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January 28, 2013

US Construction Boom: Starting Now
Filed under: Industry outlook — Tags: — nedpelger

For many in the US construction market, the last five years have been a depression. Most folks agree the market has improved the last year or two, but still has been super competitive. I see trends that indicate a reasonably long construction boom headed our way, particularly in industrial/commercial construction.

Let’s look at some history and define some terms to begin. The Economist special report on Outsourcing and Offshoring provides most of the background information for my opinions. Since the 1980s, American companies embraced Offshoring, defined as getting work done in a distant location, away from the headquarters and the customers. In Offshoring, the company still controlled the means of production, but they built plants in foreign lands and hired foreign workers.

Outsourcing, on the other hand, also was done on foreign lands with foreign workers, but the work was subcontracted. So a company that outsourced their manufacturing hired a foreign company to provide the products at a given price. Apple provides the most famous example, contracting with Foxconn to produce iPhones and iPads in China and throughout Asia.

Reshoring is the newest term, which involves production returning to the company’s home country and customers. Google, General Electric, Caterpillar and Ford all all bring some of their production back to America. Here are several reasons for reshoring:

  1. Foreign labor costs continue to substantially increase while US labor costs don’t
  2. Shipping cost and time lost seem to cost more than previously thought
  3. American future energy costs look promising with shale gas
  4. A real advantage has been found for keeping product design and manufacturing located near each other, as smart contractors understand, designers benefit interacting with production supervisors
  5. The increased automation of manufacturing (use of robots) further erodes the advantage of low cost foreign labor
  6. Quick product design changes can be made much easier with local manufacturing, which the future economy seems likely to demand at an increasing rate
  7. When products are outsourced, the intellectual property often slips away and foreign competitors copycat innovations
  8. When service sectors are outsourced (like information technology, human resources or customer service), the company tends to lose essential competitive advantages

So for all these reasons, many American firms are both reducing their outsourcing (having tasks again done by employees) and reshoring (bringing the work back home).

This reshoring phenomena may not greatly increase employment, as the new factories will be more automated and efficient. But these new factories have to be designed and built. That’s where the US construction boom happens.

Interestingly, Europe doesn’t seem likely to have this same type boom. They didn’t do nearly as much offshoring, partly because of the difficulty of terminating labor and partly due to family owned firms staying loyal to their locale. Their inflexible labor market and poor business conditions still doom Europe to times of poor construction opportunities.

America, on the other hand,  seems to be benefiting greatly from reshoring. The graphic below shows some examples with varied reasons.

Understand it’s not just manufacturing, though, the entire service sector also will be bringing jobs back home. The huge offshoring and outsourcing of service sector jobs to India seems over. The results, as anyone trouble shooting a computer can attest, haven’t been great and the costs have been high. Companies increasingly see the strategic advantage of employing their own local employees for IT, financial, customer services and other service sector work.

In fact, HFS Research in Boston published a survey that named America as the most desirable location for expanding IT and business service centers, beating India despite it’s lower costs. A McKinsey study found American IT workers cost less than in Brazil or Eastern Europe and only 24% more than in India.

A fascinating area in services innovation is described by Chetan Dube, a former math prof at NYU, ” The last decade was about replacing labour with cheaper labour. The coming decade will be about replacing cheaper labour with autonomics.” Mr Dube, owner of IPSoft,  has produced:

Eliza, a “virtual service-desk employee” that learns on the job and can reply to e-mail, answer phone calls and hold conversations, is being tested by several multinationals. At one American media giant she is answering 62,000 calls a month from the firm’s information-technology staff. She is able to solve two out of three of the problems without human help.

Again, this type of innovation requires construction be done near the company headquarters, not in some foreign land.

My conclusion to these trends? US commercial/industrial construction will have some strong growth for the next few years. Combine that with a rebounding housing market and the natural pent up construction demand that follows a recession and we have a bright construction forecast.

If you agree, now’s the time to expand. Get good people and develop new market niches. Or jump out there and start something. You only live once, but once should be enough if you make decent decisions.

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