Thursday, 24 November 2016

Frontier Firms in Construction

Technology and Industry Structure

What evidence is there that there is an emerging global elite among construction firms, as argued in this previous post? This is not an easy question to answer because the evidence tends to be partial and rather anecdotal. However, two recent reports help shed some light on the issue.

A 2015 report from the OECD examined the performance of a “representative sample” of companies in 24 countries between 2001 and 2013, and discovered that the top 5% of them continued to increase their productivity while the other 95% were almost stagnant. They called the top firms “frontier firms”, and they identified a widening gap between these firms and the laggards.

Their analysis was an at a very high level of aggregation, using the manufacturing and services sectors of the economy (at the two digit SIC level). Manufacturing frontier firms had an increase in labour productivity of 2.8% a year compared to 0.6% a year for the rest, and in services the gap was even wider, with the frontier firms increasing productivity by 3.6% compared to 0.4% for the laggards. This productivity data came from another 2015 OECD study called The Future of Productivity.


The frontier firms had a number of key characteristics. They were frequently part of multinational groups that benchmark themselves against other frontier companies, and technological innovations at the frontier spread more rapidly across countries than they do within them. These global firms use patents more, are more technologically intensive and, significantly, their investments in technology are more effective in enabling their workers and reinventing their business models. Also, many of these firms have developed internal capabilities that are exclusive, or difficult for other firms to copy.

The OECD researchers found for firms at the productivity frontier, new innovations are the key to their competitive advantage. The strength of these global frontier firms is their capacity to innovate, which increasingly requires more than just investing in R&D and implementing technology. It requires the capacity to combine technological, organizational, and human capital improvements, which the OECD calls “knowledge based capital”. From this perspective, the main source of the current productivity slowdown is not a slowing in the rate of innovation by the most globally advanced firms, but rather a slowing of the pace at which innovations spread through the economy from frontier firms to others. The gap between the frontier firms and laggards will therefore continue to widen, and the report argues for public policies to increase technology diffusion to counteract this, most of which will be too politically difficult to implement in any meaningful way (like deregulating services in the EU).

How does this apply to construction? First, construction is classed as a service industry, so the gap between the frontier and the rest is probably wide, even extremely wide. Second, the fragmented nature of the industry and preponderance of small firms with limited technical and knowledge resources will restrict innovation. This is compounded by the significantly better quality of managers at larger firms (the subject of another OECD paper). Third, many or most firms in the industry will not have the capital to invest in developing the internal capabilities or business models that are required to move toward the frontier.

The OECD argues investment in innovation should extend beyond technology to include skills, software, and organisational know-how (i.e. managerial quality), and innovation depends on the bundling of these investments. For many small and medium sized contractors this too would be well beyond their current plans or objectives, which might extend to some basic BIM capability or supply chain integration. Generally, because the difference in size between the small and medium firms in construction and the largest contractors is so large all these effects will be magnified, and the gap between the frontier firms and the rest may well be much larger than the averages found by the OECD researchers.

A few examples follow. Two global are contractors and they demonstrate the extent of the gap argued above, with the resources and scale to research, develop and test the wide range of software and hardware now available. The third is a start-up that has major firms as partners and sponsors who are backing a technology innovator, and who would be expected to deploy the technology once proven. All three have created internal innovation labs and fabrication shops to experiment with emerging technologies and create custom software tools, and have built significant R&D teams and partnerships.

Skanska and its partners are developing wireless monitoring of buildings, using sensors to record data on temperature and vibration, and embedding sensors into roadways in a pilot project for self-driving buses and trucks in Sweden. The company is using drones for surveying and is testing the use of robots and concrete printing, and radio frequency identiļ¬cation (RFID) tags and barcodes on products and components. They are extending their use of 3D BIM models to VR, operations management and FM using software developed in-house. In 2010 Skanska launched an Innovation Grant Program to provide employees support to partner with local universities, which led to funding for their idea of Flying Factories for offsite manufacturing.

Fluor Corporation have a long history of nuclear EPC and in 2011 became the majority shareholder in NuScale Power, a small modular reactor (SMR) technology developer. These SMRs are a factory built modular electricity generating system. The company expects to submit its US Design Certification Application in December 2016 and to be fully licensed by 2020. The first generating plant could be operating, in Utah, in 2024.

MX3D is a Dutch start-up working with partners such as ArcelorMittal, ABB and Autodesk. In 2014 they invented a six axis 3D printing robot by equipping an industrial robot with an advanced welding machine, and developed the software to control it. They can 3D print metals and resin in mid-air, without the need for support structures, and are printing a steel footbridge across a canal in Amsterdam as a demonstration project of what they call digital fabrication. The videos are very cool.