A compelling white paper by Navitas Capital, the prolific California-based investor in proptech, paints a picture of the construction market of the future dominated by today’s early adopters.
The 36-page report, Construction + Technology: Building for the Future, sets out the dynamics that have led to a loss in productivity for the $10tn worldwide industry. Analysis of labour shortages and regulations, case studies and statistics are presented before Navitas concludes that transition will be slow and “early adopters are likely to enjoy a competitive advantage for 10-15 years.”
The conclusion to the report, written by in-house analyst Madison Gesser, is as follows:
Today, construction is opaque and highly fragmented both horizontally and vertically. Using a manufacturing production system, large players may eventually consolidate or coordinate the fragmented supplier base to deliver the full range of components. As a result, integrated construction processes will lead to increased resource utilisation and reduction of waste on job sites, while also reducing human error and improving safety as a by-product.
Most new applications still have a high degree of uncertainty, making it hard for companies to predict which applications will take off or when to invest. These unknowns can easily lead to analysis paralysis. But construction and property development companies don’t have the luxury of sitting back and waiting years to see which technologies pan out. By that time the first movers will have stepped in and captured the benefits while those that took a wait-and-see approach will find themselves at a competitive disadvantage for years. Many contractors fear that changing from an entirely project-based approach to a manufacturing-like system of mass production could lead them to lose revenue unless owners and the broader industry environment move too. A departure from the status quo is only likely possible if contractors can build the scale (and repeatability) needed to drive cost efficiencies from productivity gains, which outweigh revenue losses from lower price points and fewer customer claims.
Owners, in turn, should welcome a more integrated and transparent process as they benefit from lower capital needs and shorter project cycles and because they hold the scarce resource: land.
Integrating new digital technologies into the enterprise and then running day-to-day operations will also require completely new skill sets. Today, construction and property development companies have civil engineers, architects, supervisors, foremen, laborers, and mechanics. But going forward they are going to also need data scientists, analysts, and software engineers. Not only are these skills different, they are scarce and in demand by many companies in many different industries. Whether companies should acquire these skills or grow their own will become a pressing strategic issue made more challenging by the industry’s reputation as conservative and as a technology laggard. This will require construction companies to develop new employee value propositions, make strategic acquisitions, and enter into partnerships and joint ventures.
In the longer term, as automation technologies like robotics and offsite construction are more commoditised and the early adopter advantage disappears, construction profits might shrink again. However, we expect a lengthy transition period for the industry, meaning early adopters are likely to enjoy a competitive advantage for 10-15 years. As automated technology applications become commoditised and profits are competed away, value in the industry will become even more concentrated in the hands of those who own the land and hold the IP. Construction could become more challenging as a standalone business, and looking forward, companies with integrated business models will have a natural hedge against this eventual commoditisation and the redistribution of profits across the value chain.