Inspection is a key part of the global supply chain and an important area of focus for Schematic Ventures. In this market snapshot, we'll highlight emerging trends surfaced through conversations with leading innovators, Schematic advisors and our industry network partners.
Mirroring other segments of the supply chain, the global inspection industry is seeing new data- driven technologies and subscription-based business models enter the market, disrupting incumbents and catalyzing a shift to digitized and factory-led “self-inspections.”
COVID-19 has accelerated these changes, as the pandemic restricted the ability of inspectors to travel abroad to visit factories, forcing brands and vendors to rely more on local and tech-enabled remote operations to get the job done.
Increasingly, companies are looking for solutions that move beyond compliance to focus on overall business operations as well as help manage risk in a volatile global supply chain environment.
We believe the next few years will continue to be a exciting period for technologies and companies looking to solve the “problem” of inspection: ensuring brands and vendors are getting what they ask for from the factories that make their products.
Testing, Certification & Inspection Market
Fueled by globalization, increased regulation and new product and service categories —connected vehicle, sustainability tracing — the value of the global inspection industry is expected to surpass $260 billion by 2025, up from around $200 billion in 2020. The three market leaders maintain profit margins in the 13 - 18% range and hold less than 25% market share; the top ten have less than 40%.
The testing, certification and inspection (TIC) industry is large and growing, but incumbents in the highly fragmented industry struggle to grow organically as new technology entrants grab market share.
“Market leaders' internal growth is increasingly challenged by mid-sized firms and fast-emerging digitized players.” stated a report released last summer by Capitalmind, a financial advisory firm.
M&A activity dominates, with TIC companies completing more than 1,000 acquisitions in the past five years. Private equity-owned growth platforms are helping fuel the buying spree, with purchases that often target the tech-enabled space. Although acquisitions fuel top-line revenues, they are rarely “margin-accretive,” warns a report released last summer by EY Parthenon. Organic growth remains stagnant, while “growing profits in line with revenues is obviously a challenge for many.”
💡 The lack of concentration among legacy TIC companies highlights an opportunity for new entrants while the pace of acquisitions indicates a lack of incumbent internal innovation.
Geographic & Incentive Trends
The TIC industry remains vulnerable to macro economic and political events such as trade wars and geographical shifts in manufacturing. There is also a general lack of trust between companies and suppliers. Technology can help absorb the trade shocks while building more productive relationships between stakeholders in the quality control process.
Minesh Pore, Senior Director of America’s for Intertek and the CEO of BuyHive, a platform that helps companies source materials for their products, shed more light on the relationship between political gamesmanship and product and materials inspections. “Inspection has long been used as a tool by governments and economies to protect themselves. The government tells people: ‘If you’re buying aeronautics products from China, they must meet these standards.’ They're not saying: ‘Don’t buy from China,’ but they are making it more difficult to buy from China. It becomes a hurdle.”
Other challenges confronting the TIC industry include a shift in manufacturing from China to Southeast Asia, upending compliance relationships, and widespread cheating and bribing of factory inspectors. “Integrity issues are rampant,” as a quality assurance manager within Schematic's retail network shared.
COVID also accelerated the use of connected devices during inspections, allowing agents equipped with video and cameras to stream inspections in real-time, a practice that had the added advantage of reducing opportunities for cheating.
David Klein is the co-founder and president of Inspectorio, one of the first companies to apply artificial intelligence and machine learning to reduce risk in the inspection process. He shared that digitization can help build trust as companies move from purely transactional relationships with their suppliers to engage in more strategic alliances. “Many companies have decided to move from control and policing to one of empowerment and relationship. To do that effectively, we have to have technology so we can see the information first-hand and ideally in real-time.”
💡 Constantly shifting geopolitical conditions create the need for technology that will allow companies to change manufacturing partners quickly. Inspection technology can solve on-the-ground trust issues and the inspection incentive misalignment that comes with new supplier relationships.
‘Self-Certification’
Companies are moving toward an inspection strategy known as “self-certification,” a counterintuitive trend in which factories take ownership of the inspection process. The goals are to cut costs, frontload inspection delays and improve quality.
One of Schematic's industry advisors described their self-certification process in this way: “We certify, partner with, train and monitor our sourcing factories. The people doing the work are overwhelmingly the employees of the factories, trained and certified by our staff and partners.”
Self-certification highlights the evolving roles of incumbents and new entrants in the changing TIC marketplace. On the staff training, the brand partners with Bureau Veritas. BV also provides additional on-site inspection staff when needed, and will conduct inspections if problems arise, such as a random audit revealing more defects than the original reporting indicated.
💡 Technology can provide a means for factories to self-certify, build a brand as the partner-of-choice and sidestep inspection delays and expenses.
Innovation in Inspection
A closer look at the digital disruptors reveals a wide variety across hardware and software categories, encompassing leaders such as Inspectorio as well as relative newcomers such as BuyHive and SILQ, an inspection management company launched last year.
Inspectorio digitizes and automates product verification data and processes, giving the apparel customer quick and easy access to data that can be mined for improved decision making and more efficient allocation of resources.
SILQ ingests data tied to a variety of processes — product sample development and approvals, raw material inspections, in-line inspections — enabling brands to see in real-time the evolution of their products, shared founder and CEO Ram Radhakrishnan, a former executive with freight forwarder Flexport. Conventional TIC players make only periodic inspections, limiting their ability to ensure quality and compliance, Radhakrishnan believes. “We start early in the supply chain, managing risk from the concept stage...so we control the outcome.”
BuyHive's Minesh Pore shared that digital technologies appeal to e-commerce platforms such as Shopify as well as digital native vendors that increasingly define the retail landscape. “These new retailers don’t really understand the inspection business. They don’t want compliance teams. They want more data, more information, and they want to outsource that business.”
💡 Technology presents opportunities to both increase inspection frequency & quality for new entrants and also drive workflow efficiency & quality improvements for traditional inspection companies.
Schematic Investment Focus
COVID- induced supply chain shocks have highlighted the need for improved upstream visibility, bringing more attention to the inspection industry as a critical to the functioning of the global economy. Acquisition fever is high, as customers and TIC companies alike search for digital native startups that can help transform business models, build trust and drive margins.
With new technologies automating and digitizing inspection processes, the next stage will be leveraging that data to connect stakeholders across the supply chain, ensuring the health of the entire enterprise through systems integration, believes Inspectorio’s Klein.
“Resilience means having the capacity to react quickly, and you can only do that when you have full visibility. I think the future is one of providing the means to have data-driven collaboration — with factories, with suppliers, so we can all have the same source of truth.” “Right now digitization, automation technologies are unique. But in ten, twenty years, they are going to be commodities. Who is going to win are those platforms that foster collaboration.”