THE ESSENTIAL INNOVATIONS IN CONSTRUCTION
Edward Merrow
I want to talk about some of the problems that the global construction industry faces. I think these global problems are equally a problem in Brazil. I believe this is a time when we need to challenge our basic assumptions. Let me just start by saying that we need new thinking. If we are looking at the petroleum industry or if we are looking at heavy industrial construction in any sector, we have a very difficult juncture in our history. Commodity prices are low, so if you make oil, for example, the prices are not good, and the same is true for chemicals.
Our supply chains are consolidating very rapidly, and our EPC contractors are quite risk-averse. They are having a really hard time finding talent in almost all parts of the world, and owners are weaker today in most countries than they have been historically. So, we need innovation, there is no question about that. And, it is also true that productivity and improvement in industrial construction have been much slower than other sectors such as manufacturing or agriculture.
Some of the consultants like to make a big deal out of it, but that is because they don’t understand basic principles of economics. The way that labor productivity improves is with massive substitution of capital for labor. If you cannot, or will not, substitute capital for labor, lower productivity cannot improve. This is the core problem in productivity and construction everywhere.
Today, our biggest challenges are these: first, our supply chains are highly consolidated and they are getting more so all the time. So, the things that we buy, that go into our projects, are now in many respects, priced in ways that do not reflect underlying costs. Second, engineering costs, which are of course of a critical labor input, are going to be increased because there simply are not enough engineers to actually meet the global demand. Third, construction itself is a young person’s, mostly a young man’s, occupation, and the demographic profile in many parts of our supply chain is very poor. Just to be clear, a birth rate of 2.1 is required for a population to stay even. Japan, which is one of the premier makers of equipment, is at 1.2. China, which is the key maker of almost anything that isn’t made in Japan, is at 1.0, and they have been at that level for over 50 years. Korea is the country with the lowest birth rate in the world, and they have the world’s best fabrication yards, which I believe is very critical to our future.
So, unless we can find a way to decrease our labor inputs, we are going to be stuck with low productivity in a world that is increasingly short of labor. So, we are headed into a difficult situation. But let me ask the question: are there technology fixes? Are there miraculous technologies that can solve the problem?
This question of “can technology save us?” has been asked many times in the last 10 years. There are lots of incremental improvements with technology that have made construction more efficient. For example, the use of drones in inspections (which is absolutely wonderful), the use of advanced photogrammetry to help us with as-built drawings for brownfield projects. There are lots of these small improvements there. We thought, 10 years ago, that digitalization was going to be our holy grail, but it is not. And the reason why it is not is because it doesn’t really remove hours from construction. It may help us with operations a lot, but does very little for construction. Design automation, which has been with us now for about 30 years, has been a huge disappointment, and I say that because it takes us as many hours to render a given design today as it did in 2000. So, we are not seeing much productivity improvement there, if any.
Everybody’s favorite technology right now is generative AI, and it may do some wonderful things for us. It will make capturing lessons learned from projects better, it may help us to eventually automate designs. But GenAI cannot fundamentally change the equation in construction because it does not remove enough hours.
So, where are the solutions? Well, we know where the solutions are, but they are not easy.
First, construction mostly everywhere is becoming much more modular. And that is because we need more flexibility in terms of where we get our labor. We also must standardize, which has at least three big benefits: 1) it reduces engineering hours (which is a help, but not a huge help); 2) it mitigates the demographic challenges that we face (and that is a big help); and 3) it makes the automation of modular construction possible (and that is a very big gain).
However, in order to automate constructions significantly in modular yards, we are going to have to invest massive amounts of capital in order to build the yards that we need and the robotics that are needed to assist the construction. This would mean that we would have to reinvent the supply chain, particularly in the construction yards. It means we need highly mechanized yards, we need maximum robotics to replace construction labor, we need highly standardized topsides, LNG modules, process plant modules, all the things will have to be more “plug and play” rather than costumed designed. Even in the best of times, this would have been unlikely for our supply chains to do, and these aren’t very good times. The contractor’s business model, of course, is to sell hours, and virtually all EPC’s are very thinly capitalized; they simply do not have much access to capital. The long-term outlook for all the key industries here, which are petroleum production and other fields, is not at all clear because of the energy transition. That makes the supply chains even more reluctant to invest. And, most of the suppliers probably don’t have the ability to borrow huge amounts of money at this point in any case. Supply chains are consolidating and that makes investment in capital even less likely.
So, is there a way out of it?
Well, I think that the only way out is to go where the money is, and what firms have best access to large amounts of capital? Owners. Not contractors and not supply chain players, only owners have the kind of capital that is needed to actually take labor out of construction. Owners will have to take control of fabrication yards for floaters, LNG modules, topsides, and process plant modules. So, they are going to have to vertically integrate, and if we don’t see vertical integration, owners are going to find themselves squeezed by the supply chains until they have very little remaining margin left. Owners with long horizons who think they will still be doing large projects in 25 years need to take control of the supply chains. The most important innovations for us are not technological, although that can be useful, they are organizational. And these are very difficult times and they will require some courage from owners to actually succeed.