- A new McKinsey report says that $265 billion in new or shifting profits are at stake as the construction industry invests more in technology.
- This transformation, already underway, has been accelerated by the coronavirus crisis, with 50% of the construction experts surveyed by McKinsey saying they’ve increased their investment in technology since the virus hit.
- While the changes will disrupt the whole construction value chain, the biggest impacts will be on the contractor and subcontractor labor field, design and engineering, and material production and logistics.
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A $265 billion pool of annual profits is up for grabs for construction companies that invest technology and digitalization, according to a new report from McKinsey Global Institute.
This shift, already underway, has been accelerated by the coronavirus pandemic, and the unprecedented amount of remote work that followed.
The report, published Thursday, found that 40% to 45% of construction incumbents’ value added in certain segments, such as design and engineering or actual contracting, is at risk in the face of increasing tech adoption. The report estimated that players that “move fast and manage to radically outperform their competitors could grab the lion’s share of the $265 billion in new and shifting profits and see valuations more akin to those of Silicon Valley start-ups than traditional construction firms.”
In a call with the press on Tuesday, Jan Mischke, a partner at the McKinsey Global Institute stressed just how existential this particular moment is: “Companies need to move now or be left behind.”
Construction’s lack of digitization, compared to industries like manufacturing or logistics, had kept the industry from seeing a drastic increase in productivity, McKinsey found. But in the last few years construction technology has gone from an extremely niche industry to one of the buzziest sectors in venture capital.
The latest McKinsey report said it expects the coronavirus to accelerate that growth. McKinsey surveyed around 100 experts and construction executives, half have already increased their investments in tech since the pandemic began.
Mischke said that some of the people they talked to said they were now squeezing their five-year plan for tech adoption into a six month period to accelerate the rate of change. As in every industry, the shift into remote work has highlighted exactly why a digital workflow is so much more efficient.
Construction executives had a number of realizations during the crisis, said Maria João Ribeirinho, a McKinsey partner and global leader of the firm’s engineering and construction practice, on the call.
“It is not okay to get to your construction project and have to deal with a bunch of paperwork or have to do 10 phone calls to see that your materials end up on-site in time,” she added.
The transformation in the industry, which could lead to a 60% increase in productivity over time, will turn a localized and fragmented industry into one that is consolidated and focuses on buildings as if they were repeatable products, instead of one-off projects. It will be driven by both new entrants, like SoftBank’s Katerra, and from more traditional, incumbent builders.
While there are potential impacts across the construction value chain, companies in the design and engineering, materials, and general and specialist contracting fields will see the biggest potential impact. In design and engineering, new software will reduce the amount of human input necessary in building, while materials companies, powered by recent changes in logistics, will become much more efficient, and likely cheaper.
Contracting and subcontracting may also see big hits, as easier offsite construction and modular building will require less labor than traditional building techniques.
Mischke noted that private equity has taken a very close interest in the industry, investing in both innovative startups and in more traditional building companies that are adopting technology. In 2019, Goldman Sach’s venture capital arm made an investment in Built Technologies, a construction lending platform, and in TopHat, a modular housing company.
Alternatively, private equity may also seek out underperforming companies to transform by connecting them with innovative technology. The public sector, which Mischke said is the “single biggest constructor” will also be key, both in the types of buildings and infrastructure they have built and in the way they adjust regulations to accommodate technological change.
Another key element to this change will be attracting Silicon Valley-type tech talent to an industry that isn’t typically known for its innovativeness. In order for that to happen, firms will need to show a commitment to using new technologies.
“We need a renovation of the sector to attract more diverse and more digital talent,” Ribeirinho said.
Read more:
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