24 Feb Construction Is Still Lagging in Digital
The construction industry, whose fortunes are intertwined with the oil and gas industry, was castigated as a digital laggard in 2014. Is this still true?
Back in 2014. McKinsey released a now widely quoted analysis of the digital readiness of a range of industries. The construction industry, which in global terms is valued at some $12T, was flagged as amongst the least digital of all industries, and for good reason:
- The industry suffered from high labour intensity, often unionized and generally low skilled. It frequently made more make economic sense to add labour rather than make the labour more efficient. Improving productivity, safety and cost confronted this labour question.
- The industry was highly fragmented, with hundreds of thousands of market participants. Imposing standards on an unruly sector was very challenging.
- The sector did not have a history of innovation, and this muscle was pretty undeveloped. In 2010, the total amount of venture capital that entered the market for start ups focused on the construction industry was just $8m.
I attended LNG18, a global gathering of the liquified natural gas industry participants that takes place only every three years, in Perth in 2016. One of the keynote presentations was from Shell Australia, who lamented that while virtually every other industry had gained ground in productivity, the construction industry had actually become 25% less productive in the previous decade. Almost all of Australia’s recent major gas projects (QCLNG, GLNG, APLNG, Ichthys, Prelude, Gorgon, Wheatstone, and Pluto), were delivered late, over budget or both.
The oil and gas industry is highly dependent on the construction industry since oil and gas needs to spend almost a trillion dollars every year to maintain production and accomodate the growth in demand. In fact, setting aside the costs to drill wells, much of this capital is used to build “facilities”, or pipelines, flow lines, compression stations, gas plants, oil batteries, refineries, port facilities, gasoline stations, and on and on. I would argue that oil and gas is synonymous with construction. Yes, it’s a specialised construction (not the same as putting up a warehouse park), but still construction.
Surely the situation has moved beyond McKinsey’s depressing view, and the construction industry is no longer the laggard, right? Not quite.
Last year, just a decade on from the paltry investment appetite in 2010, where $8m in venture funding came into the sector, venture funds are now plowing US$1.8b into various construction industry start ups. Dedicated investment funds are taking aim at transforming the industry. Some of the biggest names in venture (Softbank, for example), are targeting the sector. Digital start ups in construction have achieved unicorn status (valuations of US$1b or more), including 3 year old Katerra who just received a capital infusion of $865m.
It’s not like there’s been some sort of weird slowdown in construction. We’re building more and bigger structures all the time. Our buildings are becoming more complex, smarter, and greener.
Here’s a few tidbits I’ve picked up recently while preparing for a briefing on digital with a construction company.
China has been forced to rethink construction because of its need to accelerate its industrialisation. We can now see how fast China gets stuff done by watching the country build a field hospital in Wuhan to deal with COVID-19 in just a week. There are lots of videos of China office tower and residential construction featuring one new floor added every day. North Americans point at these efforts as yet more expressions of China’s technocratic authoritarianism — the site construction was round the clock, clearly standards were not observed, workers were enslaved, blah blah.
The UK’s new government under Prime Minister Johnson has approved the construction of a high speed rail line connecting London to Birmingham and eventually Manchester and Leeds. The project has ballooned in cost from GBP 56 billion to 106 billion. China has built 25000 kms of high speed rail lines in the past decade and they have hinted they should be able to build out HS2 at much less cost. I don’t doubt that.
Tokyo will be hosting the 2020 Olympic Games this summer and as is typical of the Olympic movement, the city needed to build 8 new facilities for the Games, set up 10 temporary sites, and reuse or retrofit 25 others. By all accounts the facilities will be ready in time. But here’s an interesting factoid: the average age of a construction worker in Japan is 60. One of the ways that Japan has managed to hit its impressive construction target is to use digital to boost the productivity and lower the cost of construction.
Korea is another giant in the world of construction. There are 65,000 digital start ups active in Korea aimed at the construction industry. Yes, 65,000. Add that to the flood of venture money aiming at the sector, and change is inevitable.
The IEA estimates that buildings account for a third of global energy demand, and 55% of global electricity demand, and are thus a major source of GHGs. Tackling climate issues means that buildings and their construction must become greener.
These examples illustrate the trends impacting construction. Different techniques for construction (unitization, modularization, stack construction, wooden sky scrapers, and factory assembly) are resetting the competitive landscape for builders. Significant labour shortages in both mature and ageing economies stimulate greater productivity. Money is pouring in to capture the inefficiencies and to make for greener, cleaner buildings.
Show Me the Money
Here’s a quick round up of the kinds of use cases that some construction companies are trialing with digital tools:
The use of smart phones with cameras and apps to capture safety incident data. Employee wearable technology supports site safety for evacuations, worker down alerts and geofencing for permits. Robots are on sites to help workers retrieve tools and parts, avoiding the need to down tools and walk to the stores. Robotic excavation equipment is in place to improve earth works productivity. Site safety is a huge driver of performance for construction companies, and the collection of safety data for analysis and sharing is directly attributable to safety gains.
The use of collaboration platforms that allow all construction participants to work off a single set of data — designers, owner, builder, crafts, suppliers, inspectors. These platforms are credited with bringing the sophistication of high tech manufacturing to the low tech construction sector. Collaboration helps projects stay on schedule, which reduces the pressure on workers to speed up and risk injury.
The construction of a purely virtual building project in the cloud. BIM, or building information management, is the name given to the digital version of the physical building. The twin is used to model out constructability, fit of components at site foundations, and mating factory assemblies across multiple factories. As built data embedded in the digital twin eases the handover process when the constructed facility is turned over to operations. Machine learning applied to the volumes of data from a construction site are applied to the digital twin to better improve schedules.
The use of augmented and virtual reality to provide for design walkthroughs, workforce training, testing and experimentation of emergency response. Reality tools can help workers on the job with in the moment training, engagement with remote engineers and designers, and even suppliers of gear.
The deployment of drones for aerial surveillance of construction sites, measuring everything from works progress to the location of kit in yards. Camera feeds, at one time used to guard the gate, are fitted with artificial intelligence to detect the arrival of time sensitive deliveries, such as Ready-Mix concrete. Sensor kits, that capture heat, humidity and light conditions, can send alerts in case conditions on a job site suddenly deteriorate and expose incomplete or vulnerable works to an unfriendly environment.
The creation of digital market places to enable access to available construction equipment, crews, and spare parts. RFID tags and QR codes help track goods completely through the supply chain for warranty and fraud protection. 3D printing is now in use to both build full structures (buildings and bridges), as well as specialized parts, and site tools.
My take-away from this brief review suggests the following:
- First, oil and gas companies should be stepping up their expectations of their construction business partners. It’s clear that at least some construction companies have figured out that digital investments can pay off. Time to make those digital investments sweat.
- Second, construction companies that are sitting it out on the sidelines are going to be at risk. I would be paying a visit to construction companies in China and Japan to figure out what can be copied and brought home.
- Third, there’s a lively flow of money into the sector. As usual, the start ups have the digital chops, but lack the domain knowledge and live project data. Builders have the data, but not the digital expertise. Construction companies should be plugging into the start up ecosystem so that they can get ahead of the wave of change.
Lest you conclude that the opportunity is over, don’t worry. Construction is a $12T industry and optimistically, it’s attracted a mere $2b in capital to transform its ancient ways. The party is just getting started.
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