Building a Better Way to Build at Katerra
By borrowing best practices from the manufacturing sector, Katerra — a unicorn start-up in the construction industry – is hoping to build a better way to build.
The Productivity Problem
Over the past 80 years, industries in the U.S. such as manufacturing and agriculture have increased their productivity by 10 to 15 times, but one industry seems stuck in place: construction.[1] Construction has enjoyed the lowest productivity gains of any industry over the past twenty years – which presents an opportunity for firms to leverage technology and digital supply chains to dramatically improve productivity in the $10 trillion industry.[2],[3]
Perhaps no company has generated as much excitement in tackling this challenge as Katerra, a startup that “optimizes the way we develop, design and construct buildings.”[4] Founded in 2015 by Michael Marks, former CEO and Chairman of Flextronics, Katerra has raised over $200 million in venture capital to apply best practices from the manufacturing industry to construction. Katerra is interested in how digitally enabled supply chain solutions can help tackle the productivity problem because even small increases in productivity could translate to billions of dollars of value creation. As of 2017, construction related goods and services account for approximately 13% of the world’s GDP and the industry employs 7% of the world’s working population.[5] And yet, despite the size of the addressable market, improvements in construction productivity have not materialized: in the United States, the construction sector’s labor productivity is lower in 2016 than it was in 1968.[6]
Katerra’s Solution
Katerra is fundamentally rethinking construction and is working to become an “end-to-end”, vertically integrated builder. It claims that “when the entire building process is owned by a single team from end to end – bringing design, manufacturing, material sourcing, and construction together intro one streamlined system – it is possible to build high quality, beautiful buildings, faster and at a lower cost.”[7] On the production front, the company has built a 200,000 SF factory in Phoenix, AZ where it can manufacture various components of a building, such as whole walls complete with windows, plumbing and electrical wiring hook ups. These “parts” can then be shipped and installed at a building site, aided by technology that tells cranes and labor where and how to assemble the finished materials.[8] By manufacturing and assembling the various components of a building at its factory, Katerra endeavors to reduce the variability associated with building on-site, as well as reduce inventory build ups. For a look inside Katerra’s factory, see here.
On the technology front, Katerra is building products that will enable the company to connect with workers in the field, better manage inventory, aggregate demand across multiple projects, and link its production facilities to enterprise resource planning systems.[9] Over the medium term, Katerra plans to build additional factories in other parts of the country, as well as become further vertically integrated.[10] In fact, the company recently announced plans to build a facility in Spokane Valley, WA that will produce cross laminated timber (CLT), a raw material for its buildings.[11]
What’s Next
Construction is an industry that is traditionally slow to innovate, so Katerra needs to explain clearly and convincingly why multiple stakeholders, such as investors and city regulators, should become “first adopters” of this new way of building. The United States does not have uniform building code regulations, which means that local authorities determine the viability of a given project’s design and feasibility. If Katerra is to leverage its technological advantages on a national scale and across building types, it will require cooperation from regulators and local agencies. Investing in educating those stakeholders early will be critical.
Katerra should also think about how digitalization can create value once the building is built; that is, are there ways that digital plans and specifications, along with IoT solutions, can become “living and breathing” platforms that help owners better manage their buildings. For example, Katerra should think about ways to stay involved in the supply chain through the useful life of the building by monitoring the building systems and providing replacement parts and services. Today, building owners are largely confronting issues after they arise, but Katerra’s control of the supply chain could enable it to outfit materials with automated sensors that monitor for potential problems.
Katerra’s technology is exciting, but many questions remain. How will Katerra convince owners and operators of real estate to abandon longstanding relationships with their existing contractors? How will they get lenders comfortable financing projects with this new building model? And how will they maintain positive relationships with subcontractors, who may find their on-site roles diminished given Katerra’s off-site fabrication methods? These are just some of the questions that Katerra needs to answer before it upends an industry that has built in much the same way for over a century.
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[1] Filipe Barbosa, et al. , “Reinventing Construction: A Route to Higher Productivity,” Page 1, McKinsey Global Institute (February 2007), McKinsey & Company, https://www.mckinsey.com/industries/capital-projects-and-infrastructure/our-insights/reinventing-construction-through-a-productivity-revolution, accessed November 2017.
[2] Ibid.
[3] “Efficiency Eludes the Construction Industry,” August 17, 2017, The Economist, https://www.economist.com/news/business/21726714-american-builders-productivity-has-plunged-half-late-1960s-efficiency-eludes, accessed November 2017.
[4] Katerra, “FAQs”, https://katerra.com/en/FAQ.html, accessed November 2017.
[5] Filipe Barbosa, et al. , “Reinventing Construction: A Route to Higher Productivity,” Page 1.
[6] Ibid, Page 3.
[7] Michael Marks, “Construction: The Next Great Tech Transformation,” Voices, McKinsey & Company, June 2017, https://www.mckinsey.com/industries/capital-projects-and-infrastructure/our-insights/construction-the-next-great-tech-transformation, accessed November 2017.
[8] Christopher Mims, “Why You’d Want to Build an iPhone like a Skyscraper,” The Wall Street Journal, July 2nd, 2017, https://www.wsj.com/articles/why-youd-want-to-build-a-skyscraper-like-an-iphone-1499000401, accessed November 2017.
[9] Katerra, “How We Do It”, https://katerra.com/en/how-we-do-it/process.html, accessed November 2017.
[10] Ibid.
[11] “Katerra Annouces New Mass Timber Facility,” press release, September 26, 2017, on Katerra website, https://katerra.com/en/who-is-talking/press/2017/press-releases/CLT-Factory.html, accessed November 2017.
In terms of real estate relationships with existing contractors, I think Katerra would be wise to focus on smaller firms. Due to high costs and historic relationships between developers and large contractors, real estate development has a high barrier to entry. Katerra offers an alternative to this for smaller or newer firms without the capital that large developers have.
The relationship with sub-contractors is trickier. I view the role many of them perform as binary – their function will either remain relevant or it won’t, rather than gradually ebbing over time. Katerra could either not utilize their services at all, or potentially build relationships with one or two regional subcontractors to perform all of the minimal work required at multiple Katerra sites.
Your comment about integrated sensors monitoring problems is interesting, but I wonder to what degree that already happens. Some commercial buildings already require monitoring systems by code. The same concept applied to homes would be interesting but would not necessarily be cost effective.