As availability of construction materials and their costs remain volatile, Philadelphia-based modular builder Volumetric Building Companies made a move to the West Coast to ensure its customers there continue to be served.
The company purchased Katerra’s assets in Tracy, California, including its state-of-the-art manufacturing facility (shown above), for $21.25 million in August. VBC will use the facility to manufacture windows, cabinetry, countertops, trusses and panelized building components.
Katerra filed for bankruptcy in June due to delayed projects, construction costs, pandemic-related impacts and an inability to convince developers and contractors to move away from their traditional subcontractors.
Here, Construction Dive talks with VBC CEO Vaughan Buckley to discuss why the company acquired Katerra’s assets, how the company is positioning itself to mitigate supply chain issues and where he sees the modular industry heading.
The following has been edited for brevity and clarity.
CONSTRUCTION DIVE: How does VBC plan on using Katerra’s assets? What’s the goal of this acquisition?
Vaughan Buckley: VBC has existing capabilities in manufacturing design and construction throughout the U.S., but we don’t have manufacturing capacity on the West Coast. We already do design work out there and we already support certain installations of modular components pretty much nationwide. So, we’ve been looking for a place to go on the West Coast and that timeline was accelerated when the Katerra facility became available.
We see it as an opportunity for both vertical and horizontal integration that allows us to get modular components on the West Coast, but it also allows us to mitigate some of the supply chain risks that are out there right now. We get to make our own cabinetry, we can be performing some of our own truss design and manufacturing. Really just some of those commodity goods that we might be at risk of not receiving on time, we can now handle it ourselves.
Why did you feel confident that VBC could make use of the assets?
I think it starts with execution. So, when we look at Katerra’s model and what they were trying to achieve, I think it was a whole bunch of talented people moving in the right direction, but from a business model perspective, they were really trying to boil the ocean. They were doing everything at once. And they had thousands of employees in a dozen countries. We are very focused on multifamily high density modular construction, and we already do it.
So, when the question about ‘how are we different’ or ‘what are we going to do differently?’ comes up, I come back to: we can do it because we are doing it. This is something that we’ve already been doing throughout the country. We’ve got thousands of modules produced around the U.S., and we’ve got a client base already in California.
So, it’s an easy transition for us to start producing for them in their market and very exciting for us to have boots on the ground because right now, our facility is in Hamlet, North Carolina. We were shipping upwards of 2,500 miles to get some of our West Coast customers served.
What did Katerra’s failure teach you and the company? Do you think VBC could face the same challenges Katerra faced?
Katerra’s failure was spectacular. They were working on just so many things at the same time. And what we understood, as we were going through the acquisition, was just the level of complexity. They were trying to solve some big problems, but they were doing it with not just advanced technology that we believe in, but with potentially over complication. They spent tens of millions of dollars on an ERP system. That’s exciting for us because we get to capitalize on that on that R&D spend.
I think there’s a lot of things that Katerra has done that we wouldn’t have done, but we’re happy to have access to and support from now. But there’s a lot of things that we just won’t do. We’re not going to add more robots to remove labor. We’re not going to add more software to remove the systems and procedures that need to be built in a functional construction company. So, I think we’re a construction company that’s embracing technology, as opposed to a technology company that’s trying to change construction.
How did the 2021 supply chain and hiring issues change the business’s strategy?
I think the perfect example is the Katerra purchase. If you’d have asked me two years ago, ‘do I want to build my own cabinetry and make my own trusses and horizontally integrate across the platform?’ I would have said no. It’s not something that made sense for the business model at the time. Materials were readily available, costing was relatively stable. That’s changed a lot.
And now in 2022, the issues of 2021 are going to continue. We’re going to be unable to get materials on time, on budget and in some cases at all. So being able to inventory products and sort of mitigate our own supply chain risk is really a key part of the acquisition of Katerra.
How will the move into countertops, windows and cabinets affect operations, and how big of a focus is that?
The way that we approach vertical integration is kind of the same as we’re going to approach horizontal integration, which is that every business unit needs to be viable independently. Cabinets, countertops, windows, trusses, they all need to stand on their own. And I think that’s a bit of a divergence from the Katerra business model, which was really to control everything. They wanted to be a part of the supply chain, and they wanted to control it.
We don’t necessarily want to control the supply chain as much as we want to mitigate the supply chain risks. So each of those business units are a focus of ours to ensure profitability, sustainability and access to product, but they’re not going to shift our focus away from our core business which is modular components and high density construction around the U.S.
Have you heard of any other new trends developing in the modular space, and what’s the sentiment for the modular industry in the future?
I think that the entire industry is starting to pick up on something that we’ve been really focused on over the last few years, which is the productization of modular components. Katerra had a K3 product. Modulous is doing something similar. The way of the future for us is on a similar path. We’re creating our own products. We’re horizontally and vertically integrated, which really means that we get to design the product that we’re building. The concept of creating the assemblies at the drawing table allows us to ensure that we get effective construction and efficient results in the factory and the field. And so we’re one of the few companies that gets to bridge that gap.
Modulous is not intending to be a manufacturer. Katerra wasn’t really intending to be a designer, but they took it on because they took on everything. And when you look at that chain, where do you come in and get out? I think for VBC, it’s where the value is generated, we want to be creating as much value as possible. And we do that in design, in manufacturing and in construction. So even though it’s a broad spread, we’re hyper focused on making each of those pieces work.
From VBC you’re going to see buildings as a product. We’re going to be starting to sell components of buildings and buildings themselves as a product, meaning that you’re going to be able to come in, identify your fixtures and finishes and pricing upfront and buy it as a holistic solution, rather than starting at the drawing table and trying to figure out what you want your building to look like.