Adjusting to 21st Century Economic and Market Forces
FWCI Research Series
April 2007The Foundation of the Wall and Ceiling Industry launched a research plan to help wall and ceiling contractors prepare for how business will be transacted during the next 10 years and to help them plan now for how they will meet their future business goals. The Foundation surveyed contractors of the Association of the Wall and Ceiling Industry and interviewed a number of industry experts to interpret the survey findings.
The survey of members looked back at the past 10 years to get a better focus on the next 10 years. It was comprised of 15 questions that asked contractors their opinions about possible trends and how they see changes coming to the construction industry in general and the wall and ceiling industry in particular. Of the 1,128 surveys sent, 130 responded, representing an 11.5 percent response. All but three of the respondents were from the United States.
Also, 18 industry experts were interviewed to provide reaction and perspective on the survey responses. They represented a broad cross-section of the industry, including wall and ceiling contractors, manufacturers, distributors, suppliers and allied construction industry association executives.
The complete findings of the survey are presented in Preparing for Tomorrow, the latest offering from the Foundation Research Series. This article is excerpted from the Preparing for Tomorrow publication.
Economic expert Paul Romer is fond of saying (Friedman 2005, p. 339):
Everyone wants economic growth, but no one wants to change.
Management expert W. Edwards Deming takes the thought one step further in this ironic comment:
It is not necessary to change. Survival is not mandatory.
What these economic and management experts are saying is they recognize that it is hard to change and whether or not to change is entirely up to each individual company, but to survive and grow companies must be aware of changes and respond to them. Business experts also emphasize that just being responsive is not enough; to be successful requires adopting a proactive business model that leverages change and the Internet to their best advantage (Friedman 2000, 2005).
From Products to Services. Responses to two of the survey questions clearly reveal that wall and ceiling contractors understand that 21st century economic and market forces are moving their role from being primarily a procurer of materials and labor to one that not only supplies these items but also where their knowledge and expertise will be highly valued (see Figures 1 and 2). In this regard, wall and ceiling contractors can learn a valuable lesson from changes occurring in the manufacturing sector.
According to the industry experts, U.S. manufacturing has decreased significantly since the 1930s and is being replaced by a service economy. The traditional model is to add a dollar amount to the product price to cover service, but with the transparency and information about product costs and comparison shopping, this model does not work any more. Manufacturers used to give away service for free. What they are doing now is charging for service and selling their products for less. This change in how to approach pricing also applies to wall and ceiling contractors, in light of razor thin profit margins and extreme pressure on the building materials side. The only place left is to make money just on service and labor, the industry experts said.
The respondents also weighed in on the methods they most likely will use to reduce labor and material expenses, including reorganizing, consolidating job functions or both; increasing the use of the Internet and software; in-house productivity training; seminars for supervisors; using new technologies; and to some degree, collaborating or pursuing joint ventures and outsourcing functions.
The Case for Collaboration, Core Services. Business journalist Thomas Friedman believes collaboration will be among the cornerstones of 21st century business:
Power will flow not simply to those who are the most wired, but to those who are the most creative at bringing firms, information, consumers and talents together in networked coalitions that create value—provide the entire package.
While the survey responses indicate a trend toward less consolidation among wall and ceiling businesses (see Figure 1), an increased number of respondents (30 percent) plan to merge with or purchase another company to be more competitive in the future. Further, a majority of respondents (10 percent) said they will engage in collaborative and joint ventures in the next 10 years.
Although business experts advocate the idea of not trying to be all things to all people and stick with core services, the survey respondents were not so sure and showed some polarization on this point. Some respondents said they offered a wider scope of services in the past 10 years and will continue with this strategy in the next 10 years. Others said they offered fewer services than in the past and plan to stay with their core services in the future.
There are good arguments for both positions. A broader scope of services means subcontractors can potentially contract for a larger amount of work on any one particular job or be awarded work in a variety of areas. A narrower scope of work means subcontractors can focus on their core expertise and not get spread too thin. Overall, survey respondents believe that the trend toward more specialization will continue to gather steam during the next 10 years (see Figure 4).
New Technologies. The industry experts mentioned several new technologies they felt would be a big part of the wall and ceiling industry in the future. Among them are swipe cards, which are used to track productivity on the job. They believe that with the data collected from their use, national productivity standards for how long it takes to build every type of wall can be created, which will help subcontractors be more effective planners and estimators.
Another technology that is gaining popularity, especially in the residential market, is pre-fabrication of structural and non-structural building assemblies, also called panelization. With panelization, entire walls, including finishes, substrates, framing, drywall and other building components, are constructed in factories. They even can be pre-wired for electricity before being shipped to the job site. Panelization has gained in popularity because of quality improvements, shortage of skilled labor, cost savings and climate controlled production, which, if transported and installed properly, can reduce the risk of indoor mold growth (SBA News 2002).
In the commercial market, panelization is utilized more in hotel and motel construction, which have many spaces of similar design specifications that need to be duplicated, or on high-rises, which would need scaffolding. In addition, chain restaurants that rely on the same design specifications for all of their locations could benefit. The industry experts did not express a lot of enthusiasm for panelization as most commercial buildings have unique requirements and require skilled labor to install the walls and ceilings components.
Cold-formed structural steel framing is another product that is being used more frequently in residential, light commercial and low-rise buildings (up to six stories). The price volatility and supply availability in recent years has impacted its utilization. The experts noted, however, that Hawaii uses steel framing for its residential construction because it is more durable and insect resistant. In 2004, more than 110,015 tons of cold-formed steel were used in single-family markets compared to 97,420 tons in 1997. The use of steel framing in multifamily construction continues to grow at a more significant pace, from approximately 0.5 percent market share in 1997 to more than 3 percent share in 2004.
Impact of Energy Costs, International Markets. Because of rising material costs, everyone involved with construction is feeling the pinch. The Bureau of Labor Statistics reported that in 2004, for example, prices for iron and steel products rose 35 percent, while steel rebar and copper wire skyrocketed by as much as 60 percent in some markets. Petroleum-derived products went up 15 percent to 20 percent, and raw steel prices have been doubling since mid-2003, although prices abated somewhat in early 2005 (Plunkett Research Ltd. 2006)
The industry experts said that drywall manufacturers have seen a five-fold increase in natural gas prices since 1999. Diesel fuel prices also are up dramatically. When new gypsum drywall plants come on line, it will help loosen up the cost structure, but prices will not go as low as they once were. Energy costs have added $30 to $40 per 1,000 square feet since the late 1990s, and given the price of energy today, those costs are likely to stay.
With respect to drywall, the industry experts said there is no real concern about being able to obtain the necessary raw materials. The biggest change in drywall manufacturing is the advent of synthetic gypsum, in which the raw material (calcium sulfate) comes from the waste generated when coal-fired plants scrub their exhaust stacks. A bath of wet limestone is used to clean the stacks, and the sulfur that accumulates in the stacks combines with the calcium to make calcium sulfate—drywall’s raw ingredient.
Manufacturers are making deals to buy calcium sulfate from utilities cheaper than it can be mined, and new manufacturing plants are going in along the Ohio and Tennessee Rivers where there are many coal-fired plants. The experts said it is a win-win for the wall and ceiling industry as well as the outdoor environment. Coal-fired plants produce cleaner energy, and drywall manufacturers use their waste material to make gypsum wallboard. With the greater emphasis on green building, drywall manufactured with synthetic gypsum becomes a viable choice, especially in the Northeast, Mid-Atlantic, Southeast and Midwest. In fact, many contractors are using drywall with synthetic gypsum without knowing it because synthetic boards work just like regular gypsum boards.
With respect to the impact international markets may have on the wall and ceiling industry, the experts were not particularly concerned, although there were some uncertainties. Because of the weight, it is not economical to ship drywall long distances, so it is unlikely U.S. manufacturers will export drywall to China. On the other hand, China can produce drywall cheaply enough to export it to the United States. Realistically, distributors and builders will buy domestic drywall over imported drywall if the domestic drywall is available. Imported drywall would have to be significantly cheaper to beat out domestic drywall but might more likely find its way into residential markets where quality might not be as important. Presently, steel products do not come from China, but China does export steel now that its steel manufacturing capacity is up. A couple of years ago, China bought all the steel it could on the world market, which drove up the price. It is conceivable that Chinese exports of steel will drive the price way down. Right now, however, the world market is strong enough to absorb Chinese exports, the experts said.