Modular builder CEO: ‘Katerra’s failure was spectacular’

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 for manufacturing windows, cabinets, countertops, and panelized 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 is the purpose 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 do already have the ability to design and support some modular component installations all over the country. We’ve been searching for a place on the West Coast, and the Katerra facility was an opportunity to accelerate that search.

Vaughan Buckley

Permission granted by Volumetric Building Companies

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 can make our own cabinets, and we can also do some of the truss design/manufacturing. We can now manage some commodity goods that might not arrive on time.

Why did you feel confident that VBC could make use of the assets?

I think it starts with execution. When we look at Katerra’s business model and the goals they had in mind, it seems like a group of talented people working together. But, from a business perspective, it seemed that they were really trying boil the ocean. They could do everything simultaneously. They had thousands of workers in more than a dozen countries. We have already started multifamily modular construction with high density.

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 we have been doing all across the country. We have thousands of modules in the U.S. and a California client base.

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? Is it possible for VBC to face the same problems as Katerra?

Katerra’s failure was spectacular. They were working on so many different things simultaneously. As we went through the acquisition process, we realized just how complex it was. They were trying solve big problems but were using advanced technology we trust and potentially excessive complexity. An ERP system cost them tens to millions of dollars. 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. There are many things we won’t do. To reduce labor, we won’t add robots. We are not going to add software to replace the processes and systems that must be built in a functional building company. We are a construction company that embraces technology rather than a technology company 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 answered no. This is not a business model that makes sense at the time. Material was readily available and the costing was stable. This has changed dramatically.

And now in 2022, the issues of 2021 are going to continue. We won’t be able to obtain materials on time, within budget, or in all cases. Katerra’s acquisition was made possible by being able inventory products and to mitigate supply chain risk.

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. All of them must be able to stand alone, including countertops, windows, cabinets, and trusses. This is a departure from the Katerra business model which was 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 produced a K3 product. Modulous is doing something similar. We are on the same path to our future. We are creating our own products. Our company is both vertically and horizontally integrated. This means that we can design the products we build. We can ensure efficient construction in both the factory and field by using the concept of creating assemblies at the drawing board. We are one of few companies who can bridge this gap.

Modulous is not intending to be a manufacturer. Katerra didn’t intend to be a designer but they accepted the challenge because they were able to take on all of it. You have to wonder where you go from there. VBC is where the value is created. We want to create as much value possible. We do this in design, manufacturing, and construction. Even though the scope of our work is vast, we are focused on each piece.

From VBC you’re going to see buildings as a product. You’ll be able to buy components of buildings as well as the buildings themselves, so you can come in and identify your finishes and prices upfront, and then purchase it as a complete solution.

Sebastian Obando
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