Modular Building Institute

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Life After Katerra: Where does the Modular Construction Industry go from Here?

Original Comment:
When Katerra burst onto the modular scene in 2015, with about $1.5 billion in help from Japan’s Softbank, everyone hailed the quasi tech/construction company as revolutionary. Problem is that folks in construction don’t like revolutions. Never have, probably never will.

In fact, many companies within the modular construction sector – often hailed as “the future of construction” - looked at Katerra with a somewhat skeptical eye. Their business model seemed to be a bit ambitious, perhaps fueled by unrealistic investor expectations. It seems like every week we read about a new project in a new market in a different part of the world that the company was involved with. Housing in California? Sure, no problem. What about India? What about offices or hospitality?

My takeaway: Katerra tried to grow too big too fast. And the construction industry is littered with failed examples of this strategy.

Over the past eighteen years, I’ve seen my share of company successes and failures. Many of the failures have been the result of over-aggressive growth strategies. Not long ago, a company called Modtech began buying up factories in various parts of the country, creating one of the first truly national footprints for our industry. I recall once at a board meeting someone saying, “I hope they never go under; they are so big it will really hurt our industry and our association.” Well, they did go under. And the industry survived.

One of the challenges to the growth of our industry is that construction is regional and fragmented. But then again, maybe that’s also the secret to our resiliency. Numerous companies have been successful for decades in this industry by understanding and serving their regional geographies in one or two key markets.

Katerra certainly raised the bar and the level of conversation about the need for greater efficiency and productivity in construction, echoing the numerous research reports published by the likes of McKinsey & Company. But rather than one large investment in one company to bring about massive changes, perhaps we need many smaller investments in many companies to bring about steady, incremental improvements over time. Not necessarily an attractive pitch to equity investors, but it has kept the modular construction industry moving forward despite high profile setbacks.

Back to Katerra – their assets were recently snatched up in a big, bold move by Volumetric Building Companies for about 40 cents on the dollar, with plans to call back former workers and start supplying the industry again. Back on track with a bright future ahead.

The modular industry has doubled in market share over the past five years. And its going to double again. And it won’t be because one big company changed everything about construction. Rather it will be because a whole lot of companies moved closer to an industrialized construction process.
Started on August 12, 2021 by Tom Hardiman
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Additional Comments:
Fulcrum provided risk management consulting on nearly 20 different Katerra-constructed projects across the country over the past few years. It's what I've said for the past three years. "They're the tree that grew to 100 feet tall, but remained only 6 inches in diameter." Their organization just didn't seem established enough to take on that much vertical growth all at once. It was like giving a 14 year old 10 million dollars and telling them to start a technology company. They can be the smartest 14 year old in the world, but because they lack maturity and experience, they're more than likely doomed to fail without a ton of oversight and influence from other more mature leaders.

One of my biggest takeaways, and what I hope the industry takes away, is that sometimes big failures can lead to GREAT SUCCESS! We should not be afraid of an occasional failure in the industry. While this may be a very high-profile cautionary tale, it's also provided a maid-to-order, perfect opportunity for the modular industry and an organization like VBC to turn it into a success story and make a significant contribution to west coast construction and development through volumetric modular construction! If THAT is the outcome and it propels the modular industry forward, so be it. I'm OK with that. Now is the time to cheer on one another's successes and enjoy the collective success of our industry that's coming in the next several years! There's never been a better time to build with modular! Cheers, all!

Updated on August 20, 2021 by Mitchell Lund

Fantastic work Tom & well stated. The industry remains well capitalized and primed for steady growth.
Updated on August 17, 2021 by Anthony Gude

KATERRA was not Softbank's first major investment not to succeed. A project of this size deserves detailed analysis and firm monitoring. Experiments of this type with a high degree of verticalization in construction do not usually generate good results. Also considering the acquisition of several companies and the need for integration, with commitments to deliver considerable volumes and clear divergences and management problems, it is not difficult to understand why KATERRA did not work out. A pity and a great opportunity lost by off-site and modular construction. However, we have several lessons to learn! - Paulo Oliveira - ARATAU Construcao Modular
Updated on August 17, 2021 by Paulo Oliveira

Tom, you are absolutely correct. What people these days forget is the long game. Most of us fleet owners have been doing this for multiple decades, there is no short term success in this business.
Updated on August 17, 2021 by Joe Helleny

Great analysis, Tom! Thanks for the insights.
Updated on August 17, 2021 by Stephen Shang

Tom, thanks for the perspective and and insight into the industry. I have had 40 years to watch and participate in the industry (including 5 years at the failed Modtech)and continue to be amazed at the number of people that believe that if you just throw a bunch of money at an idea it will magically happen. Just think what our little piece of the construction industry could have done with the rumored $3Billion that Katerra invested. Katerra just simply attempted to "boil the ocean" and even though we may be headed there it just won't work. I remember having a brief conversation at WOM with 2 representatives of Katerra and asked them "who is your customer". I did not get an answer. Maybe that was the real problem.
Updated on August 12, 2021 by Rick Bartolotti

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