, the lower demand from the sparse populations meant that big retailers often couldn't succeed with the same business model (at least, until Walmart came along with a low-cost model and finally made it work).

Today, as the Digital Revolution unfolds, it is literally changing the landscape. Each of the forces that propelled the growth of cities and discouraged people and businesses from locating far from the nation's urban centers is now being reversed by the powerful impact of digital technologies. The result will be a new approach to spatial economics, or the cost of distance.

Consider these four revolutionary shifts:

  1. Because of 3D printing, manufacturers no longer need to locate near transportation hubs. Small satellite facilities can be located closer to the end-user, jobs can be outsourced to local 3D printing shops, or customers can purchase digital designs online and print their own products in their homes. The cost of moving digital goods is now zero. Even physical goods can be delivered at low cost by drones.
  2. Because of teleconferencing technologies and ubiquitous Internet access, office workers no longer need to commute to offices in cities. Employees can work in their homes or in co-op workspaces in their neighborhoods.
  3. Retailers are no longer limited to markets with dense populations. The products and services that were once only physically accessible in big cities can now be sold in stores in rural areas.
  4. Suddenly, workers do not need to make the agonizing trade-off between living in a small, expensive home close to work, or commuting two hours or more to the office from a larger, more affordable home on more land. There will be much less need to live in a city or within commuting distance of an employer.

As always, the catalyst for big changes in society, the economy, and consumer behavior is the rise of new technologies. As we move further in the Digital Era, the first waves of technologies and their applications-computing, the Internet, e-commerce, social media, and the Cloud-have multiplied in power year after year, so that digital storage is now virtually unlimited, processing speeds are instantaneous, and everyone is becoming connected to everyone else.

Now the next wave of technologies will crest, as billions of dollars in research invested in the Internet of Things, 3D printing, driverless cars, robotics, drones, and low-Earth-orbit satellites is about to pay off.

According to a report from Bain & Company titled "Spatial Economics: The Declining Cost of Distance," these technologies are enabling companies to focus on offering goods and services at a small scale, while the cost of delivering products will drop dramatically. For example, service robotics and 3D printing will lower production costs, while drones and driverless vehicles will lower delivery costs.

Based on this trend, we offer the following forecasts:

First, by 2020, manufacturing will begin to shift to local operations.

3D printing is reducing the costs of manufacturing so that it's possible to profit at a small scale, including the production of a single unit for a single customer. Companies will no longer need to invest in centralized manufacturing facilities and vast warehouses for their inventory. That means that businesses will need to be careful not to invest in assets that will be stranded by 2030, such as factories in locations that are now considered prime areas near transportation hubs.

Production will move closer to end-users, wherever they may be located. And those customers will increasingly move farther away from cities, because they'll be able to work remotely. That shift is already underway: While just 9 percent of American workers telecommuted in 1995, 37 percent say they currently telecommute or have done so in the past.

Second, by 2025, automation will revolutionize the service industry.

Consider how service robots will change the economics of three typical businesses:
  • Researchers from Bain's Macro Trends Group concluded that a casual dining restaurant that deployed service robots could cut its staff by two-thirds, from 25 people to just seven or eight employees. Wage costs would drop by 40 to 50 percent. The number of households the restaurant would need to served annually in order to break even would drop 30 percent, from about 5,000 today to about 3,500.
  • A clothing retail store that currently needs to serve 3,000 to 3,500 households per year would break even by serving 1,500 to 2,000 households, a reduction of 35 to 45 percent.
  • An Apple Store that currently needs an installed base of 2 million users in the vicinity will be able to profit in a community of just 200,000 people.

This means more restaurants and service businesses of all types could profitably serve smaller communities far from densely populated urban and suburban areas. Already, a hotel called Henn-na in Nagasaki, Japan is operating without human employees. Service robots handle guests' check-in, carry their luggage, and provide concierge services. The hotel is able to price its 72 rooms at $80 per night, and guests don't have to tip anyone.

Third, by 2025, America's population will increasingly move to exurban areas.

Research by Bain's Macro Trends Group suggests that population density maps will take the shape of a barbell. According to Bain, "Some cities will continue to grow successfully, attracting the wealthy, the young, and empty nesters. Another segment of households-especially middle-class families-is likely to opt for a big increase in space at lower cost, moving far away from city centers. Caught in the middle are the traditional suburbs-the old compromise that is neither spaciously rural nor conveniently urban-and small or medium-sized cities lacking sufficient urban appeal. Both would have to improve their offerings or face decay. On one end of the barbell will be cities with large walkable urban cores like New York, San Francisco, London, and Paris. These urban centers will be inhabited by an affluent cohort able to choose where to live without financial constraints...

The other end of the barbell will include what we call the "New Villages"-residential zones lying at the furthest edge of the traditional metropolitan commuter belt, more than 50 miles or a 90-minute commute from city centers. The New Village model will blend the most desirable features of rural living, particularly lots of living space at low cost, with many urban amenities. The declining cost of distance will help diminish the gap in goods, services, education, and healthcare between densely packed urban centers and the New Village.

In a post-urban economy, it will be even less important to live within commuting distance of an office building, or to relocate for a job. Instead, people will choose where to live based on lifestyle characteristics and amenities, such as good weather, a vibrant social and cultural scene, proximity to recreational activities, or extended family." By 2030, only the most desirable cities will continue to grow, while the population of many cities will drop by more than half-a-million people per year, and nearly 3 million people per year will migrate to the exurbs and New Villages.
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