Bracing for the Avalanche in the AEC Industry
Senior Partner of McKinsey & Company, Dr.-Ing. Gernot Strube, spoke at iTWO World 2018 and shared his insights on the “avalanche” of change in the construction industry, the key drivers of the avalanche, and what we need to do.
Good afternoon, and I would like to start with thanking RIB for the invitation as a guest speaker. I’m also the last speaker on the agenda so the only thing separating you from the Music Wonder tonight and I hope that will make this worth you a while. As a last speaker, I’m more used to opening conferences than being at the back of the conferences but it’s fantastic because it gives you an opportunity to reflect on the things that we have seen and heard and I have to say that it was quite overwhelming. And we have seen lots of tools, lots of applications. And I’m very happy that I’ve chosen the title for my presentation as “Bracing for the Avalanche” I think what we have experienced at least that’s my emotional reaction to what we’ve seen over the last two days is an overwhelming breath of things, tools, systems, that our industry has at their hands. What’s a bit frightening is that we can’t pick and choose. We have to do it all. Otherwise, we’ll end up as the dinosaurs that we`ve seen in the previous presentation.
McKinsey has extensive experience in digital and in capital productivity
At McKinsey & Company, we are working both on the digital side as well as on the construction site quite a bit. I`ve put up a few numbers of studies we’ve done, reports we published for you here, and I’m very happy that continuously and again this year we have been named the most or the best consultant in capital projects and infrastructure. And the Gap is widening that what we tried to do is rather than highlight individual opportunities in bits and pieces. It`s really trying to give you a perspective on where we stand and what we need to do, how we need to go about things, and let me try to share that. I think you can summarize also what we`ve heard from this conference in three blocks of trends that are happening.
Three drivers for avalanche of change in construction
One is digitization. I think RIB itself stands very much for that; it’s very clear, it’s what we are talking about. We have a surge in investments in new technology, we see trade platforms, we see disruptive attackers at least on the horizon, integrated project for seamless collaboration.
The second thing is industrialization and we see elements of integrated prefabrication, standardized modular construction, but and this is something that hasn’t been as explicitly shown is also the industrial-grade supply chain. We need not forget only that we don’t only look at the front end, but we also look at the back-end of things otherwise it won’t work.
I think the third big trend that is probably emerging, but we have to already include that in how we think about it, is globalization. Smart city or smart infrastructure, technologies, we will simply not have the ability, that each city will develop their own technology. It won’t happen. We will see global products, global investments happening over and over again which means we will see globalization of this. This also means that for all of you in the room, we will need to build better scalable business models. If you don’t have those we will not be able to serve the global markets. And we do see internationally increasing competition, also increasingly across continents not only within individual continent.
We identified 7 levers that could improve global construction productivity by 50-60%
I think you’ve seen this chart before, it was part of our initial publication on the productivity gap. I don’t want to show that analysis anymore. It’s been shown several times also in this conference. But I do want to show this chart that we’ve done an analysis, and we can improve productivity in our industry that has been stagnant as we`ve seen, by about 50 to 60%. I think it’s not about the exact number, it’s the order of the magnitude that’s important here. The second thing you see on this chart is that there’s not a silver bullet. There are several things we need to do to capture that productivity. Technology is the single biggest lever but it’s still one amongst several levers.
And when you go through the chain of collaboration contracting, different design and engineering, industrial-scale supply chain management, lean onsite execution, technology application, and last but not least, not very much talked about at this conference, capability building of our workforce. You do understand how all three trends – Digitization, Industrialization, and Globalization will play into all these levers, and we have to embrace them all.
Exposure to digital is increasing, raising expectations of measurable impact
I would like to share, this was a poll I had the opportunity at the global conference of construction engineers earlier this year. I asked the participants, about 250 of them replied to the poll, “what was the highest level of technology you’ve been exposed to in your projects?” and assuming everybody gave us an honest answer. What we can see is that at least 60% have been exposed to at least a 3D level of BIM or higher. We also see that 4D and 5D are still emerging, but still very low. But I think it’s fair to conclude we do see things picking up.
At the same time and this is also something that we haven’t really talked about all that much, we also asked “if you ran a large project above a hundred million dollars, and you ran it well with the use of digital tools and technology, what would be the cost savings you would believe you could achieve?” And again 60% of the participants said 20% or more. Think about a project of a hundred million dollars and you can save 20%. That’s real money. So, let’s talk about digitization first.
Investment in construction technology has doubled over the past decade
What we look on a regular basis is investment in construction technology. And what you see is that between 2008 and 2012 there was roughly 9 billion dollars investment into this technology and the following 5 years that was doubled. We see a lot more than we’ve ever seen before, which also means that we will see new technologies but we will also see some disruption going on. When you break it down to how that investment happens, it’s very interesting to note that by far the largest amount of money was spent on M&A. So, we start to see consolidation and integration of the technology. On the other end, I think the notable figures as well. When you look at the number of transactions, the vast majority of transactions went into early-stage, which shows us that I would see the sums are smaller at that stage but it does show us that we need to brace for a lot more technology to come online in the next 2 years. Now, what do we do with this type of information and the matter shown in the chart before? Let me try to explain a bit what this shows. The size of the circles is the number of transactions we have seen in the different fields that are depicted here. And you see the big backbone is around document management, BIM and 3D modeling, real-time monitoring, and contract management. But when you look at the M&A activities, which shows us a bit the clusters of technology that are emerging.
Constellations of new solutions and use cases are emerging around proven technologies
There’s a trend that is quite interesting – there are four areas of technology that we see as primary applications: it`s Digital Twins, it’s 3D printing, modularization, and robotics, it`s Artificial Intelligence and analytics, and the supply chain optimization and marketplaces. These are the ecosystems particularly when you look at the M&A activities that we are dealing with. I think this is important for everyone to understand that these will be the big buckets that you need to embrace when you build your strategy for digital transformation.
Artificial intelligence can revolutionize the way we deliver projects
Let me go quickly into some of these things we have seen many examples that I don’t want to go through all the details of the charts. I think that the visual presentations that other colleagues have shown were much better than a very dull chart. On the other hand, when we look at artificial intelligence, there are a couple of things we haven’t really talked about yet. We`ve talked about quality improvement and claims management. We have talked about project monitoring, we haven’t so much talked about risk management of projects through artificial intelligence. And if we do keep in mind that our projects, at least the large projects are typically over-running in the budget by 80%, and in time, almost usually taking twice the time that we had planned for. Risk management is an important factor that we can tackle with artificial intelligence. We`ve talked a lot about design optimization I don’t want to go into that and we`ve seen great examples here.
Another thing which we`ve touched on, which I think is very important – we can use digital to build a commercial edge, and this is something that we had our Global Infrastructure Initiative summit last week that came out very clearly that we’re busy with looking at technology. We don’t look enough at the customers and how to create value for the customers with this technology and this is very important.
AI adopters with a proactive strategy have significantly higher profit margins
One thing on artificial intelligence that we also found in the analysis, as very interesting is that between you see on the right-hand of the curve 4 different Industries, you see the self-reported profit margins, people who have adopted an explicit AI strategy versus the companies that have not adopted an AI strategy. And you see in every industry who wants to adopt already has a better margin. You see some industries how much larger margins in construction it’s notable, it’s rather than 2%, we’re getting to about 5%. I would say this is going to increase, because we’re just embarking on this technology, this is a very early indicator of the potential that is in artificial intelligence.
Digital twin technologies present abundant opportunities to optimize project delivery
Again, when we look at the second bucket digital twin technologies we’ve seen a lot of that and I think all of you in the room have fantastic applications, you just need to think about this not only as individual parts and pieces. Digital twin technology is an end-to-end technology. It’s from the beginning all the way until you hand over the asset, to really hand over the as-built twin ideally even with operating simulations that you have run through and that you hand over to the new owner if you sell your asset.
Robotics and 3D printing can push the industry towards a mass production system
Robotics and 3D printing – we`ve seen great examples I think that a lot of the things in the Dubai office, etc. I think these are examples I’m not sure that these are the relevant scale-up models yet that we will see in the future. However, we should take this very seriously. It will happen, it will be part of the factories that we have seen, but it will also be on construction sites. To be frank, I doubt we’ll see the bricklaying robot on the construction site because there’s new technology really involved except that we automate things with very cumbersome technology. But we will see robots producing very different structures than we have produced in the past and this is where the change will come.
Offsite prefabricated homes currently occupy a small market share of residential construction
The second piece, industrialization. And we had a whole breakout of modernization so I don’t want to go into too much explaining what it is. Again, I would like to share a few numbers. This is typically what we like to do is to look at some facts, and then draw conclusions from that. It’s very interesting that even in housing, the offside share in Scandinavia is already very significant. Now that doesn’t talk about how integrated things are but as a significant share and you can tell from the chart, that every other country pretty much has a catch-up to do, and the question is how fast do we do this.
Offsite construction for residential real estate includes 3D volumetric and flatpack products
Now one thing I would like to share is we are just conducting pretty detailed study about modular, and off-site manufacturing in construction. And we were a bit surprised that just in the initial research we found over 250 companies, engaged in off-site construction, and the models that you see, range from fully integrated to simply precast, from 2D flat panel to fully volumetric pre-fitted construction. You see everything out there. It’s very hard to compare right now what will be the solution in the end.
What I think is important is that we don’t only look at what’s possible, I think if you have 250 examples, a lot is possible. What we need to look at this, how do we create the most value, and the value is in the end defined by your customers. And there are 6 levers on this page, obviously one is if you do go into modular, you will be better able to fit the regulatory requirements because you don’t have to do a total new design for every region or country, or to go to change different parts.
8 drivers contribute to the attractiveness of offsite construction
You have better access to materials because if you go to repetitive manufacturing, you can define what you need and you can build a supply chain. We see a massive labor force crunch, and to be frank, right now what we see that the labor force crunch is the biggest driver for modularization and factory prefabrication that we hear from the people engaged in the field. And I think this is very serious. Number 4 is quality perception and quality. And here it’s a big piece of customer acceptance for modular. It’s still something we need to work on. And again, to our experience, it’s something that we don’t work enough on to get acceptance. So, we have the supply but often the demand is not there yet, because people don’t understand that they’re getting a better product and not the modularized product of the sixties where we’ve done probably a lot of bad images of modular construction.
Local site constrains a big piece for example when you are building in big cities, that are already existing which is the mature world, reduction of construction time is a massive benefit. You don’t have the negative impact of noise, light pollution, traffic congestion for two years, but maybe only 6 months, that makes a big difference in the acceptance to all the people already living somewhere to the new building that’s being erected. And this is going to become increasingly important that people accept what you do. And then always the scale and continuity of volumes. I have not put numbers here yet, the study is ongoing, but I can tell you that we’re typically looking at right now savings potential of about 20% and, to be frank, this is very important. It will all depend on how we scale things up.
Because that’s a difference if you do a new building every time. It’s the same process and there’s no benefit from the scale when you go into these models it’s all about scaling up. Because then you can leverage your R&D you can leverage your machinery, you can leverage your supply chain in a very different way and that’s why my prediction looking at other industries we will see much more than 20%, but that will be an evolution over time, not the first Big Bang.
What we also see is the construction time reduction in the projects of 50% up to 70%. That’s a big deal not only from the financing cost but also from the pollution that we deliver in constructing things. And we do see the quality that’s a big part of the graph so far but I would assume that we’ll see defect rates of delivered construction sites go down by about 80% to 90%.
Significant funding is required to build sufficient technology base, develop applications and promote public usage
Globalization. And I don’t want to go through all the trends but I would like to highlight that this is something that we need to put on our radar screens. We are with digitization also going into completely new decade of infrastructure requirements. We will not build roads or rail the way we built in the past. We will have to future-proof our infrastructure, which means that we will have to think ahead of what it means to have smart infrastructure. We have just in July published a study on smart cities.
That is resonating extremely well both with the people delivering the infrastructure as well as with cities and countries where we say there are three layers you need to think about – one is the technology base, meaning you put in the sensors, you put in the databases that we talked about, and they need to be open databases otherwise you can`t use them. And this is very relevant because the construction industry are the companies who are going to be responsible for the integration of that technology into their products. We`ve seen bits and pieces during the conference.
We will see a massive change here because it doesn’t make sense to build the road and then to rip it up again to build infrastructure into it and then rip it up again because there’s new technology change and we do it the road gets bad it costs a lot of money … we need to think ahead. The second layer is applications, meaning that you actually don’t only have the data but you provide information and pre-process the information maybe even decisions to your citizens.
And here’s I think an opportunity for the construction industry,
because if you own the data, if you can do the analysis, you can also draw conclusions may be better than others, and then can you get into digital business building models that will add additional business opportunities for your companies that it didn’t have in the past, and it will be a fundamentally different business that you’ve never done before.
But it’s going to be there. Then obviously the third element that’s critical, is the adoption of this technology by the citizens.
Technology base layer is key for smart cities with significant demands on construction engineering
It doesn’t make sense to generate an APP that nobody uses because then it’s for nothing. So, this works quite well, I just want to highlight here the key elements of each of these layers. The technology, it`s an open data portal, it’s a communication layer, and it’s a sensing layer. That`s the base in IoT devices that you need to make the infrastructure work. On the applications of the study we’ve done we`ve looked at five categories. What’s important is that while we looked at individual applications actually we evaluated 80 different applications already used in smart cities in the world to understand how well cities are developed. What’s important to us is that while we separate the categories, they will not be separated in the technology and they will be modeled in how they are used. Energy and mobility, for example, you will not be able to separate them because you have electric vehicles you need to get the energy to them.
There’s not going to be a choice. When you think about security or health, one of the big applications actually get ambulances and help faster to the citizens, it’s about mobility, you have to be able to do that in a mobile way to get the people there. So, don’t look at these things independently but these are the categories you should think about.
Asian cities lead the way in application rollout and citizen adoption
And then I don’t want to talk about the public adoption that’s more how to think about the use, so I will skip that. What I show here it’s just the result we`ve mapped 52 cities in the world across their digitization index, and you see a bit of the correlation between the GDP per capita and the combined score of digitization. Don’t worry about the color-coding we`ve separated into the different regions, but you see that it does not depends so much on the regions.
When you look at the top cities to see New York, Singapore, and San Francisco in the score, they are furthest ahead. When you break that down it’s very interesting though. And this is a busy chart but I think it’s very easy to read. We have given the score; the black is the technology infrastructure base that the city has installed. The blue bar is the level of applications that cities have offered to the citizens and the yellow bar is how well the citizens use it. And the thing is only if all three things are in place you really are moving to a smart city. And here you see different patterns.
There are some cities that don’t have the base but they have fantastic applications that exploit the base very well. Other cities have a fantastic infrastructure base, they`ve made investments already, but they haven’t put the applications or haven’t encouraged the use of these applications as much.
Bold investments required now
Why is this relevant for you? First of all, this is happening on a global scale. And remember, we talked about why globalization is important to our industry even if today I may only be working in a local environment. And we will need to have a structured approach to how to think about our individual companies’ role in the future space of infrastructure including housing, I would not separate that in a smart city.
What’s important is, the technology is there too large to state. You’ve seen that throughout the conference. What we’ve seen, the application is out here, I think they’re fantastic examples that we’ve seen when you look at where the industry stands for probably still back here. The key will be how do we get the industry moving.
The world needs the infrastructure, and it’s our responsibility to deliver that infrastructure in a better way than we have delivered in the past. What’s critical is collaboration and capability building in our people.
And that’s why I brought you a slide about a model construction site that we were discussing with the industry association in Europe, where we can, first of all, bring different participants of the industry together to build a practice or a testbed site that is not used to actually build something. It is used to just train and experiment.
And this is key that we not only have the technology but we make use of the technology and we make broad use of technology.
So, with that, I would like to thank you very much, and I would like to particularly thank RIB for hosting this fantastic conference of doing a big job in getting the industry together. Because I think it’s all about your motto – Running Together.
Thank you very much.