Recently, the New York Times published an opinion piece written by Binyamin Appelbaum, a business and economics writer, asking “Why Do We Build Houses in the Same Way That We Did 125 Years Ago?” The piece- which explores the history of modular and prefabricated home building, as well the federal government’s own failure to support an industry recommended by Operation Breakthrough -challenges the current “old fashioned” way of building, one at a time and by-hand, which takes an average of 8.3 months to complete.
Appelbaum notes that last year, only 2% of new single family homes were built in factories. With the cost of building a home accounting for nearly 80% of the overall cost, the question is: Why exactly has the housing industry not embraced change?
To inform readers on the challenges and the potential of the modular housing industry, VX News shares the take of Vamsi Kumar Kotla, founder and CEO of LA-based modular homebuilding company, ReMo Homes. Kotla provides his valuable insight into the obstacles that modular home builders are facing, and how those obstacles could be overcome.
Vamsi Kumar Kotla: The New York Times article Why Do We Build Houses in the Same Way That We Did 125 Years Ago? has been making waves in our industry and I had a chance to discuss this with peers.
The article gets mostly right, in regards to supply side incentives, standardization, streamlining of building codes, etc., but, it is missing the most critical aspect: forming a consortium to tackle the problem.
First, the most important reason for the failure of modular to become mainstream is the lack of substantial cost savings vis-à-vis traditional construction. As it stands currently, most modular companies offer substantial time savings but just single digit cost savings.
To provide more cost savings, two things need to be implemented through a consortium or a supplier network:
1) Componentization (using prefab components from suppliers)
2) Pooling of R&D resources to conduct non-redundant research on building materials and manufacturing techniques.
On Componentization:
Manufacturing modules involves about 20 different trades and most modular manufacturers do not have the scale necessary to innovate with all of these trades. Sourcing prefabricated components from suppliers would allow the manufacturers to laser focus on only a handful of trades. In the case of ReMo, we are focusing on wall panels and integrated pods (electrical/mechanical/plumbing) innovation while sourcing the rest from reputed suppliers.
Automotive manufacturers and defense manufacturers too depend on vendors and subcontractors for manufacturing the vast majority of their components, so this is a tried and true best practice for any industry.
Additionally, this method also allows the suppliers to aggregate demand from different manufacturers and cut savings through focused innovation and manufacturing economies of scale.
On Pooling of R&D Resources:
Most modular manufacturers are small (<1000 modules annually) and do not have the scale needed to allow big R&D budgets. For comparison, Tesla makes millions of cars a year and its average R&D to revenue for each quarter from 2010 to 2023 was 30.38. This number is less than 1% for the construction industry.
There was a recent LinkedIn post from our advisor, Nolan Browne, about how the Reagan administration saved the semiconductor industry by nudging chip companies to collaborate with each other to compete with the Japanese companies.
At ReMo, we are heavily relying on decades of research done by national labs like NREL and ORNL on best practices for modular manufacturing, and strictly limiting ourselves to applied research. We are also thankful to Panasonic USA’s R&D division for signing an MOU with us to conduct joint research on home energy efficiency equipment.
I hope we can seize this opportunity to industrialize the residential construction industry with the above approach. Or else, our foreign competitors will rise to the occasion, or worse, our net birth rate per-woman will keep going down, in part, due to unaffordable housing, which would spell long-term doom for our country.