The global housing need is significant and growing. So too is the need for affordable housing. In this interview, Bruno Balbinot, founder and CEO of Ambar, a Brazilian construction technology company (or, construtech) with a focus on efficient construction and smart housing, talks about his journey from the automotive industry to modular residential construction. He highlights some of the lessons he believes can transfer from automotive to help the construction industry increase its productivity and bring affordable housing to those who need it.
McKinsey: What led you from the auto industry to modular construction?
Bruno Balbinot: I got my start in my family’s business, which partners with Volkswagen Commercial Vehicles in Latin America to develop, manufacture, and commercialize special products. These include vehicles for the military and for transporting beverages, waste, and concrete. I looked around and realized there are a lot of other industries where I could apply what I’d learned in the automotive sector. By 2012, I felt compelled to build my own company.
I quickly fell in love with construction, specifically in the residential market, because I could tell there was a major demand for affordable housing. I’d venture that 70 percent of the global demand in the residential market is classified as affordable, and every developing country is launching affordable housing programs.
The affordable housing market in Brazil, for example, remained strong even through the country’s recent economic crisis. The market here is huge, and its consumer base is going to grow from 60 million families in 2010 to 90 million by 2030.1 For every single family, you're going to need a new house—there’s no substitute for a family home in today’s society.
I also realized how archaic the homebuilding industry is: low productivity and little transparency result in high costs, waste, and delay. These inefficiencies, coupled with the scope of the opportunity, make homebuilding a very interesting industry to disrupt.
When you look at the construction industry, every housing project seems unique. Meanwhile, since the same car is made millions of times, it is assembled with standardized components, enabling higher productivity. But one of our key findings is that if you’re looking at Southeast Asia or North America, you find huge patterns when you break down a family home into its components: the kitchens, the bathrooms, and so on. So at Ambar, we break down nonstandard projects into a family of standard components, thus bringing efficiencies to the industry and enabling modular and digitalization.
McKinsey: Describe how you think of homes and cars in terms of products, components, and materials.
Balbinot: When you look at the automotive industry, the product is the car. The components consist of all the different parts used to assemble a car: engines, gear boxes, axles. And then you have materials—aluminum, steel, plastic—that are used to manufacture those components. Other industries see a similar value chain. A mobile phone (the product) is made of a screen, semiconductor, and casing (the components), which are made of aluminum, glass, et cetera (the materials).
But when you look to the construction industry, the components part of the value chain doesn't exist. Instead, raw materials are being transformed at construction sites into the final product. This reality comes with consequences: a lot of waste is generated on construction sites, and the labor is intensely specialized.
McKinsey: What are some of the key differences between automotive and construction?
Balbinot: I see two big differences in terms of technology and supply chains. Construction is maybe 30 years behind the automotive industry in terms of technology. For example, the automotive industry used to draw all of the components and the cars on paper. Between the ’80s and ’90s, they moved to software. And then in the late ’90s, they moved to computer-aided technology, which basically converts 2-D to 3-D and also connects the design to the bill of materials, of the components, and of the car.
But in the construction industry, building-information modeling (BIM) is still not in widespread use. In Brazil, just 7 percent of construction companies are currently using BIM, and more than half of companies believe that 3-D design is the same as BIM—which of course is not the case.2 The lack of precise planning technology brings a lot of inefficiency to the rest of the value chain because projects aren’t tightly connected from the design phase to the construction phase.
The second major difference between the automotive and construction industries is their supply chains. The automotive industry's supply chain includes materials and labor, allowing a manufacturer to look beyond the cost of each product at the big picture. In construction, however, material and labor are handled separately and by subcontractors. As a result, construction companies focus on up-front costs for materials and labor rather than the total cost of construction. Since modular construction comes with more material expenses but much lower subcontractor expenses—and therefore much lower labor expenses—its cost structure is much more predictable and streamlined.
All that requires construction companies to shift their mind-set. It requires them to change the way they work, the way they design, the way they procure, the way they run construction sites. The ecosystem now is much more open than it was when we started. The industry is paying significant attention to all these new things. But we’re not fully there yet.
McKinsey: What opportunities does the industry have to bring modular affordable housing to developing markets?
Balbinot: Modular affordable housing can reduce the total cost of construction through better productivity and quality, thus making affordable homes available to more people. In addition, modular construction can reduce the environmental footprint of projects by significantly reducing waste through more efficient use of materials in a controlled environment. With traditional construction, usually about 30 percent of all the material delivered to sites becomes waste. By combining modular or off-site construction with BIM, estimates are more precise and construction-site waste is close to zero.
McKinsey: How does modular construction improve energy efficiency?
Balbinot: We apply the same vision to energy efficiency as we do to cost efficiency—using technology to improve people’s lives. We ran a two-year pilot in Brazil with almost 200 families. We looked at how much families pay for their mortgages and in energy and water bills. The total cost of ownership (TCO) was the sum of those three major components.
We looked at it with these questions in mind: if we build a home with a solar photovoltaic and a smart-home device, how much will the mortgage go up? And how much will the water and energy bills go down? We are not only looking for better TCO but also delivering technology so families can manage their energy consumption, empowering them to make better decisions.
We learned that today in Brazil if you build an affordable home as I described, the mortgage will go up R$39 ($10) and the energy bill will go down R$90. So the monthly TCO of that home is R$60 lower than a traditional home. On a yearly basis, you're talking about R$700, which is almost half of the monthly income of the average family living in affordable housing. The home will cost less from a total cost of ownership perspective, and the quality is higher.
McKinsey: How will the modular construction landscape change in the next five years? And how can we encourage more entrepreneurship in construction?
Balbinot: Developers are increasingly willing to take a chance on this new vision. It’s common sense. Nobody discusses anymore if modular, if prefabrication, will be a reality or not. It is reality; this is happening. Everybody understands that there’s no way that they can go forward if they don’t buy into modular construction and BIM.
I think the upcoming five years will be amazing for modular construction. The industry is moving. I think people now are listening because the results speak for themselves and drive adoption. In our work, we’ve been able to reduce total cost, waste, and time on a project while increasing simplicity and transparency. As a result, we see repeat clients, have zero churn, and have generated referrals by word-of-mouth.
To unlock entrepreneurship, it is, of course, important to see such success stories. Three years ago, “construtech” wasn’t a word in this market. Now, it’s the local word for what we do. So, I think the atmosphere of venture capital is booming, and it’s paying a lot of attention to the sectors with new technologies. Construtech is a huge market and such a dynamic platform. There are so many things to be done, and people want to do them. They believe the future has arrived. I think it’s a great moment for the industry.