Monday, November 2, 2020

The Three Types of Integration in the Modular Housing Industry

A lot of discussion has taken place recently about vertical integration in the modular housing industry. Many builders want it and a couple of factories are currently looking to try it.

It will take quite a bit of cooperation between many different trades to accomplish it for factories that build 10-25 modules a week and also between the factories themselves.

Taking a closer look at Integration we see there are not just two types of Integration but three. All three have their pros and cons.

What is Vertical Integration?
Vertical integration is the process in which several steps in the production and/or distribution of a product or service are controlled by a single company or entity, in order to increase that company’s or entity’s power in the marketplace.

Simply said, every single product that you can think of has a big life cycle. While you might recognize the product with the Brand name printed on it, many companies are involved in developing that product. These companies are necessarily not part of the brand you see.

An example of this in housing are tract builders. They buy raw land, develop it, put up sales offices, take orders for new homes, build them and service them for one year…themselves. They don’t just build houses, they produce a total experience for new home buyers.

Types of Vertical Integrations
There are basically 3 classifications of Integration:

Backward integration – An example of this a builder first selling the home to a customer and then producing it themselves from start to finish.
Forward integration – Where the business tries to control the post production areas, namely the distribution network. An example of this is Impresa Modular who is the only national modular home builder with sales reps and affiliate modular factories throughout the US.
Balanced integration – You guessed it, a mix of the above two. A balanced strategy to take advantages of both the worlds. Most commercial modular construction factories fall into this category.

What is Horizontal Integration?

Much more common and simpler than vertical integration, Horizontal integration (also known as lateral integration) simply means a strategy to increase your market share by taking over a similar company. This take over / merger / buyout can be done by buying the companies that perform work not done by the modular factory itself.

What is Non-Integration?

This third type of integration occurs when a modular company refuses to move either up or out but prefers to remain insular and isolated from the rest of its competitors. A company using this strategy most often remains in a non-growth state until it either ceases operation or is bought out by either a vertical or horizontally integrated organization.

Most non-integrated modular factories fall into this category, owning only one factory, being insular and isolated from others in the same business and not having any backup plan or group in place in the event the economy changes. COVID-19 caught many modular factories off guard and trying to figure out for themselves how to survive the forced shutdowns earlier this year.

Integration does have some real downsides however. It doesn't matter if the factory or the builder is doing the integration, one of the keys to being successful is finding and retaining professional set and finish crews.

Here are some of the areas that can cause major problems with both vertical or horizonal integration.

Set CrewThe one thing a set crew owner needs is steady work, preferably 5 days a week. Many set crews work within a tight geographical region of 200 miles. If they were to become part of a custom modular factory's vertical integration plan, they may find themselves doing a house in Virginia one day, New Jersey the next and Vermont the next. That still leaves two days without work and they haven't been home for 5 days.

Would any custom modular factory be willing to pick up the tab for travel, hotels, rain delays or the modules arriving a day late? Would any factory pay them as full time employees?

Finish Crew - In most cases finishing a custom modular house can take a month or longer to complete. Drywall and trim installation and finishing, flooring, painting, staircases and repairing problems delivered along with the house become very time consuming. 

Here's a math problem for you. A custom modular home factory produces 2-3 homes a week. Each home requires a finish crew for one month. How many finish crews does the factory need to hire and keep on the payroll? Scary answer!

Integration in modular housing is something that has to happen but what it look like and how it's accomplished is still up in the air.

Gary Fleisher, the Modcoach, is the owner of the Modcoach Network consisting of Modcoach News, Modular Home Coach and Modcoach Connects.

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