How The Construction Industry Will Overcome Its Biggest Challenges in 2019
The global construction market will reach $1 trillion by 2030, making it one of the most dynamic sectors of the next decade. Nevertheless, many questions remain that must be asked and issues that must be addressed before those in this industry can take full advantage of the trend. Also, the positive outlook is mitigated somewhat by unknown factors. These include tariff impacts on construction projects in the housing, commercial, industrial and infrastructure sectors and a housing affordability crisis. Questions also remain regarding the Fed's direction on interest rates and how that will impact new housing starts, commercial project funding, industrial CapEx spend and release of infrastructure projects.
Tariff impacts on global construction
The cost of goods related to construction could go up by $1 billion due to new tariffs against China. Under the latest round of tariffs, about 600 products, representing $10 billion in goods, are related to the construction of residential, commercial and industrial projects. The higher cost of goods, a direct result of new tariffs, will add significantly to the ongoing affordability crisis, which may have a negative effect on the positive growth outlook.
Every company across the construction supply chain, from raw materials to application, will be looking for ways to offset this impact. Public and private companies will be looking for ways to meet their financial guidance numbers. Managing the end-to-end supply chain, applying Total Value Optimization techniques to increase EBITDA and release cash while focusing on value creation will become even more important in the coming year as companies in this industry search out ways to maintain growth in an environment made unpredictable by the trade war.
Tariff impacts on total project cost in residential, commercial and industrial projects
The tariff situation is going to exacerbate the housing affordability crisis. The market is already expensive both for renters and buyers and the added expenses that result from new tariffs will result in a situation where increases in living expenses are outstripping wage growth by a solid margin. The affordability crisis may be further aggravated by interest rate hikes and an ongoing labor shortage.
Much of the positive outlook is generated from the commercial sector. Companies in the residential construction industry will be looking for ways to mitigate their cost increases so the projected growth can actually be achieved.
In addition to the complicating factor of unknown tariffs, questions are arising around commercial project funding, with the potential for rising interest rates and funding challenges. The prospect of large infrastructure projects will contribute to industry growth, although these too may face political challenges prior to release.
Construction is a very capital-intensive business, and the potential for increases in CapEx spend will weigh heavy on projected growth -- but at the same time, newer Industry 4.0 innovations may help to mitigate some of those expenses and drive profitability.
Those in the industry will be especially anxious to move into Industry 4.0 innovations, which will mitigate the challenges and help bring about more growth. Current building practices are stalling growth and increasing cost, yet the outdated practices are used daily. Construction businesses need to identify the newest technologies, capitalize on improved business practices like Total Value Optimization™ and implement Industry 4.0 changes to avoid being left behind.
Just one example of disruptive Industry 4.0 technology is 3D printing, or additive manufacturing, which creates parts on-site/on-demand, minimizing need for inventory space and eliminating the incidence of unavailable parts. Instead of focusing on sales of physical building materials companies will focus on selling copyrights to designs which will be created by 3D printers on-site.
A lack of skilled labor, fewer millennial workers going into construction and stricter government policies around immigration will all factor into an ongoing and critical labor shortage in the construction industry. Companies need to start/continue investing in training programs and supporting legislative reform, although raising wages will be seen as an imperative in order to attract the talent necessary to compete.
Combined with the talent shortage, the Industry 4.0 shift will bring about a need for an entirely new skill set.
The industry goes green
Demand for green and eco-friendly construction materials continues to grow, with new homeowners demanding things like bamboo flooring, no-VOC paint, and products made from recycled or reclaimed materials. This trend is also developing in the commercial construction industry. For both residential and commercial construction, preparing for this demand will be key to staying competitive. Maintaining an adequate stock of eco-friendly products -- and re-evaluating the supply chain accordingly -- will ensure that orders can be filled on a timely basis, and that a strong growth strategy will be in place.
Green building materials are becoming increasingly affordable and more readily available with four out of five contractors citing that customers are requesting energy efficient materials for US projects.
Preparing for the future
Challenges including labor shortages, project complexity, housing affordability crisis and an unknown tariff landscape threaten to derail the industry's growth. Companies which address these challenges with supply chain strategies, Total Value Optimization™ and new Industry 4.0 technologies will be poised to take advantage of the predicted growth, while businesses that do not take these challenges seriously will face an uphill battle.
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Maine Pointe is a global supply chain and operations consulting firm trusted by many chief executives and private equity firms to drive compelling economic returns for their companies. We achieve this by delivering accelerated, sustainable improvements in EBITDA, cash and growth across their procurement, logistics and operations. Our hands-on implementation experts work with executives and their teams to rapidly break through functional silos and transform the buy-make-move-fulfill supply chain to deliver the greatest value to customers and investors at the lowest cost to business. We call this Total Value Optimization (TVO)™.
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