Thesis: Why AEC incumbents are being FORCED to buy tech

May 16, 2024

034 | Thesis: Why incumbents are FORCED to buy tech | Our 4-part answer | Exploding demand | Shrinking productivity | Fleeing labor | AEC is service & project biz | Perfect storm for industry

This week:

Construction demand exploding globally, creating multi-decade tailwinds

Productivity paradox: construction worker output decreased 20% over 35 years

Aging workforce crisis: 20-25% of US construction workers nearing retirement

Global skills shortage: severe lack of skilled workers worldwide

Industry vulnerabilities exposed, creating perfect storm for construction-tech adoption

Construction Demand Surges

Demand for construction is exploding globally due to various factors, creating multi-decade tailwinds for the industry. Shub highlights the dire situation in the US, stating, "Did you know that the US needs more than 7 million homes just to shelter the homeless?" Europe and the US are expected to add 50-70% more floor area to existing buildings over the next few decades, while Asia and Africa are seeing even higher growth, with floor area almost doubling. Patric emphasizes the unprecedented scale, noting, "Between 2020 and end of 2050s, so in the next 40 years, we will have the largest wave of human building activity in the history of planet Earth, in the history of mankind." Infrastructure needs are also booming across the world. This surge in demand is driven by population growth, aging infrastructure, migration, and rising middle classes. Europe faces additional pressures to renovate existing buildings to meet environmental targets, while also potentially restricting new construction land by 2050. Shub points out, "Europe is desperately short of truck drivers and therefore there's a drive to, I guess, import truck drivers from other markets, say India, for example." The construction industry is poised for an era of unprecedented growth and activity.

Productivity Paradox

Productivity per construction worker has decreased by 20% over 35 years, contributing to over 60% of inflation in Western markets. Patric shares the startling statistics, "It has actually decreased by 20% over the last 35 years, while every other relevant, like highly relevant sector for the global economy, think manufacturing, think agriculture, for example, has actually increased by up to 200%." This decline is even more stark when adjusted for inflation, with Shub adding, "If you were to correct it for inflation, you'd be actually at a tiny fraction, less than half of the productivity you were at 60 years ago." In contrast, other sectors like manufacturing and agriculture have seen productivity increases of up to 200% in the same period. Construction's lagging productivity has led to a 3% annual price increase in Europe, outpacing inflation. Shub explains, "The typical rate of price increase adjusted for productivity in manufacturing has been less than 1%, which is not bad at all. I mean, you would happily take it given the rate at which productivity is growing. Whereas in construction, it's typically been around 3% a year, right?" This productivity paradox presents a dire picture but also highlights the immense opportunity for improvement and disruption in the industry.

Aging Workforce Crisis

Qualified labor is fleeing the construction industry at an alarming rate, with 20-25% of the US construction workforce over age 55 and nearing retirement. Shub shares the worrying statistics, "In the US today, 20%, I think the number is more like 22, 23%. So almost a fourth in fact, of the construction workforce in the US is over the age of 55. Right?" The next cohort, aged 45-55, accounts for another 25-28%, meaning nearly half the workforce is over 45. Patric adds, "As our US partner Adam likes to say, we're building the most and most demanding infrastructure and buildings with the least experienced workforce in the history of mankind." This aging workforce takes with it decades of accumulated experience and wisdom that will be lost upon retirement. The situation is similar in Europe, with Patric noting, "We know that more than 1.2 million workers across Europe are about to retire here in the next few years and leaving the workforce and replacements are far and few between, very difficult to find." The construction industry faces the challenge of building more than ever before with the least experienced workforce in history.

Global Skills Shortage

There is a severe shortage of skilled construction workers in both developed markets like the US and Europe and emerging markets like India. Patric shares the staggering numbers, "We're missing 650,000 truck drivers right now in the EU." The US currently lacks 500,000 qualified workers, while Europe is short 900,000, a number expected to reach 1.2-1.5 million by 2030. In emerging markets, the problem manifests as a steep drop-off from interested workers to those skilled enough to take on qualified roles. Shub explains, "If you were to structure the workforce or the inflow entry into the workflows as a funnel, where the top of the funnel is all the workers who are interested in taking up construction jobs. And the very bottom of the funnel is the people who are skilled to take up highly qualified jobs or who can potentially lead functions in construction, the accumulators of wisdom, if you will, who are capable of doing that. That funnel is not looking pretty, I have to admit, in markets like India." This skills gap necessitates widespread tech adoption to bridge the divide and enable the industry to meet growing demands.

Industry Vulnerabilities Exposed

Construction, as a per-diem, project-based business, is highly vulnerable to exploding demand and shrinking qualified labor, creating a "perfect storm" for construction-tech. Patric explains the industry's unique challenge, "All of this happens in an industry, construction and architecture and engineering. That is a project business, a service business, a knowledge business, and ultimately a per diem business. Being a per diem business means that everybody in this industry prices their revenue, except the materials manufacturers, on a per diem basis." The industry's reliance on pricing labor output on a per-hour basis leaves it exposed as workers retire or leave. Maintaining top-line growth becomes challenging, let alone increasing productivity or capturing the surge in demand. Patric emphasizes the vulnerability, "Imagine I'm a general contractor that assumes risk, builds portfolios, but in the end everything I'm doing is knowledge that I'm injecting into a project and now my labor is fleeing. I will not be able to maintain my top line." This vulnerability is exacerbated by the knowledge-intensive, project-driven nature of the business, which requires highly qualified labor to generate revenue and margins. The construction industry finds itself in a precarious position, with an urgent need for technological solutions.

AI and Tech to the Rescue

AI and construction-tech are poised to help compensate for fleeing qualified labor and boost stagnating productivity, signaling an inflection point for the sector. As the industry grapples with the perfect storm of challenges, technology emerges as a critical solution. Shub expresses his growing enthusiasm, "I'm warming to the idea. And I think especially what I'm most excited about, you know, going back to what we discussed in our most recent episode on services, which, I mean, when you think about it, what are services, right? It's administered by labor, maybe not blue collar labor, but, but, or even that also takes its own form of services, but ultimately it's work performed by people, the workforce. I think that I'm actually very excited about, maybe not in a one year horizon, but eventually what AI can do to augment and transform the way services are administered, what services are even thought of in construction." By leveraging these tools, the industry can deliver the per-diem output needed to generate revenue, even as labor resources dwindle. Patric emphasizes the urgency, "The pressure to do something, not just the incentive to the first point demand is exploding, but the pressure to do something and capture it has never been greater." The construction industry stands at the dawn of a technological revolution that will reshape its future. Patric concludes, "We really believe that we're at a generational and perfect storm opportunity for the AEC tech sector. I think people, some outsiders, you know, VC friends, et cetera, I think they still wait for this tourist opportunity to be over. And I think anyone who thinks that is absolutely utterly wrong. It's the exact opposite. We're even at only the beginning of an inflection."

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