The off-site industry is full of great energy but in a mess, stumbling around looking for solutions, writes Dan Heyworth, CEO of Box, a company which has dipped its toe in the prefab business.

Heralded as key to the government’s ability to build 100,000 homes over the next 10 years, prefab is hot right now. There has been plenty of flag-waving around the benefits of off-site production over the last few years, but with some prefab businesses failing it’s time we took a hard look at the business of prefab, otherwise the sector could be heading for a financial train smash.

Don’t get me wrong – I’m a big advocate. Off-site production has the potential to drive supply and help solve a number of issues, from labour resourcing through to building-materials costs. The problem is that the economics behind off-site production are complex. For a number of reasons, the New Zealand situation is not comparable to countries like Sweden where conditions are conducive to the successful implementation of an extensive prefab programme.

For one thing, Swedes embrace medium-density and value function over form. Prefab buildings can be very repetitive and we have yet to see this typology developed successfully in NZ. The prefab solution consists of container-like volumes which sit on one another. They repeat the same thing over and over. Unlike the Swedes, Kiwis prefer bespoke design.

High performance requirements for the Scandinavian climate mean that the wall and panel system for these buildings is complex and suited to factory production, whereas our Building Code minimums require much simpler construction. The upshot: there’s less impetus to move our house building into a controlled environment. (Factory assembly is also more attractive in Sweden since fewer production days are lost when the winter temperatures drop to -30 degrees C.)

According to Demographia.com, Swedes live in smaller houses – on average 83 sqm. This more compact footprint is easier to design for prefab, cheaper to build (and no doubt quicker to heat when the winter chills hit). According to QV, the average house size in New Zealand is 205 sqm.

Many Swedish prefab companies are vertically integrated – they grew from forestry companies and now build houses with their own lumbar. They are well capitalised so that when holes appear in commissions, they build speculative homes or build-to-let developments. What’s more, the Swedish government incentivises timber construction and prefab manufacture. We don’t.

Over the last couple of decades, volume house-builders have cornered the premium-economy market in New Zealand. Architects address the business class and first-class end. There’s money to be made here – just not in the economy segment. Left to its own devices, the private sector will not build ‘affordable’ homes without incentive from government. It is this area where prefab has potential.

Volume house builders can build 180sqm in 12 weeks or less on a flat site. One of NZ’s largest group home builders confirmed there were few or no productivity gains to be made with prefab. This is because they have mastered the process of building – they do simple things over and again, and they do it fast. They are more interested in vertical integration of the supply chain and supply-chain savings. Interestingly, this is the conclusion previous generations have reached. Process efficiency, repetition and supply-chain economies are everything, with or without off-site production.

Constructing 100,000 houses in 10 years may seem like a hard goal but let’s put it in perspective: 279,000 homes were built in the 1970s (according to BRANZ). They were smaller on average (140sqm) and simpler to build.

Overseas, innovative US developers like Eichler in the 50s and 60s were building 10,000 architecturally complex homes per year. Their secret was repetition of details and tight project management. And, during the government-sponsored One Million Homes programme in Sweden in the 60s, companies like Lindbäcks were producing hundreds of homes per year off-site with very low levels of mechanisation. It wasn’t until 2007 that they decided to splurge on automation.

Off-site production is nothing like the standard construction business model; instead it’s akin to the manufacture of a product. Repeatability=efficiency=less time=less waste=savings. So we need robust systems and support from people outside the industry and the country to design the right product for prefab. But high land costs mean factory overheads near main workforce centres are high, so too are transport costs. Savings generated by off-site construction need to cancel out these costs for the business case to stack up.

Meanwhile, investing in production-line machinery has a high capital cost, adding to the price of the house. Once the capital is outlaid, the production line needs to hum along at close to full capacity – difficult when you are dependent on infrastructure being ready and consenting. Manufacturers need more working capital than they realise – evidenced in recent failures such as Matrix Homes, eHomes and ABT.

The manufacturing business is different from our highly-fragmented construction business. Many construction-business owners are turning their hand to prefab without little understanding or expertise in how the model works. The industry needs help but where are the economic models that examine exactly when off-site production improves productivity and lowers cost? Should we manufacture panels, volumes, pods, or nothing at all? Which construction methodology is the most economic response to a particular building typology or market niche – and how big are the market niches? Do we need to build 100, 1,000 or 5,000 factory homes to disrupt the supply chain? How do we balance standardisation and repetition (not the same thing) with the need for homes to fit different sites and specifications?

The off-site industry is full of great energy but in a mess, stumbling around looking for solutions with few international benchmarks to guide us, weak competition laws that allow anti-competitive behaviour from major materials’ suppliers and a lack of stimulus in the economy housing sector since 1992.

MBIE, The Commerce Commission and Treasury all have a role to play in plotting a path that will see us come out of this as a global leader in housing. Off-site production is potentially part of the recipe. But before we skip headlong into the path of the fast-approaching prefab train, we need to take a breath, look left and right, and figure out exactly how and when to apply off-site practices before some of our earnest and most promising innovators in the sector lose more limbs.

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