'The whole sector is deeply undermanaged'

October 28, 2020

Stefan Kirsten is an industrial veteran with a background as a German blue chip CFO at companies like Metro Group, Thyssenkrupp as well as Vonovia, the largest German residential real estate company.

Stefan Kirsten is an industrial veteran with a background as a German blue chip CFO at companies like Metro Group, thyssenkrupp as well as Vonovia, the largest German residential real estate company. He currently serves as a non-executive director in both growing start-ups and mature companies. Besides teaching as a professor, he just joined the Foundamental advisory board. That’s why we called him and asked for his take on what’s going in the building world. Here are his answers on undermanaged industries, rising costs and the labor shortage in construction. Definitely worth a read (if you ask us).

Stefan, you’ve worked in the building world on multiple continents. Looking at these industries in 2020, what is your state of mind?

These are challenging times. For all of us, and the building world makes no difference. If we look at the planet and the decades ahead, we can say that demand will be there. It’s simply demographics. It will obviously differ from continent to continent, but we are about to add 13’000 new homes every day for the next 40 years. That’s net new – every single day…

The main problem, however, is that the sector is deeply ‘undermanaged’. We need to address that with all the radical means necessary – especially if you look at bringing down carbon emissions.

When you say the sector is undermanaged you mean …

It basically means that you have a high degree of fragmentation. Just look at the numbers: 80% of value-add in construction comes from companies with less than 250 employees. And it’s no surprise if you look at what makes construction so unique. Construction sites will always be geographically dispersed. That’s for sure. Ten construction sites will always be in ten locations. With all the characteristics and regulations prone to the area of the site. Also, the assembly itself will always be distinctly local. Fully-assembled structures are just too heavy to be transported. And you can’t transport cement over 4000 kilometers. It just doesn’t make sense. Compare that to the car industry for example: they have controlled environments where the car is assembled mostly by machines as they can ship it easily wherever they want. That’s why they have seen a steep increase in automation, tech-adoption and, hence, productivity. And construction did not.

Which leads to the spiraling costs seen in past decades …

Exactly. Low productivity is one reason that drives costs. As well as local constraints on site and regulations that make it nearly impossible to build in developed countries (all implemented for the right reasons, but also driving costs in the end). But what shouldn’t be overlooked when talking about costs is the looming construction labor crisis.

In many markets we have an aging labor force. Up to 40% of the US construction workforce today will be retired in ten years. The problem is that the young aren’t keen on joining the construction trades. Meaning that the US alone will be short of a couple of millions of workers by 2030. And it’s pretty much the same in all other mature markets.

Doesn’t that mean we will have to build the most complex projects we’ve ever built with the least experienced workforce we’ve ever had? What can we do about it?

That certainly is one way of putting it. Addressing it won’t be easy, but we have to. We have to better utilize the workforce. That means we will have a higher disparity between skilled and unskilled workers. Let me give you an example: when you refurbish a flat, the refurbishing crew should not carry the materials into the flat. That’s what a freight forwarder does. Because these guys can do bathrooms, and they can only do bathrooms, but they do them in 72 hours. And they do them very well. By letting the experts do their job, and only their jobs, productivity goes up.

Another way of increasing output of a single worker is standardization. That combats complexity and is one way to not only increase productivity of the unskilled, but also make life easier for everyone involved. And, of course, there is the point of best managing all the different parts of a construction supply chain and optimizing processes. It sounds so simple, but there is so much room for improvement, believe me.

We do. But how to change an industry with such a high fragmentation?

Good question. I mean the industry isn’t solving it from within. Too fragmented and too little spend on R&D. We need to attract outside innovators, being it tech founders or industry experts that are fed up with the status quo. Let’s make use of the technology that is certainly out there and use it in every step of the supply chain. Once done, you can much better manage the industry.

But we must also get better in learning from the past. I don’t want to drop any names, but even big firms start every project as if they are reinventing it. And each time when you hear the word experience, it simply means knowledge which is in brains, but not in systems, structures and processes. And this is something where this industry is significantly underdeveloped. I mean if you have built, for instance, the Olympic Games in Sochi and you want to build them in Tokyo, I doubt that they will take more than 2% of the knowledge and experience from Sochi over to Tokyo. And that’s stupid because it’s still a stadium, isn’t it?

Let’s change that with bright minds fueled by venture capital.