The Offsite Construction Revolution: The Prospects
Although the trend for offsite construction is undeniably upward, the pace of its development is difficult to determine. The landscape could change dramatically if an individual participant makes the right bold move—an offsite construction company acquiring a large traditional contractor, for example, or a major building materials company opting for a switch to offsite. The detailed changes are impossible to predict, but there are some rough guidelines for gauging how offsite will evolve in any particular market.
First, offsite in general will likely grow fastest in regions that emphasize new buildings rather than renovations and that have key market shapers, such as a major developer or active government support. The UK and Japan, for instance, fulfill both of these conditions and have fast-growing offsite ecosystems accordingly. In contrast, Germany skews toward renovations, and the US lacks any major national offsite champion, whether private or public. Growth of offsite in these markets is therefore likely to be more subdued or localized.
Offsite will likely grow fastest in regions that emphasize new buildings rather than renovations and that have key market shapers, such as a major developer or government support.
Second, within any region, adoption will be highest in construction segments that feature one or more of the following factors:
- A high degree of complexity, with multiple and/or sophisticated components that would benefit greatly from the time savings derived from offsite methods
- A high degree of repetitiveness, either within or between projects, facilitating standardization and economies of scale
- Strict requirements regarding quality, cost, or onsite logistics
The segment that is currently the main application for offsite construction is that of residential buildings, and it will likely continue to be so. Houses are not unduly complex, but they are characterized by a high degree of repetitiveness. And they often are subject to strict requirements, in the form of buyers’ expectations concerning quality and price. So most of the major offsite-construction companies have a strong housing presence, or even an explicit preference.
In nonresidential segments, the prospects are more varied. Hospitals, hotels, schools, and prisons, for example, are in general prime candidates for offsite construction. They are highly standardized, follow strict requirements in regard to safety or branding, and are time-constrained and labor-intensive when it comes to furnishing and outfitting. For other types of building, offsite can sometimes be the optimal approach on account of project-specific factors: for example, for the Leadenhall Building, a towering office block in the City of London, more than 80% of the components were built offsite, in order to meet the double challenge of a tight construction site and a tight delivery timeline.
Finally, hard infrastructure is likely to remain less receptive to offsite construction. Of course, small standardized components, such as sewage pipes or railroad sleepers, are frequently precast offsite. But major components—of a bridge, for instance—are often large and awkward to transport from an offsite location, so it might be more cost-effective to construct them onsite. Once again, however, project-specific factors will sometimes favor offsite construction: the Geneva airport is resorting to offsite methods for its new intercontinental terminal, which has to fit into a site barely 20 meters wide. Such specialized offsite projects will likely increase in frequency, especially since infrastructure is the most international branch of construction, with many contractors operating across borders.
BUSINESS MODELS AND PARTICIPANTS
No specific business model or company has yet emerged as the winner in offsite construction. But current participants can be classified into two broad groups: end-to-end providers and ecosystem coordinators.
The first group, end-to-end providers, consists of asset-heavy, vertically integrated generalists, which participate all along the value chain. Companies of this type have their own design and engineering departments; they manufacture and preassemble most components in their own factories; and they actively manage the final onsite assembly. They believe that having a seamless, integrated manufacturing system is crucial for producing top-quality results, and they are willing to invest capital to secure it. This model is currently the most common one. Among the leading examples are Katerra in the US, Laing O’Rourke in the UK, and Daiwa House and Sekisui House in Japan.
The second group of companies, ecosystem coordinators, consists of asset-light overseers. Having developed an offsite-construction system, they then coordinate an ecosystem of specialized partners to deal with individual aspects of it. They may, for example, limit their own direct role to that of overall design and customer-relationship management, while relying on partners to make the various components to their specifications. They favor flexibility in manufacturing over sophisticated machinery. For instance, Bryden Wood and Skanska, two leading ecosystem coordinators, have developed the “flying factory” concept: they find an underused building, such as a barn, close to the construction site, and convert it into a temporary, low-tech plant to assemble components supplied by third-party partners. The ecosystem coordinator model is fairly new, but many new entrants might be attracted to it because of its asset-light nature.
The two business models are distinct in theory, but companies do not stay neatly within the confines of one or the other. End-to-end providers, such as Sekisui House, readily revert to independent suppliers for some components. Conversely, the ecosystem coordinator Bryden Woods initially operated its own factory for testing and learning purposes. Moreover, both types of companies rely on specialized third parties for key technologies. (See “The Surrounding Community of Technology Companies.”) Still, most offsite companies have very clear strategies regarding which parts of the value chain they want to own and where they want to invest.
It is too early to tell which of the two models will predominate, if either. They might well continue to coexist on roughly equal terms. Would-be entrants should consider which model best suits their strengths and risk tolerance. An end-to-end provider will boast a proprietary and differentiated offering, but faces the worry of having underutilized factories whenever business takes a downturn. An ecosystem coordinator has a different worry: how to retain ownership of its system, given that its IP necessarily has to be shared among multiple third parties.
As well as pondering the business models, companies need to consider three strategic questions:
- How much standardization should we aim for in regard to design and manufacturing?
- How much automation and robotics should we use in manufacturing and in onsite assembly?
- Where and when should we use fully preassembled volumetric components versus flat-pack units?
Offsite is going to be highly disruptive to construction as a whole, and existing companies are at risk of losing considerable value.
The answers here will depend on local market circumstances and on the relevant segment. This variability has two important implications. First, companies should question any received wisdom or success formulas derived from other companies. For instance, the common mantra that “volumetric is just transporting air” is certainly not applicable when the project is a fully outfitted hotel or hospital. Second, companies should allow themselves some flexibility or else accept the inevitable tradeoffs. For example, if a company commits to a volumetric-only system—in pursuit of an overall cost advantage, perhaps—it should do so in the clear knowledge that some projects would then be beyond its reach, for logistical reasons.
In seeking the optimal responses to the three strategic questions, companies need to conduct a thorough analysis of their target market and an honest assessment of their strengths. And even then, they should be prepared to adjust their responses nimbly, in keeping with the rapid changes taking place in the market.
Offsite construction clearly has an upside potential that traditional companies cannot ignore. But there are other reasons for companies to participate in the offsite market. Offsite is going to be highly disruptive to construction as a whole, and existing companies are at risk of losing a significant amount of value. Specifically, offsite construction will mean more productization, less onsite labor, different materials, and different tools. (Productization refers here to the adoption of standardized, factory-made components, such as walls or even rooms, to replace the traditional process of constructing each individual component onsite.) See Exhibit 3 for some of the details.
These transformative developments will affect all companies along the value chain, to a greater or lesser degree. Here is the likely scenario:
General contractors will feel the impact most intensely. Their service offering will become commoditized. The pool of value that they can access will shrink as construction sites diminish in size and complexity; their current labor model, equipment, and subcontractor/supplier relationships will become redundant; and they will come under greater pressure than ever to reduce costs and delivery times. Global competition will sharpen: Poland’s Polcom Modular, for instance, is able to deliver offsite-built hotels around the world. The best survival strategy for contractors is to expand their offsite capabilities, in the way that Laing O’Rourke and Skanska did (using the end-to-end-provider and ecosystem coordinator models, respectively). Contractors are well-positioned to make this switch because they oversee the entire value chain—but they need to act quickly.
Producers of light-side building materials will see their business volume and margin premium decline drastically. As construction gets more productized, they will have to become offsite-compatible if they hope to win any contracts. Their current individual brands, customer relationships, systems, and distribution networks will lose their distinctive value in a productized market. At the extreme, they could even lose their status as original equipment manufacturers (OEMs) and instead become suppliers to OEMs, and have to submit tenders to them to produce specified components. If they are to remain specification makers rather than specification takers, they need to work proactively at shaping new offsite ecosystems, in partnership with other companies that have complementary expertise.
Producers of heavy-side building materials will suffer as demand shifts to other materials in certain segments. The product at greatest risk is probably cement, which is too heavy for widespread offsite use. To respond, firms can shift toward more offsite-appropriate materials, drawing on specialized know-how: the Austrian startup Cree, for instance, has developed a new wood-concrete hybrid material. Alternatively, firms can expand into offsite-related services, such as 3D printing of formwork, which enables mass-customization of precast concrete.