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How the Nanotechnology Revolution


Will Affect Cost Management

Saurav Dutta, Raef Lawson, and David Marcinko

N
anotechnology sphere of modern soci-
is a technologi- Nanotechnology—the application of research about ety. It includes the
cal revolution objects at the molecular level—holds the promise of development of nano-
that will significantly transforming the processes used to produce goods, materials, revolution-
impact almost every revolutionizing whole industries, and transforming ary materials that will
industry and almost society as a whole. This article explores the cost be stronger, lighter,
every area of society. management and corporate financial implications of and “smarter” than
It will enable the this coming revolution. © 2006 Wiley Periodicals, Inc.
those currently avail-
manufacture of prod- able. Carbon nano-
ucts that are built bet- tubes, which are
ter, last longer, and are which deal with the study of stronger and lighter than steel
“smarter” than anything that objects at the atomic level. The but conduct electricity better
exists today. This technology goal of nanotechnology is to than copper, have already been
will dramatically affect manu- manipulate millions of individ- developed. Other new materials
facturing processes and the way ual atoms into a given pattern in in development include materials
businesses operate. order to produce a desired struc- that have the ability to react to
This technology will signifi- ture or product. This will enable changing conditions.
cantly reduce the variable costs the manufacture of items with Nanotechnology also
of production but will require incredible precision. includes nanoelectronics,
significant up-front technologi- The idea behind nanotech- through which incredible reduc-
cal investment. While this nology has been around for quite tion in the size of electronic
emerging field has received con- some time. Nobel Laureate components, especially comput-
siderable attention in the techno- physicist Richard Feynman first er chips, will be possible. Final-
logical and popular press, this proposed the idea of building ly, the new technology includes
has not been the case in business things by individually arranging the development of nanosys-
or finance. In this article, we atoms in 1959: “it is something, tems. These are small systems
identify the impact that the in principle, that can be done; that can be viewed as an exten-
emergence of this new technolo- but in practice, it has not been sion of biotechnology. They
gy will have on businesses, par- done because we are too big.”1 include such things as virus-
ticularly in the area of cost man- Recent technological advances size motors. These and many
agement and corporate finance. are helping to overcome the other similar inventions will
physical hurdles of individually greatly impact the health care
NANOTECHNOLOGY DEFINED rearranging atoms: we will soon industry. The effects of nano-
no longer be “too big.” technology will be pervasive,
Nanotechnology includes Nanotechnology will signifi- affecting almost every industry
many areas of research, all of cantly impact almost every in some way.
© 2006 Wiley Periodicals, Inc.
Published online in Wiley InterScience (www.interscience.wiley.com).
DOI 10.1002/jcaf.20196 37
38 The Journal of Corporate Accounting & Finance / March/April 2006

STAGES IN THE DEVELOPMENT IMPACT OF NANOTECHNOLOGY tained within small blocks, which
OF NANOENGINEERING ON PRODUCTION are then fastened together by the
trillions to make a product.
The theories for using The introduction of nanotech- Once a successful prototype
mechanical chemistry to directly nology will vastly improve the design has been developed, it can
manufacture nanoscale structures quality of products made by a be rapidly replicated and distrib-
are well developed. Progress is manufacturer using this technolo- uted for widespread use. This
now being made in the enabling gy. The products will be precise to will reduce transportation costs
technologies. It is estimated that within the size of a molecule and as well as the time and costs
at the current rate of development, have perfectly smooth surfaces. associated with product distribu-
exponential general-purpose The introduction of this tion. A prototype design could be
molecular manufacturing might technology will affect not only sent to nanofactories all over the
become a reality by 2010, is likely the products produced by a man- world, and local factories could
by 2015, and almost certainly will ufacturing process, but also the reconfigure and produce the
be present by 2020.2 processes themselves. Due to the product with ease for immediate
The development of nano- assembly of goods from the local distribution. A designer
technology will take place in molecular level up, there will be working with a few basic blocks
three stages. The first stage, pos- no waste in the production of could design, build, and test a
sible since the 1990s, was the goods. This will eliminate the simple product in less than a day.
development of the ability The production and distri-
to individually manipulate The introduction of nanotechnology will bution time for a product
atoms—that is, to pick also has the potential to
them up and place them in vastly improve the quality of products shrink to less than a day.
desired positions. This abil- made by a manufacturer using this Nanotechnology will not
ity will allow the manufac- only enable production of a
ture of items with no scrap
technology. large number of high-quality
and with almost perfect products at a very low cost,
efficiency and accuracy. but will also allow the pro-
The second step will be the production of unwanted by- duction of new nanofactories at
development of assemblers— products and the possible pro- the same low cost and at the same
machines that can be programmed duction of pollutants. Parts of rapid speed. There will be the abil-
to manipulate atoms and mole- machinery made using this tech- ity for factories to build other fac-
cules. Assemblers will have a sub- nology that come in contact with tories—rapidly, cheaply, and
microscopic robotic arm manipu- each other will fit perfectly cleanly. The means of production
lated by computer control. These together, reducing wear and tear will be able to reproduce exponen-
devices will perform assembly at due to abrasion as well as the tially. In a short period of time, a
the nano level, arranging atoms need for costly lubrication and few nanofactories conceivably
into their proper place. cooling systems. In addition, could become billions. Nanotech-
The third step will be the having such perfectly fitting nology is a revolutionary, powerful
creation of enough assemblers to parts with smooth surfaces will technology.3
build consumer goods. This will reduce friction, thereby dimin-
be achieved through the use of ishing energy consumption. STRATEGIC COST
replicators—assemblers that are The power of nanotechnology MANAGEMENT
programmed to build more can potentially be contained in
assemblers. The ability to make simple devices called nanofacto- Strategic cost management
nanorobots self-replicate is a crit- ries. These units, which will be uses value-chain analysis4 to pro-
ical key to making this new tech- able to sit on a desktop, will be vide a framework for representing
nology a reality. This idea is sim- packed with miniature chemical and analyzing the strategic deci-
ilar to that of biological cells that processors, computing, and robot- sions made by a company regard-
self-replicate in all living organ- ics. They will be able to produce ing its position in the extended
isms. It is the discovery of how a wide range of items quickly, industry in which it operates. Use
to create and control this process cleanly, and inexpensively, build- of this tool also facilitates the
that is currently a constraint that ing products directly from blue- detailed analysis of the processes
needs to be overcome. prints. Functionality will be con- required to provide a competitive

DOI 10.1002/jcaf © 2006 Wiley Periodicals, Inc.


The Journal of Corporate Accounting & Finance / March/April 2006 39

product or service. The processes adoption of nanotech methods, little ability to control the magni-
required to provide a product can the impact on total profits and tude of these costs, as they have
be pictorially represented through cash flow will tend to be less dra- already been “designed in.” With
a value chain, which typically matic. The impact will primarily nanotechnology, both the percent-
begins with research and develop- be restricted to the shifting of ages of costs committed and costs
ment (R&D); continues through costs from downstream (such as incurred early in the life cycle of
product design and engineering, failure costs) to upstream (higher a product will be even higher.
resource sourcing, manufactur- cost for parts manufactured Early consideration of the total
ing, marketing, and distribution; through nanotechnology). This cost incurred over the entire life
and ends with customer service shift in costs, however, may be cycle of a product, rather than
supporting the ultimate consumer. accompanied by a shift in the just the cost of manufacturing,
(See Exhibit 1.) For some prod- profitability of the various seg- becomes much more important.
ucts, this chain may also include ments of the external value chain, Exhibit 2 contrasts the costs
postsale service and the cost of and companies should perform a incurred over the life cycle of a
disposal of a product by the final value-chain analysis prior to product in the traditional manu-
customer. Performing a value- negotiating with suppliers or facturing and nanomanufacturing
chain analysis is useful when making strategic investment deci- environments. In traditional man-
examining the lifetime profitabil- sions in this new environment. ufacturing (as compared to
ity and cash flow implications of Organizations adopting nan- nanomanufacturing), incurred
a new product or technology. otechnology in their manufactur- costs are more evenly spread
The advent of nanotechnolo- ing will face much higher initial over a product’s life cycle, with
gy is likely to affect the extended developmental costs than previ- significant costs incurred in the
value chain in every major indus- ously incurred. However, production, sales, and after-sales
try. For some organizations, nan- nanomanufacturing techniques phases. Companies utilizing
otechnology will have a direct will reduce the costs of produc- nanomanufacturing techniques
effect on their internal value tion and other downstream costs. will incur most costs upstream in
chain. For others, it will have an For example, distribution costs the development and prototyping
indirect effect through the exter- can be vastly reduced as proto- phases and relatively few costs in
nal value chain (which extends types are sent electronically to the production, sales, and after-
forward and back to include sup- nanofactories and production is sales phases. Exhibit 2 depicts
pliers’ and customers’ value localized to places where higher total costs when employ-
chains) of which they are a part. demand for the product is great- ing traditional manufacturing
From a profitability and cash est. This will eliminate the need methods to signify the economic
flow perspective, the impact of to distribute and ship inventory feasibility of nanomanufacturing
nanotechnology will likely be far of the products, reducing ship- for a given product. If traditional
greater for those organizations ping, storage, and related costs. manufacturing yields lower total
that adopt this technology, there- Under conventional technolo- cost for a given product, as is
by affecting their internal value gy, typically 80 to 90 percent of currently the case, nanomanufac-
chain, than for those that are a the total costs associated with a turing techniques will not be
part of an extended value chain product are committed in the employed for a product.
adopting this technology. Though early stages of a product’s life Exhibit 3 extends the above
these latter organizations will be cycle. By the time production analysis by superimposing rev-
indirectly affected by nanotech- begins, while much of the costs enue and cash inflows onto the
nology through their suppliers’ remains to be incurred, there is prior exhibit. Revenues com-

Exhibit 1
Internal Value Chain

© 2006 Wiley Periodicals, Inc. DOI 10.1002/jcaf


40 The Journal of Corporate Accounting & Finance / March/April 2006

Exhibit 2
Costs Incurred over the Life Cycle of a Product

mence at the initial point of sale. Since the initial development even on a product (graphically
However, cash inflows lag rev- costs are higher in nanomanufac- represented in Exhibit 4 as the
enue by the collection time. The turing, the losses in the initial point at which the profit curve
revenue and cash-inflow curves period are higher as well. Howev- crosses the horizontal axis) will
are approximated as straight lines; er, the situation changes once typically be later when employing
these assume constant sales price sales commence. Nanotechnology nanomanufacturing. This is due,
and uniform sales over time. The will have much lower costs of as mentioned previously, to the
line depicting cash inflow lies to production and a resultant higher higher front-end cost incurred
the right of the revenue curve to gross margin. Thus the increase (and subsequent lower cost of
portray the average collection in profits in a nanoenvironment manufacturing). It is important to
period of the receivables. The due to an increase in sales will be note that while this will be true in
longer the collection period, the greater than those in a traditional general, it may not be true in all
larger the gap between the cash manufacturing environment. In cases, and the exact situation will
inflow and revenue curves. the traditional manufacturing depend on the extent of the
Exhibit 4 extends the above environment, production costs are upstream development and proto-
analysis to the profit domain. The more substantial, causing profits typing costs.
various phases of a product’s life to accumulate at a slower pace, Exhibit 5 extends Exhibit 4 to
cycle are indicated on the hori- and resulting in a flatter profit the cash flow domain and com-
zontal axis, and the cumulative curve due to the lower unit gross pares the cumulative cash flows
profit is graphed on the vertical margin. Exhibit 4 again depicts under traditional manufacturing
axis. During the initial phases of higher eventual profitability when with those under nanomanufactur-
the life of a product—R&D, pro- employing nanomanufacturing to ing. The effects on cash flow are
totyping, and initial production— signify the economic feasibility similar to those on profits—that
there is no revenue generated of the process. (If this was not the is, traditional manufacturing has a
from the product. As much of case, the nanomanufacturing shorter payback period than
these costs are expensed,5 the curve would not intersect the tra- nanomanufacturing. We note that
result is the incurrence of net ditional manufacturing one.) The the lower manufacturing costs
losses during this time period. point at which a company breaks associated with nanomanufactur-

DOI 10.1002/jcaf © 2006 Wiley Periodicals, Inc.


The Journal of Corporate Accounting & Finance / March/April 2006 41

Exhibit 3
Cost, Revenue, and Cash Inflow over Product Life Cycle

Exhibit 4
Profits over the Life Cycle of the Product

© 2006 Wiley Periodicals, Inc. DOI 10.1002/jcaf


42 The Journal of Corporate Accounting & Finance / March/April 2006

Exhibit 5
Cash Flows over the Life Cycle of the Product

ing and the resultant higher gross duction. However, once a proto- tors that may mitigate the effects
margin and net cash inflows result type is prepared and a nanofac- discussed. As shown in Exhibit 3,
in the curve being steeper for this tory assembled, little additional once production commences, the
method than under conventional cost is incurred in the later advantages of nanotechnology
manufacturing. stages of the value chain, yield- become evident. With smaller
ing larger profit margins. raw material requirements, virtu-
FINANCIAL IMPACT OF NEW Much of the capital invest- ally no direct labor input, local-
COST STRUCTURE ment of a nanoproject will be ized production, and zero failure
required early in the product life rates, relatively little additional
Similar to other emerging cycle. Additionally, there is a cost is incurred beyond this point.
technologies, nanomanufacturing higher degree of uncertainty Once break-even is achieved,
requires capital formation that regarding the initial cash outlay, future free cash flows are poten-
will pose considerable chal- due to the newness of nanotech- tially much larger due to the frac-
lenges to investors and credit nology. Moreover, the unpre- tion of fixed costs included in the
analysts. Compared to traditional dictability of sales volume cost structure. These effects are
investments in manufacturing makes it difficult to forecast shown in Exhibits 4 and 5. For
technology, nanomanufacturing future free cash flows. The high- nanotechnology, although the
possesses a much different dis- er initial investment in nanotech- break-even point is achieved later
tribution of costs over time. As nology will magnify the effects in a product’s life cycle, profit
shown in earlier figures, a large of forecast errors. Consequently, grows at a faster rate than with
fraction of total costs will be nanomanufacturing will pose traditional manufacturing and
incurred in the earliest stages of substantially greater risk to a could eventually exceed the profit
the value chain in a nanotechnol- capital provider, with a resultant levels attained under traditional
ogy environment. The develop- increase in a nanomanufacturer’s manufacturing. Similarly,
ment of assemblers and replica- cost of capital. although the payback period is
tors will require significant The same pattern of costs likely to be longer for nanotech-
outlays prior to initiating pro- suggests that there are other fac- nology, future cash flows could

DOI 10.1002/jcaf © 2006 Wiley Periodicals, Inc.


The Journal of Corporate Accounting & Finance / March/April 2006 43

also be larger in the later stages, sales volume where both tradition- to be at Point B (the break-even
as shown in Exhibit 5. al manufacturing and nanomanu- point for nanotechnology) of
Exhibit 6 presents a typical facturing yield the same profit. Exhibit 6. Exhibit 8 presents the
profit-volume curve for traditional Point D denotes a higher sales vol- probability distributions of profit
manufacturing as well as for ume at which the lower variable assuming the expected sales to be
nanomanufacturing. The profit costs in nanomanufacturing result at Point C, and Exhibit 9 presents
curve for traditional manufactur- in higher profits being earned a similar analysis assuming the
ing is represented by a line indi- when employing that technology. expected sales to be at Point D.
cating lower fixed costs than those From Exhibit 6, it is apparent
incurred utilizing nanomanufac- that traditional manufacturing will EFFECT OF SALES VOLUME ON
turing. Similarly, it is drawn to yield higher expected total profit RELATIVE PROFITS
show a lower unit profit margin if the forecasted lifetime sales of
than that obtained when utilizing the product lie somewhere below As discussed earlier, the gross
nanomanufacturing, as represented C. However, due to the uncertain- margin in the nanomanufacturing
by the steeper slope of the profit ty in forecasting sales and the environment is higher; this results
curve for nanomanufacturing. enormous disparity in the profit in a greater sensitivity of profit to
Point A is the sales volume at margin between the two methods, changes in sales volume. In
which traditional manufacturing the choice is not apparent at this Exhibits 7, 8, and 9, this is repre-
breaks even. At this point, or the surrounding expected sales sented by drawing a flatter proba-
nanomanufacturing is still operat- volume. Rather, the choice is bility distribution for nanotech-
ing at a substantial loss due to the dependent on the risk tolerance nology, denoting a greater
high fixed costs incurred in the and the associated higher cost of variance in profits for a given
developmental phase. Point B is capital. This issue is further exam- variance of forecast errors. On the
the sales volume at which ined in Exhibits 7, 8, and 9. other hand, the profit margin in
nanomanufacturing attains the Exhibit 7 presents the proba- the traditional manufacturing
break-even point; at this point, tra- bility distributions of the profit environment is lower due to rela-
ditional manufacturing methods for both methods of manufactur- tively higher production costs;
are yielding profits. Point C is the ing assuming the expected sales hence, there is less sensitivity to

Exhibit 6
Profits over Projected Lifetime Sales

© 2006 Wiley Periodicals, Inc. DOI 10.1002/jcaf


44 The Journal of Corporate Accounting & Finance / March/April 2006

Exhibit 7
Profit Distribution When Expected Sales Is at the Break-Even Point for Nanotechnology

Exhibit 8
Profit Distribution When Expected Sales Are at a Level Where the Expected Profit
from Both Technologies Is the Same

DOI 10.1002/jcaf © 2006 Wiley Periodicals, Inc.


The Journal of Corporate Accounting & Finance / March/April 2006 45

Exhibit 9
Profit Distribution When Expected Sales Are at a Level Where the Expected Profit
from Employing Nanotechnology Is Greater Than When Employing Traditional Technology

errors in forecast. This is repre- Exhibit 9 shows the probability nanotechnology, extremely
sented by a narrower probability distribution for Point D, where high profitability is possible
distribution for traditional manu- nanomanufacturing yields higher with this production method-
facturing techniques, denoting a profits, and this is shown by cen- ology. In all three graphs,
lower variance in profits. The tering the probability distribution larger profit is more feasible
probability distributions for each curve of nanotechnology further (with non-zero probability)
technology in all three exhibits right than that of the curve denot- for nanotechnology than for
are assumed to have identical ing traditional manufacturing. traditional manufacturing.
variances but are centered on dif- Two interesting observations,
ferent profit levels. For example, from the perspective of corporate These two observations
in Exhibit 7, the probability distri- finance, can be made by further have ramifications for financing
bution for nanomanufacturing is analyzing these three exhibits: such ventures. Debt holders or
centered on no profit, as Point B creditors are more wary of
denotes the break-even point for • Since the probability distribu- bankruptcy risk or the risk of
nanomanufacturing. As shown in tion for profits is flatter for default; hence, debt holders will
Exhibit 6, traditional manufactur- nanotechnology, there is a tend to prefer traditional manu-
ing yields profit at that point, higher risk that a product facturing methods, as the risk of
which is represented in Exhibit 7 manufactured utilizing this default is lower. However, equi-
by centering the probability distri- technology will not break ty investors will prefer the
bution of traditional manufactur- even. In other words, the investment with higher expected
ing at a positive profit. Similarly, probability of having a loss is return. Hence, in Exhibit 9, debt
Exhibit 8 is drawn for expected higher for nanotechnology, as holders might prefer the tradi-
sales at Point C, where both meth- measured by the area under tional manufacturing methods,
ods yield the same profit. This is its probability curve to the whereas equity holders and
represented in the exhibit by cen- left of the break-even point. management may prefer the use
tering both probability distribu- • Again, due to the flatter of nanotechnology due to its
tions on the same profit level. probability distribution for higher expected value.

© 2006 Wiley Periodicals, Inc. DOI 10.1002/jcaf


46 The Journal of Corporate Accounting & Finance / March/April 2006

The above problem is further from making those choices, debt processes performed by organi-
accentuated in situations where holders may impose additional zations in many industries.
equity holders can limit their covenants and restrictions on Costs for companies adopting
losses under limited liability pro- equity holders, or increase the nanotechnology will shift to
visions. In these situations, the cost of debt. Consequently, most activities earlier in their inter-
profit graph for the equity hold- nanotechnology projects may be nal value chains. This shift in
ers will be asymmetrical and funded primarily through equity cost structure will change the
truncated at the point of maxi- capital. This capital could be sep- risk and expected return associ-
mum loss. For simplicity, let’s arately raised for this purpose or ated with developing, manufac-
assume the break-even point to firms could engage in diverting turing, and marketing a given
be the limit on equity holder loss- their equity capital to separate product. Organizations that
es. Hence, the expected values of nanotechnology ventures and bor- adopt nanotechnology will need
the truncated probability distribu- rowing funds from debt holders to adapt their cost management
tions are the relevant ones for the to meet the capital needs of their systems to take into account the
equity holders. The expected traditional (low-risk) projects. impact on costs at different
profits for equity holders increase Another more subtle advan- points in the value chain.
for both traditional manufacturing tage of the cost structure is Strategic cost analysis will be
and nanotechnology; however, the depicted in Exhibit 5. In the later important to assess the impact
increase is much larger for nan- stages of a product’s life cycle, on the entire value chain of
otechnology, as the cumulative the nano process will require less which an organization is a part,
probability of losses was greater financing of working capital and to determine its desired
for that technology. This would requirements. Raw material place in that chain. Additional-
create asymmetry in the choice of inventories will be substantially ly, there are disparate implica-
process between the debt holders smaller and turn over more rapid- tions for debt holders and equi-
and the equity holders. Debt ly. The same will be true of work- ty holders in terms of expected
holders will be conservative and in-process inventories, since the returns and the risk of default
prefer the traditional technology speed inherent in the nanomanu- that will affect the financing of
until the risk of default for nan- facturing process will allow just- organizations employing nano-
otechnology has been eliminated. in-time production to be applied technology.
On the other hand, equity holders over a larger proportion of cus-
will be inclined to adopt nano- tomer orders. Hence, nanotech- NOTES
technology methods sooner, espe- nology companies will have
cially in those situations when fewer working capital needs than 1. Richard Feynman talk entitled “There
partial risk of default can be traditional companies. This Is Plenty of Room at the Bottom,” pre-
sented December 29, 1959, at the
passed on to the bond holders. should enable nanotechnology annual meeting of the American Physi-
The asymmetry of choices companies to sustain faster cal Society at the California Institute of
discussed may lead to asymmetry growth rates than their traditional Technology.
in information exchange by the counterparts. This higher growth 2. Center for Responsible Nanotechnolo-
managers, and consequently bond rate may reduce the cost of their gy, at http://www.crnano.org/
timeline.htm.
holders may be even more wary equity capital, again leading to a 3. Center for Responsible Nanotechnology,
of investing in the new technolo- favoring of equity financing. at http://www.crnano.org/index.html.
gy. For example, bond holders 4. Shank, J., & Govindarajan, V. (1993).
would be aware of the increased Strategic cost management. New York:
CONCLUSION Free Press.
propensity of equity holders to
5. Current accounting standards require
invest in nanotechnology even The introduction of nan- expensing of these costs as incurred
when the risk of default is high. otechnology will cause tremen- until the technological feasibility of a
To prevent and limit management dous changes in the business product has been established.

Saurav Dutta and David Marcinko are associate professors in the Department of Accounting and Law at
the University at Albany, State University of New York. Raef Lawson is Director of Research for the Insti-
tute of Management Accountants in Montvale, New Jersey.

DOI 10.1002/jcaf © 2006 Wiley Periodicals, Inc.

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