Thursday, January 7, 2021

Will Consolidation and Vertical Integration Work for Modular Housing

Have you ever wondered why there are very few modular home factories with more than one location? So have I!

With modular home builders starting to expand beyond their original territory for selling homes, one of the biggest problems facing them is finding a modular factory to serve their new expanded sales territory(s).

Vertical Integration:

A builder in Boston may want to start a business in South Carolina but will his factory want to go to SC and if they do, will the freight be an unbearable expensive?

Logistic problems are not the only problem. Finding a set crew and finish crews in the new area can be a hassle, especially if the builder wants to expand into an area that is seeing lots of new homes going in. 

Finding HVAC contractors can be another obstacle to overcome.

The custom modular home factory is a unique animal. Only a small percentage of them are vertically integrated and those that do tend to serve a very small regional market of about 100 miles from the factory.

Logistics makes expanding beyond that distance a problem. If the factory uses their own set and finish crews, problems become apparent rather quickly. First, let’s assume the factory has its own set crew. They should be able to set from one to 4 homes a week within that hundred-mile radius depending on the house options and complexities.

If the factory can build 2 homes a week, about 7-8 modules in total, having a set crew on staff makes sense if they set every house.

Finish crews are a completely different story. Depending on the complexity of the custom single-family modular home, a fully staffed factory finish crew could be working on the house for up to two weeks. Finding more than one complete finish crew of 4-6 people is an almost impossible job in today’s market. That is why modular factories are looking at the builder to finish the home.

Vertical Integration for the single factory producing custom modular homes can actually start when the builder’s customer has their plans drawn by the factory all the way through the set process, including transportation. The crane is one thing factories shy away from as there is usually more than an adequate supply of them in serving the area.

Going beyond the set is not economically feasible for many factories.

Conclusion: Vertical integration can be a good thing for the modular home factory but stretching beyond the 100 mile radius of the factory could see fewer homes a week being set. 


When Softbank gave Katerra $200,000,000 to help stave off bankruptcy, one has to ask if that was a good investment. Maybe. 

But what would happen if some of the cash was used to purchase four established custom home modular factories across the East Coast from Georgia to Vermont? Would the outcome be the same? Again...maybe, but I don’t think so.

If an experienced modular housing team were assembled to run the consolidated companies using the best processes from each one, the chances of not only surviving would be good but they could expand even further by taking the interconnected factories and offering the builder that wants to expand a standard product and a team that would work together to help the builder.

Could someone put this consolidation in place and make it work? Yes.

Modular factories have a tradition of being staunchly independent and even getting four modular factory owners to sit down and discuss consolidation could be a trick even Houdini might not be able to pull off.

The big question is, could consolidation actually be the vehicle for growth that our industry has been looking for since its beginnings or would it become the final nail in the coffin for the modular custom home market if it failed?

There are a couple of startups that are looking to open multiple factories across the country but they don’t appear to want to build true custom housing or have any established single-family builder network. Projects and standard planbook housing are their plans for their factories.

Conclusion: Consolidating several custom modular home factories is probably inevitable. Let’s hope the people chosen to do the consolidation don’t fail prey to the same problems encountered by Innovative Building Systems almost 5 years ago when they bought factories from Maine to the MidAtlantic region, then went into bankruptcy.

I hope our industry learned a lot from that experience.

Gary Fleisher, the Modcoach, writes Modcoach News and Modular Home Coach blogs as well as the best site for off-site consultants, Modcoach Connects

Contact Gary at


  1. Hello,

    I think you meant $200 million for the SoftBank investment.

  2. Gary:
    Wow. This article just scratches the surface of a complex issue, not just in the modular industry but in all sectors of business around the world. Just so I don’t go too deeply into the minutia, I would recommend the interested reader study and, for more depth, read Michael Porter’s Competitive Strategy. (Yep, it was first published in 1980 and is still relevant.)
    Having said all that, I have managed vertically integrated operations; i.e., modular manufacturers with captive retail builders, and witnessed the IBS failure first hand. I now serve as a modular developer/builder. The simple takeaway is either vertical or horizontal integration can be executed successfully but an organization must go in with its eyes wide open.
    Vertical Integration
    Simply stated, this is just grasping more of the margin in the entire value delivery chain. While it sounds easy, it is not. Often the competencies which lead to success in one part of the value delivery chain; i.e., engineering, procurement, manufacturing, finance, planning/permitting, site prep, foundation, transport, set, MEP, trim out, etc., may be totally different from another. Moving into an adjacent function is easier said than done.
    But it can be done and some companies, notably Clayton, are moving strongly in that direction. Clayton benefits from strong financing, a well-defined product strategy and a host of other strengths. (Note Clayton’s approach avoids the long-distance problem cited in your article. Having shipped from VA to MT during the downturn, I would not recommend it.)
    Horizontal Integration
    Horizontal integration can be particularly successful in the realm of scalable and location-independent functions; i.e., finance, procurement, IT/process control, engineering, etc. Production, although usually tied to a location, can benefit if processes are defined and controlled. (In a previous life I was part of the company which manufactured all of the fryers for McDonald’s. If you ever want to discuss scalable process control, meet me at the local McD’s, buy a large fry and block three hours.)
    Step one for horizontal integration is to do it right in a single location first. Get the processes completely under control, standardized, documented and repeatable. Then replicate. This is the antithesis of uninvolved consolidation; just buying a number of plants and hoping to conform them to standard procedures can drain cash in a hurry. Also, Katerra is not a consolidation; it is a massive startup with yet-to-be-proven processes.
    Lastly, the IBS failure was a financial management failure, not necessarily a failure of horizontal integration per se. Admittedly, the horizontal integration could have benefitted from stronger process management and control but leadership was not empowered in that realm. Process integration requires rigorous central leadership or it is doomed. (A great example is Norman Schwarzkopf; see Desert Shield and Desert Storm at Another example is Jack Welch, albeit the leader of a conglomerate not a consolidation. A modern day example is Jeff Bezos. Note all are engineers.)
    I welcome other comments on this Saturday morning. Or meet me at McD’s.

  3. Gary and Mr. Hobbs have experience I don't. Yet the way we have always done it cant be the way of the future or their will be no future.

    I have many years of experience and ownership in another very competitive industry and as independents we came together, remained independent, remained competitors, and yet helped many remain independent while benefiting from competitive purchasing and use of each others resources.

    The independents across the US were closing or selling their businesses at a fast pace as we all were up against 3 very large International Vertically Integrated companies. Our biggest challenges were financing of heavy equipment on short term loans, performance and bid bonds not being available, very high premiums on equipment insurance/WC, purchasing small quantities of tires, paint, steel and collection equipment that depreciated very fast as it was subject to heavy abuse and destruction along with being uninsurable.

    Total minimum investment to get started on a small scale was 1 million plus. Shoestring operators failed within 3 years of opening because of low initial capital investments and large operating cost.

    Our solution was to remain independent yet use our purchasing power as a collective unit. Sounds like a Co-Op but it wasn't. We contacted large suppliers and negotiated lower cost and we purchased collectively in bulk.

    We overlapped service areas and would assist each other to avoid redundant purchases of service equipment. We worked together and yet were competitors in every sense.

    This concept has worked for independent farmers in this country for years and could be applied to other industries. This would eliminate factory owners coming to a consensus on consolidation while increasing their equity and competitiveness in the industry.

    From the outside looking in independent Modular and Manufactured Home Retailers/Builders are a thing of the past, and I am speaking of the rule not the exception. The State of Virginia is a great example of independent retailers closing, factories downsizing, or closing and/or builders changing course to site building with some modular builds.

    One would assume Mr. Buffets MOTE will continue to consume the vertically integrated companies he requires to keep competition at bay. He is a very wise investor and recognized the market need and solution for affordable housing and built upon it.

    The question I have will Independent Retailers and Builders of Modular Homes be able to remain competitive against larger competitors having a National presence and site built becoming more competitive to build every day given "TIME" is money.

    I would hate to see the best building process in the nation shrink to nonexistence because of principle or pride in doing things the "way we have always done it", after all this is not the government.

    Thank you for permitting me to comment.