Katerra Comes Out With a Splash
Thursday, June 28, 2018
By John McManus, Builder magazine
The Katerra is out of the bag.
Two highly visible in-depth analyses in the past week focus on the Silicon Valley unicorn as a potential disrupter to entrenched powers-that-be in architecture, engineering, and construction, and a potential solution to the chronic and increasingly acute challenges that plague them.
At first, quietly and slowly in its Menlo Park, California, start-up mode beginnings in 2015, and then quite noisily and suddenly as an international venture capital belle of the ball, Katerra has now generated great expectations.
All they have to do now is deliver on them.
This piece, in Bloomberg’s Businessweek, “The Modular-Home Maker That Could Make Housing Cheaper,” by Dina Bass portrays Katerra as construction's best – and most well-endowed – bet yet to crack a code that anchors modern design, construction, engineering, and sourcing companies to a century-old legacy of efficiency traps. Bass writes:
This process is a radical change for the construction industry and a threat to decades of this-is-just-how-we-do-it attitudes. While other construction tech startups try to modernize some parts of the business, designing modular homes or building robot-run factories to make prefab parts, Katerra seems to have the best shot at putting all these pieces together, from design to finished building.
And this article from CityLab's Amanda Kolson Hurley (a former colleague who worked at Builder sibling title Architect) – “Can Silicon Valley Disrupt How We Build?” – delves deeper and more descriptively into the riddle Katerra has designed itself to solve, one that creates inevitable opposing forces, agendas, and interests among three key disciplines essential to any building – architecture, engineering, and construction. She writes:
The way that most large buildings get built hasn’t changed much from 50 years ago. It goes by a deceptively straightforward name, “design-bid-build.” First, a developer or owner hires an architect, who comes up with a rough design. To flesh this out, the architect brings in consultants such as engineers and landscape architects, and sometimes niche consultants such as food-service specialists.
When the design is finished, the owner puts it out for bids from general contractors, and hires one of them – often the lowest bidder – to supervise construction. The GC issues its own bids, and farms out the pieces of the project (for example, the HVAC system and the concrete work) to subcontractors. It’s not uncommon for the subcontractors to bid out work, as well, hiring sub-subcontractors. Then, when construction begins, the architect runs interference between the owner and the GC, trying to ensure that every detail is built correctly without blowing the owner’s budget. (Much of the time, the budget gets blown anyway.)
Not surprisingly, having so many cooks in the kitchen leads to misunderstandings and finger-pointing. Add volatile material prices and a skilled labor shortage, and you have, in the now-familiar parlance of Silicon Valley, an industry waiting to be disrupted.
The conclusions of both articles are similar – and, ultimately, inconclusive.
That's because this story is just beginning. However, it's also because many of the entrenched, established, incumbent players in the businesses of architecture, engineering, and construction have heard it before and seen it all before, or believe they have.
A quick note on that came as we talked with a financial industry executive whose firm has lending relationships with many builders and developers.
“Yes,” he said. “And electric cars were around for years, and all the Detroit gear-heads would have said, ‘been there, done that,’ with the idea of a car not powered by gas. Then, everybody knows what happened next. Tesla comes along with a great, exhilarating, must-have kind of car, that happens to run on battery power.’
So there's skepticism – and perhaps a bit of envy – about a player who's come in from the outside of housing’s invested and vested powers, who feel that they’re infinitely more qualified to understand what can and can't be done to evolve systems and processes and models to bring construction productivity into sync with other, more progressed business and industry sectors.
We’ve talked to the CEOs of several home building organizations, who’ve toured though Katerra's sprawling, immaculate factory complex in Phoenix – some with a mind to invest in the business – who came away less than impressed. It’s hard to know exactly what felt wrong about the business and operations model. It would be unlikely and uncharacteristic for these business leaders to let on, one way or another, whether Katerra strikes them as “the real deal,” or another expensive lesson learned about how things in building won’t change by throwing money and technology at the issues.
Both pieces touch on, but in a glancing way, at what we feel are critical points of friction for even so well-conceived and richly capitalized a business and operations model as Katerra’s.
One is dirt.
The other is people.
Both factors are full of occasions for variability, the enemy of a model like Katerra’s, which aims to “productize” building parts and components, deconstruct them down to the nano-fiber of material, attach radio frequency id’s to everything, and apply machine learning to create the most direct, efficient, and elegant path to completion.
A “secret sauce” building block that will inform design, specification, processes, software, robotics, and assembly of all the components and subcomponents in a structure is commonly used in “productizing” technology’s physical devices and platforms: the bill of materials.
When a bill of materials becomes a non-negotiable operational unit for every part of a structure, real 3-D CAD, and real-time virtual construction can precede real-world fabrication and assembly processes. RFID sensors build in learning and discovery tools and processes that allow artificial intelligence to figure into ever more efficient – ultimately productive – ways to design and build.
Getting back to dirt and people, and why many of today’s builders are rightfully skeptical about Katerra and the growing ecosystem of offsite construction capabilities and facilities that have become an investment sweet spot in the VC community.
Dirt stands for the site, and all its shameless uniqueness and complexity – natural conditions, climate zones, land use policy (i.e. 110,000 municipalities, each with their own codes), neighbor’s attitudes, financial valuation, etc.
People, an even more complex field-force that works outside of and impinges on any would-be elegant solutions to the architecture-engineering-construction riddle of inertia, push-back, and cost. People are a make-or-break factor for Katerra, both as end-user customers who will be renters or owners of apartments or homes that come out of the factories, and as workers.
People spend more on their housing than they do on any other part of their lives, as a rule. When it comes to homes, what people want and what they're willing to pay for – at least to date – correlate.
Also, any new, better, faster, cheaper, less labor-intensive way to do things in the world of construction is going to cause a lot of anxiety and worry for those whose livelihoods depend on old, worse, slower, more-expensive, and more labor-intensive ways to do them.
So, dirt and people are big reasons many of the incumbent organizations who are prospering in the residential construction and development business sector today are skeptical about Katerra.
And, they believe, it’s like deja vu all over again.
Thing is, this time two major things are different. One is, there truly is no genuinely realistic prospect of a reversion to norm of cheap labor.
And two, America has never been so under-built when it comes to housing, which makes it so that too many bidders are angling for too few homes, which, in turn makes what’s here too damned expensive.
So, it’s our belief that incumbent players need to align with what Katerra and others are trying to do, and help those businesses with their biggest current impediments, dirt and people.