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ELEPHANT IN THE ROOM continued
of the homes they (the builder) have sold to a customer. Even worse, most builders do not even know whether the labor will show up.
Therein lies the risk and the opportunity.
If skilled trade labor is no longer
as plentiful as it was in the past,
yet demand looks like it will be considerably higher than our current and forecast ability to produce well into the future, perhaps someone should recognize the elephant in the room and be looking to fundamentally change the business model of the business. Rather than buying back stock, shouldn’t the largest home builders reinvest in another way to create homes that involves less labor and more automation, and achieve higher productivity?
It would seem that the very existence of builders depends on how this question is answered and the value of their companies either ride higher or lower based on how they address the issue.
Shouldn’t Boards of Directors of home builders address this existential question before either the activists come in and turn the company
upside down or market forces slowly eviscerate the franchise?
I wonder what the reaction in the marketplace would be to a builder CEO who, when asked the question regarding how they were innovating, had a response that sounded something like this:
“We recognize that this industry cannot operate any more like it has historically. The days of abundant and quali ed sub-contract labor seem to be coming to an end.
We cannot afford to embrace a business model that thinks it is okay to deliver homes in 6-12 months and where we have little control over who builds our homes each day.
We have looked at other industries and see that, on our current track, we are destined to extinction in the face of a surging demand that our current business model does not permit us to meet at levels of margin and capital return that are acceptable
and industry-leading.
We, instead have chosen to take a different path that will involve some short term pain, but will position us as a leader in the new housing economy.
We are going to take a meaningful portion of our cash ow and, rather than reinvest it back in land or stock buy- backs, we will invest in new methods
of producing our homes, using a high degree of automation, new materials, and a dedicated workforce consisting
of full-time team-members of our company.
We will use the best people and ideas from other manufacturers and home builders from around the world to help drive this innovation. Our belief is that we can deliver homes in under 60 days from the day the customer signs a contract with us, and at net margins and returns on assets of over twice what we achieve currently.
Even more, we are choosing to reorganize our company to continue to invest in the research and development needed to drive the continuous innovation and improvement that we see will be needed to keep us at the top of the competitive heap.
We will be innovative in our use of
technology, materials, business systems, and people in this drive.
We know that, if we do not make these fundamental changes, we stand a high risk of extinction, and we will not ignore that fact.”
Wouldn’t that be interesting?
If our current crop of home builders cannot make that speech, my sense is there are others from outside of the industry or outside of the country who see this opportunity and will take it and run with it.
If this elephant of a question is
not addressed, the current crop
of builders risk a fate similar to those companies in other industries who failed to see the changes that drove new companies like Walmart, Amazon, and Apple to dominate spaces where more established companies had operated. Those companies that did not change with the times and environment ultimately became either extinct or
food for the new.
So, if leaders and directors of current home builders continue to work
in the old business model and on innovations with a small “i” and a 3-font, rather than innovations with
a capital “I” and a 128-font, they will be truly picking up peanuts while
the elephants run wild, and, (to mix metaphors) risk becoming the extinct dinosaurs more quickly
than they realize.