Thursday, July 23, 2020

Who Will be the New Vertical Integrators of the Modular Industry?

Recently there has been a renewed interest in vertical integration in the modular construction industry. Proponents say it has to happen to have any chance of our industry growing beyond the 3-5% market share it currently holds.

The thinking behind it is absolutely on the right track. Vertical Integration is coming and sooner rather than later.

Everyone from single family modular home builders to large project developers are ready to see it happen but the big question is really not when it will happen but who will be doing it.

Factory Vertical Integrators

Many point to the modular factory saying they are the most obvious party to vertically integrate modular, but are they? It’s true they can possibly do more than they currently do.

However the modular factory is, in fact, just a production line pumping out modules for homes, commercial projects, ADUs and medical projects. Asking them to take on more of the responsibility beyond their gates has always been left up to the individual factory.

Some factory management teams encourage developers to work with their factory engineering department to come up with the design for their projects. They order the materials, build the modules and some factories even deliver and set the modules.

However, this is where vertical integration stops for most modular factories and the reason is quite simple. If the factory takes on the completion of the house or project for the builder/homeowner or developer, it severely curtails their market area.

Having factory people work away from home weeks at a time is not cost effective. It also puts all the costs of insurance, travel expenses and liability squarely on the shoulders of the factory itself. 

Some very successful modular factories actually do total vertical integration but it’s mostly on the residential side but this is rarely embraced by modular factories building more than 6 line moves a week.

On whose shoulders can vertical integration fall?

Here is where it could get very interesting.

First, we could see developers take over the reins by bringing on a team to take the project from cradle to grave, working and hiring all the different trades and production needed to bring the project to fruition.

This is already happening in some parts of the world and look for more in the US. Modular factories will simply quote the jobs and produce the product FOB. The developer will look at the module simply as part of the supply chain.

Fee Based Vertical Integrators

Another possible vertical integrator are the independent integrators that put the entire project together for a fee. Again, this is already being done both in this country and around the world. 

One of these is the Modular Mobilization Coalition (MMC), formed to help supply medical modules for the COVID-19 crisis and now branching out to help states and communities with homeless and affordable housing projects.

MMC currently has about 30 factories in the coalition that can share workloads providing even larger projects to developers. They are working on standardizing their designs through their centralized operation center.

Other Vertical Integrators on the Horizon

Two other Modular Vertical Integrators could soon be entering the picture. 

The first could be major material suppliers that could do it as a way to insure their products are used throughout the project.

The other could be large modular home builders looking for more steady supply of homes across their target market. Working with many modular factories would also give them factories willing to build modules as the builder requires.

Call them consolidators or integrators, the end result is about the same. More vertically integrated modular projects should mean a larger share of new construction.

Gary Fleisher is a housing veteran, editor/writer of the ModcoachNews, Modular-homecoach blogs and the ‘coming soon’ ModcoachConnects Construction Consultant’s Directory. 

Modular Construction Industry Observer and Information Gatherer


Anonymous said...

No matter who steps up or looks at the concept the limiting factor will always be transport rules and costs. Most other issues in the concept can be addressed in some fashion.
Modular works as multiple units to one location or deliveries to high labor costs areas typically not where plants are located.
Distance/transport is a negative. Which is why flat pack/panels/and floor systems work where volumetric does not.

John DL Arendsen said...

Very interesting I'd like to learn more about this. I've been a general and manufactured home contractor, manufactured home dealer, real estate broker, developer, property manager and investor for the past 35 years. Currently we are focusing on ADU's in San Diego. Please let me know how I can get more involved.


John DL Arendsen