Modular Capital and the Fragmentation of Industrial Demand: Economies of Scale vs. Economies of Scope

he industrial economy is undergoing a change in structure. Up until now, factories and shops have had only two options when procuring machinery: they either had to commit to large bulk orders through exclusive distributors or forgo manufacturer warranties. Today, a single CNC machine, a commercial food packager, and even individual tools like pallet trucks to carry heavy loads are all available for sale directly online with full warranties and global logistics. This is not just an evolution in the distribution system; it represents a fundamental shift in how economies of scale and economies of scope will function within the industrial capital markets.

Online Marketplaces Consolidate Fragmented Demand

Previously, industrial manufacturers sold to a small number of large buyers to spread high fixed costs to the buyer through bulk purchases. Their business processes, such as minimum order quantities, dealer contracts, and long procurement cycles, arose from these parameters. Digital platforms have removed these frictions.

Marketplaces like Alibaba, Indiamart, ThomasNet, and Surplex aggregate large numbers of micro-buyers, each of whom will purchase only one or a few units. As a result, manufacturers achieve scale not through a single large-volume buyer, but through mass fragmentation enabled by the platform. Instead of one large firm ordering a laser cutter, a small factory in Nigeria buys a packaging sealer and a start-up in the U.S. buys a single machine tool; the collective forms a global buyer with demand comparable to that for a bulk order.

In 2010, less than 10% of worldwide machine-tool sales with warranties were for single units. By 2023, this figure surpassed 34% of all unit sales, according to McKinsey. This consolidated micro-demand is reshaping factory pricing and production planning protocols.

From Economies of Scale to Economies of Scope

Manufacturing has changed from scale to scope in preparing for demand fragmentation. Instead of a few large customers ordering thousands of the same machine, manufacturers now develop numerous product types to meet demand for multiple niche markets--for example, metal shops, modular food processors, small textile factories, dental milling labs, and local construction suppliers.

Economies of scope develop because:

• Each model is built with share common parts (motors, bearings, control systems, enclosures).
• Warranty and distribution networks can be standardized across many relevant types.
• Compliance documentation can be reused for many similar models.
• Search engine data shows manufacturers what variants to produce.

Thus customization of the product was preserved in a database rather than in a contract.

Instead of one bulk buyer managing the process, there are thousands (millions) of data points driving the products produced, and their locations.

Decreased Barriers to Entry and Micro-Factories

The move to modular capital is opening the door to extended ownership of industrial machinery, allowing businesses to start micro-factories for tens of thousands of dollars rather than millions. A coffee roaster can purchase one packaging line; a machinist can purchase one industrial lathe; and a logistics start-up company can buy one lift or conveyor, for example.

For many small business owners, buying one warrantied piece of machinery is the equivalent of utilizing cloud computing instead of having physical servers: capital becomes an operational decision instead of a fixed obligation. Once there is a capacity to purchase and operate one piece of machinery, test out a business model, and sell it, risk is lowered and experimentation is encouraged.

According to the World Bank's data on small businesses, looking from 2014-2022, countries that experience increases in unit-based equipment imports will experience growth of 11-18% as new manufacturing SMEs formed, mainly due to new entrants to small-scale industrial activities.

The Con: Saturation and Tightening Competition

With reduced capital barriers will come excess market entry, when too many small producers flood into niche local markets resulting in tighter margins. This is similar to the economic prediction of free-entry equilibrium; when fixed costs drop too much, churn accelerates as firms enter and exit rapidly.

Additionally, variation in quality allows for adverse selection risk, especially in cases with limited warranties or ambiguous buyer specifications. Cheap entry allows competition, but it also leads to volatility.

Conclusion

The era of modular industrial capital indicates the end of accessing machinery only through bulk purchasing. A digital aggregation of fragmented buyers allows manufacturers to achieve scale, not as a result of large contracts, but in serving hundreds of small sequential contracts. The result is a global rebalancing from client-driven economies of scale to market-driven economies of scope – with more producers, more competition, and a world in which production can occur anywhere machinery can be shipped.