The engineering, construction, and building materials play a crucial role in the recovery of our economies and communities after a pandemic. Seven actions will help prepare companies for the new normal.
This was written by a team of global leaders from the McKinsey Engineering, Construction, and Building Materials Practice, which includes Jonas Biorck, Jose Luis Blanco, Jan Mischke, Maria Joao Ribeirinho, David Rockhill, Erik Sjodin, and Gernot Srube.
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COVID-19 is a virus that has spread to communities around the world. As of April 30, there were more than 2.5 million reported cases. While governments and businesses around the world are responding quickly, there is still much to be done.
Construction is more important than ever in these difficult times. The industry played a crucial role in addressing the crisis and the recovery. From building hospitals within a few weeks to donating equipment that saved lives, it has been a vital part of the response. The construction industry accounts for 13 percent of the global GDP. Unlocking labor that is currently limited could drive recovery and address our most urgent construction needs.
Construction sites have been closed in many countries. Most areas are still open, but they have been affected by disruptions in supply chains and restrictions on operations. This disruption is reflected in the financial indexes. Since February, companies that are part of public engineering, construction, and building materials (ECB) have fallen significantly more than average.
Exhibit 1.
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Leaders also invested heavily in digital technologies, differentiated their portfolios and offerings, and cleaned up their balance sheets (Exhibit 2). Leaders invested heavily in digital technology, differentiated portfolios, and offered and cleaned their balance sheets.
Exhibit 2.
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Organizations need to think about the steps they can take today to be ahead in the future. It is unlikely that the construction industry can return to normal business quickly. Leaders must first prepare and define what the end of the sector will be like. Seven actions will help them adapt and anticipate the new normal.
COVID-19 and its effects on industry dynamics, supply, and demand
The crisis will have a long-term impact on supply and demand. This will result in a shift in investment patterns. McKinsey’s Global Institute research suggests that despite the high level of uncertainty in the economy, the economy could return to normal by 2021 if the virus can be contained within the next couple of months and if the right policies are implemented. But, more severe, long-term restrictions or lockdowns, even if they are intermittent, could lead to a sustained and severe economic downturn, with the economy returning to its 2019 levels at least by 2023.
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Construction is usually much more volatile than overall economic activity. The reduced economic activity leads to a lower demand for commercial and industrial facilities. Uncertainty further dampens investments. Lack of confidence among consumers and income loss can negatively impact the need for new housing or renovations. As the value of infrastructure and buildings closely follows GDP, new construction is sensitive to GDP growth even in long-term models. Even though the current recession is not as severe as the 2008 crisis, a four-year slump could significantly reduce the construction sector’s share in GDP.
The upside is that unprecedented public relief packages can not only help to support rapid economic recovery, but public investment programs could also follow them up.
Pandemics can also be a shock for the supply. Construction workers, both migrant and local, may not be able to access the sites and must adhere to stricter protocols on site. This will affect productivity in the near future. Some supply chains for building materials have been disrupted, resulting in the suspension of production and distribution.
Signs of disruption
Even before COVID-19 was released, ECB had a poor performance compared to other industries. The industry has been plagued by low productivity, low digitization, and low profitability for many years. It also suffers from a highly customized building approach, a fragmented ecosystem, and reliance on manual labor.
Recent years have indeed signaled an impending disruption. The industry is being forced to innovate by a combination of increasing sustainability requirements, rising costs, labor shortages, new materials, production methods, and digital tools. The market share for permanent modular construction has increased by 50% in North American real estate from 2015 to 2018, despite a modest increase. R&D expenditure among the top 2,500 companies has also increased by approximately 77% since 2013.
An upcoming analysis, including an in-depth evaluation of the economy and a survey conducted with more than 400 ECB executives, indicates that this disruption is likely to change the size and distribution of industry value pools fundamentally. Existing businesses will have to change their business models and strategies to thrive and survive in the ECB sector.
Trends for the short- and long-term
Some disruptions may be induced or increased by the COVID-19 pandemic. We expect that, in addition to the immediate trends, longer-term trends will accelerate as new living and working styles become commonplace:
- Short term: An increase in digitization. The industry is moving to remote working. Designers and engineers, for example, are increasingly relying on digital collaboration tools like building-information modeling (BIM). Engineers and contractors use 4D and 5D Simulation to replan and optimize schedules. Digital-twin integrated solutions are being created to be used from concept to commissioning. Contractors are also looking at online channels to monitor their employees’ health through apps, order construction materials, manage scarce resources with greater accuracy, and maintain cash flow.
- Short-term: Rebalanced the supply chain towards resilience (versus efficiency). Contractors are building up inventory, securing long-lead materials, and identifying alternate suppliers.
- Long-term: Enhanced consolidation Players will consolidate in order to create economies of scale, support investments in talent, R&D, and technology, and achieve economies of size. Companies and investors alike will look more to consolidation in order to achieve the resilience they need on their balance sheets.