Monday, March 1, 2021

Horizontal Integration in the Modular Housing Industry

Merging with or being acquired by another modular housing factory to increase market penetration is the core of horizontal integration.


In many industries where separate factories build a similar product with similar processes for another industry or service, horizontal integration is an accepted practice. Modular housing isn’t one of those industries. 


Recently I talked about the things that govern modular factory capacity and noted that two factories built next to each other doing the same type of modular could vary widely in total capacity. 


Even though most modular housing factories only have one location, there is a need to start thinking about horizontal integration today more than ever. It will be the only way our industry can meet demand in a time-sensitive market. Integrating several factories will give them more leverage with suppliers and also with investors when the new company wants to expand.


Integrating two or more modular housing factories will also mean shared services. Engineering, some management positions, service and marketing are just a few areas where integration will not only save the new company money, it will strengthen those areas for all the newly integrated companies.


In theory, this could make a lot of sense for those factories building mostly single-family homes but reality doesn’t usually favor modular factories.


Different as Night and Day


I have been in dozens of modular housing factories over the years and each is unique. Even though they build single-family modular homes, each has chosen a different way to build them.


The real fun could begin when each factory’s management team first sits down to go over what they build, how they build it and who they sell it to. Oh, to be a fly on the wall during those negotiations. 


Since no two modular factories are alike, each company will want their system of building modules to be the one used.


There are three primary ways to build modules:

  • Parallel Production Lines
  • Shotgun Lines
  • Cribbing Production


Four main primay to move modules in the factory:

  • Rail Systems
  • Wheeled or Roller Systems
  • Air Bags 
  • No Production Line - Cribbing


Very few modular housing factories have any type of automation. Some build their own cabinetry and trusses. Some are partially vertically integrated with their own trucking companies and set crews while others have none of these things with everything past the gate the responsibility of others.


Differing Customer Bases


Because this article is about single-family housing production, I will not go into the developer end of the modular business.


There are two types of customers. The first has built a network of approved custom home builders that sell directly to the customer. Those factories view the builder as their primary customer. 


The other type of factory has retail sales centers and sells directly to the new home buyer. This model had been dwindling but may begin to see a resurgence since housing is super hot at the moment. These factories are vertically integrated.


Horizontal Integration’s Pros and Cons


Pros:


Reduced Competition. The companies reduce their competition in the market space. This is done by merging the companies in their current market space.


Benefit From Synergy. Competitive pricing, marketing, research & development, production, distribution, etc.should benefit from two or more modular factories merging.


Economy of Scale. Companies can achieve economies of scale by increasing its production and lowering its cost. This happens because the cost is distributed in a large number of goods.


Lowered Costs. Shared services and management will allow more profit dropping to the bottom line.


Sharing Capacity. Managing production scheduling centrally between the factory will lower leadtimes.


Cons:


No Positive Synergy. Horizontal integration doesn’t always yield positive synergies and add values as expected. It can even result in negative synergies and reduce the value of the total business.


Management Clashes. The differences in leadership styles, office culture, and organizational structure of each company can actually bring down the new company.


Stunted Growth. This happens because the company is now a larger organization and management doesn’t know how to work in this new environment.


I almost forgot the most important CON! Clashing Egos.


A few years back, an East Coast investment company actually tried acquiring modular housing factories from Maine to Virginia. It looked good on paper but soon reality set in when each factory was so different that the advantages never came to fruition.


Today, only one of those factories is still operating under new ownership and the investment firm filed for bankruptcy.


It’s really up to who is merging or acquiring whom and how closely their management and production types are to each other. 



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


CLICK HERE to sign up for my twice-weekly newsletter



No comments:

Post a Comment