This article describes Blackhorn Ventures’ strategy to address the capital-intensity and resiliency challenges of prefabrication in construction, an industry plagued by lumpy short term micro-demand and by severe swings in regional and national macro-demand across business cycles.
Construction is one of the largest industrial sectors globally, yet its productivity gains lag behind other sectors. Modular construction through prefabrication is one promising solution to this productivity challenge, but three factors restrict its growth: market cyclicality, market fragmentation, and demand for customization. Blackhorn is backing a new generation of companies in prefabricated or modular construction that take one of two differentiated approaches to mitigate the above challenges.
Disrupting the Construction Industry
Construction firms assume significant risks of cost overruns and delays, but most general contractors still earn an operating margin of less than 5 percent. Furthermore, construction is one of the highest emitting and most dangerous sectors, accounting for 39 percent of carbon emissions and more fatal work injuries than any other industry.
Prefabrication offers a compelling opportunity to make construction more efficient, profitable, sustainable, and safe for workers.
Why Prefabrication Has Failed in the Past
Despite prefabrication’s potential, past U.S. attempts at prefabrication, including the ambitious Operation Breakthrough experiment during the 1970s, failed spectacularly, largely because their capital-intensive and vertically-integrated approaches did not account for market cyclicality, demand for customization, and both vertical and horizontal industry fragmentation.
The market demand for new construction is highly responsive to changes in macroeconomic conditions and resulting changes in interest rates and the availability of debt. The industry’s cyclical nature is highly problematic for prefabrication businesses that must assume significant debt or make large capital investments. Modular firms that participated in Operation Breakthrough, for example, invested heavily to build plants that required large amounts of equity and debt. When demand unexpectedly fell and interest rates simultaneously rose due to “stagflation” in the late 1970s, the plants became stranded capital assets. And “stagflation” may be coming back now! Integrated prefabrication business models have been successful in some European housing markets, where demand for homebuilding is driven by long-term government investment in affordable “social” housing, but this model does not work for the U.S. market.
A high level of customization is needed to accommodate the significant differences in building design caused by divergent local building codes, climate conditions and variations in material and labor supply and cost in different housing markets.