Global Construction Industry:
An old-school industry

Archimede Mulas London 06/06/2018

The Global construction industry is a key industry in many countries and an important contributor to the global GDP. Construction accounts for 13% of the global GDP, about $10 trillion, and employs 7% of the global working population.

However, the sector has struggled to innovate and in terms of productivity lags behind other industries. In the US productivity in industries like manufacturing, retail and agriculture have increased by 1500% since 1945. The construction industry instead has registered a growth of barely 1% per year and in some countries, productivity has even receded. This lag in productivity represents not just a lost opportunity for the industry but also a cost for the world economy.

The main reason behind the backwardness of the construction industry sits with its market composition. Construction is an opaque and highly fragmented industry (both vertically and horizontally). It is roughly split into two fields: residential and non-residential markets - that is the construction of large and complex infrastructure both private and public.

The cost and complexity of large projects makes it impossible for small and medium players to take on this kind of assignments. Only few large companies have the critical mass and the wide range of services required to successfully complete these contracts and survive the cyclicality of public infrastructural projects. Extensive regulations, land fragmentation and brownfield nature of the projects are further obstacles that prevent small and medium players to win contracts.

On the other hand, the residential market is dominated by many small firms and their suppliers. Usually these companies operate in a de-facto monopoly determined by their geographical position. In fact, each company will operate exclusively in the market where it is based as it lacks the resources to offer its services in more areas. Most residential projects require a high level of personalization, which is another factor that contributes to the opaqueness of the industry.

Size matters, and in the construction industry it is a key driver for growth and innovation. The smaller companies with few employees don't have much incentive in becoming more efficient and are interested mostly in maintaining their niche market share. The lack of innovation and productivity leads to poor management of projects and creates fertile conditions for corruption and distortions in the market.

Why is productivity important? By achieving the same result with fewer resources, it is possible to achieve an optimal scenario where all stakeholders win. Customers will have better solutions faster and cheaper and construction companies and suppliers will be able to build more with higher margins.

In the next article we will focus on the UK market and explore solutions to the malaise of the construction industry.