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The construction industry is a paradox. The annual global growth rate is more than 3%, but the sector is in crisis: prices are soaring, jobs remain unfilled, and demand far outstrips supply. The crisis can be attributed to one broad shortcoming: unlike almost every other industry, construction has been reluctant to modernize and thereby boost its productivity. The car factory of 2019 looks nothing like the car factory of 1919, whereas the construction site has hardly changed during that time

Of course, construction is not easily amenable to mass production, but it could certainly exploit modern industrial techniques more than it does. Offsite construction, or “prefabrication,” is the key: creating in a factory various parts of a building before assembling them on the building’s actual site. The parts can be either precast (concrete) or made from compound materials (such as sandwich panels). The offsite factory of today may produce flat-pack components (such as walls or beams), volumetric modules (bathroom pods or bedrooms), or even entire buildings. The practice of systematically constructing houses offsite goes back to the 20th century: builders in the US began selling “kit homes” in the early 1900s, for example, and European governments on both sides of the Iron Curtain turned to offsite construction after World War II to address housing shortages

the offsite revolution in construction - bcg global

Despite its history, however, and despite the pressing need, offsite has remained a niche approach. That is changing at last. Offsite construction is now being adopted for projects as varied as high-end condos, hotels, and airport terminals. The disruptive potential is huge. Industry executives, as they weigh their options, need a clear understanding of the offsite phenomenon—why it is gaining in popularity, how companies are participating in it, and what it implies for the industry

Offsite construction alleviates several problems associated with traditional “onsite” methods. By moving a large proportion of the work from a messy, exposed open-air setting with limited working hours into a safe, controlled indoor factory setting with 24/7 production uptime potential, offsite construction offers five main benefits

The global penetration of offsite construction is difficult to quantify. Analysts define offsite construction in different ways, according to the proportion of offsite content—50% versus 80%, say—and according to the techniques for measuring that offsite content. The data is most reliable for single-family homes, the segment that historically has been the main beneficiary of offsite construction. In some smaller markets, such as Sweden, more than 80% of new homes are now built offsite. But despite an upward trend, no major market yet exceeds 20% penetration; in the US, offsite barely registers at all. (See Exhibit 1.)

Despite its long history and its compelling value proposition, offsite is only now gaining traction. The reasons for the slow uptake are complex and vary from market to market. But four particular barriers apply very widely:

the offsite revolution in construction - bcg global

In combination, these barriers had the effect of forcing offsite construction into a vicious cycle. The barriers kept demand for offsite weak; the weak demand discouraged investment into offsite, so the supply remained very limited; and in light of the limited supply, there was little impetus to break down the barriers that kept demand low. Fortunately, this cycle is at last starting to collapse

The first factor is the long-running skills shortage. The construction workforce in wealthy countries has been declining rapidly as current workers retire, since traditional construction jobs hold little appeal for younger workers today (see Shaping the Future of Construction: A Breakthrough in Mindset and Technology, pp. 15 and 36). The old solution—importing workers from abroad—is becoming less viable, as the importing countries are tightening their immigration policies and the exporting countries are generating more attractive jobs for their own workers. Offsite construction is an obvious remedy—appealing to local construction workers while increasing overall productivity in the sector

The second factor is the surging use of digital technology. This development is helping to erode the barriers to offsite, in particular the barrier related to inflexibility. Thanks to digital tools, such as building information modeling (BIM), it is becoming easier to integrate offsite components into conventional builds and to create more sophisticated and flexible systems of offsite components. (See “The Transformative Power of Building Information Modeling,” BCG Perspectives, March 2016.) Moreover, advances in digital production methods, such as robotics and 3D printing, should one day be able to turn the ideal of “mass customization” into a reality. (See “Will 3D Printing Remodel the Construction Industry?,” BCG article, January 2018.)

the offsite revolution in construction - bcg global

The third factor is government support. Governments around the world are now backing offsite construction far more vigorously than before. Faced with serious housing shortages and chronically tight budgets, governments in Australia, Singapore, and the UK are making offsite construction a strategic priority and are favoring offsite in procurement. Others will doubtless follow their lead, and in doing so will create stable demand, help to standardize designs, shape new regulations, and publicize the benefits of offsite. Private companies will then have the incentive to get seriously involved as well

To be sure, some challenges remain. Offsite construction can ease the labor shortage, but it requires new skill sets and training programs, and these are still under-developed. BIM will help to integrate offsite into the planning and building process, but not while incompatible standards persist and not until adoption rates increase. Robotics and 3D printing need considerably more investment and R&D before they can realize their full potential. And most governments still need to assign offsite a higher status; in the US, for instance, only a few city- and state-level authorities have formulated a comprehensive policy on offsite construction

Nevertheless, the momentum is unstoppable. Companies that emphasize the opportunities rather than the challenges, and quickly consolidate their base of talent and technology, will enjoy a competitive advantage. That is something that smart investors recognize. Venture capital is pouring in, and two startups, Katerra and Revolution Precrafted, have already attained “unicorn status,” with valuations exceeding $1 billion each. Private equity funds run by Bain Capital, PIMCO, and others have invested hundreds of millions in offsite companies such as Consolis and Polcom Modular. The veteran UK contractor Laing O’Rourke is hurriedly building yet another offsite manufacturing plant. Even Google has invested $300 million in offsite construction to produce homes for its employees. All the signs are that this wave of investment will grow even stronger

the offsite revolution in construction - bcg global

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

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

the offsite revolution in construction - bcg global

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

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 offsite revolution in construction - bcg global

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

the offsite revolution in construction - bcg global

A rich and growing community of technology companies plays an indispensable auxiliary role in offsite construction. The two types of company that arguably make the greatest contribution are those providing software and those involved in robotics

Software. Software developers offer vital support in fields such as design and engineering (Tekla and Aditazz are prominent examples) and project management (GenieBelt and Sablono, for instance). Some areas are still maturing, notably software that can really integrate some of the links in the value chain, especially design and production; at the moment, it still takes considerable manual intervention to translate a design intent into production instructions. The experience of other industries—as in the case of printed circuit boards—suggests that the solution will not be easy to find but will have a dramatic effect once it is found

Robotics. Most robots currently used in offsite construction are generic ones, performing basic manufacturing or assembling tasks. The potential here is two-fold— refining the performance of these generic robots, and developing construction-specific robots

the offsite revolution in construction - bcg global

First, the generic robots could be optimized for construction-specific tasks. Consider the task of assembling a building frame, for example: today it is still a nontrivial task for robots because they are not situationally aware, and without the right instructions they often crash into parts of the frame that have already been built. Given that the designs keep changing, the programming needed to resolve this issue is particularly complex. But it should eventually be possible to do such programming at scale, and promising work is under way at research labs such as the Swiss National Centre of Competence in Research for Digital Fabrication at ETH Zurich

Second, construction-specific robots should soon become more common and more versatile—able to work with awkward materials such as concrete and to cope with many current challenges, such as the weight of very large components and the proximity of human workers. Developers can derive much encouragement from the successful adaptation of related technologies: 3D printing, notably, is now being exploited very productively to build complex components for construction projects. (See “Will 3D Printing Remodel the Construction Industry?,” BCG article, January 2018.)

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

the offsite revolution in construction - bcg global

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

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