Innovate with care: lessons to be learnt from collapse of Katerra

Recent announcements have highlighted how home-grown MMC businesses in the UK are thriving and securing investment for expansion. Both Reds10 and Ilke Homes have published very positive updates. In the United States, however, the opposite has happened and Katerra, the $2bn Silicon Valley MMC start-up that aimed to disrupt the US construction market has filed for bankruptcy protection.

Ostensibly these three businesses have the same business model – offsite construction – but approached in very different ways. As the UK seeks to transform its construction sector, and with the Infrastructure and Products Authority (IPA)  seeking a 40% productivity improvement, there are some important lessons to be taken from the Katerra experience.

With $1bn in start-up funding from Softbank, the warp-speed expansion of Katerra posed a fundamental question: What would happen if a tech firm took on construction? By combining deep pockets, West Coast lateral thinking, powerful data capabilities and modern manufacturing and logistics, Katerra set out to increase productivity, drop the price point and secure a price and quality-led competitive advantage.

It is worthwhile reflecting on whether too much investment can result in a misallocation of resources. This is where the Katerra story is most instructive

This has not happened in the UK, where the construction sector remains super-competitive and where the perennial problem is more one of attracting investment than fighting off new industry entrants. However, it is worthwhile reflecting on whether too much investment can result in a misallocation of resources. This is where the Katerra story is most instructive.

Katerra was founded in 2015 and in 2018 it secured its $1bn investment from Softbank. It used this enormous capital base to develop an end-to-end delivery model based on manufactured components.

So far, so P-DfMA. According to the model, Katerra designed, manufactured, transported, and installed most of the content on its projects. This model was intended to achieve substantial scale economies in automated factories, eliminate waste through a deeply integrated supply chain control systems and deliver MMC-level quality of build.

I saw a presentation by Katerra’s CTO in 2018 and, at the time, it was difficult not to be impressed. The model incorporated so many of the components that are fundamental to the MMC model – an integrated supply chain, seamless digital design integrated with manufacture and logistics and a component-based product set. What could possibly go wrong?

At the time, I thought that Katerra’s problem was that it was not scalable. It needed to invest in physical factories, warehouses and logistics hubs associated with the end-to-end model even before it could deliver a single project.

Katerra will be seen as a case study for how to burn investors’ money rather than a template for transforming an industry

What is more, it continued to invest in capacity ahead of the growth curve implied by a total investment of $2bn. In reality, unlike TV networks or food delivery, construction was just too big a mouthful to disrupt through sheer weight of money.

But the Katerra model was built on far weaker foundations. Its client base was narrow and, due to poor quality control and processes that did not work, it could not complete the projects that it was contracted to deliver. In the end, Katerra will be seen as a case study for how to burn investors’ money rather than a template for transforming an industry.

However Katerra’s collapse has coincided with some really positive moves in the UK offsite sector, with ambitious expansion planned by Reds10, Ilke Homes and other MMC specialists. With the Construction Innovation Hub busy developing its Platform Rule Book, and the as-yet-unrealised potential of the government offsite mandate, the UK looks like it is on the cusp of a better managed and more sustainable MMC transformation.

But it is important to reflect on the demise of Katerra – primarily because its story highlights how much potential there is for things to go wrong.

The first lesson has to be that construction by its very nature is difficult to replicate – not necessarily with respect to the use of standard components and systems, but with the integration of these components in-situ. The unique skill of completing precise, high-quality site-based work provides some protection from disruption.

However, it follows that, when the assembly and integration skills of construction are integrated with OSM at scale, then the gains will be very large indeed. This lesson does not suggest that construction is safe from Katerra-style disruption, it means that the expertise inherent to the construction process is essential to unlock this. Constructors and investors should take note.

Katerra chose to build its own supply chain at great expense and, in the end, it delivered no competitive advantage

The second insight for me is the huge value represented by the specialist contractor and manufacturer supply chain. Katerra chose to build its own supply chain at great expense and, in the end, it delivered no competitive advantage. Far from being a weakness as it often portrayed, the fragmented or “distributed” construction supply chain is an important asset that channels investment and expertise as well as risk transfer.

However, the UK needs greater scale, new products, and new entrants. The collaborative model advocated by the Construction Playbook and others is a necessary key to unlocking the kind of mass-industrialisation attempted by Katerra. Hopefully, the super-deduction and other incentives will attract much-needed capital.

The final point is a reminder that construction will always be a people business, where the interface of behaviours, processes and data will be a potential point of failure. Katerra did not recognise this critical point and, as project delivery stalled, the pack of cards came crashing down. Developing the skills base for new approaches is probably the most important investment of all.

The demise of Katerra may well discourage new industry entrants, but there is no doubt that the forces that created the opportunity and ideas have continued to grow. Future investment will need to be much smarter than that thrown at Katerra – recognising the inherent value in the existing business model as well as finding the best targets for high-impact change.

Simon Rawlinson is a partner at Arcadis and a member of the Construction Leadership Council