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Hello and welcome to another episode of the All Thoughts podcast.
I'm Tracy Alloway.
And I'm Joe. Wasn't all Joe?
You're a homeowner now right?
Yeah, it's very fun.
Tell me, tell me how fun it is.
I know you've had a few issues that cropped up basically as soon as you brought your new place.
I don't want to talk.
Let's go, let's move on.
No, this is part of my carefully planned Yes, I know.
Yeah, it's annoying and you have to deal with stuff. And I may have mentioned Alicia one time. Actually have been lucky by and large, But yes, it was very funny. You know. The I think literally the day or two days after it closed on my apartment in the East Village. You know, it's like whether there was something wrong before you just there's the phone number of somebody, just call it. Yeah, we still the building still is a super right, you know,
the landlord just deals with replacing something. And then I think literally the day after we closed, there was like a window leak and it's like, wait, is there no longer a number? Do I have to pay for this myself?
So who did you find to fix the window.
Dad, I don't remember. There is still a super of the building of the super, but we had to write a check.
Okay.
One of the things that has surprised me about being a homeowner is like how low tech a lot of the housing construction and fix it actually is. Right, So, if there's a leak in your ceiling, in your roof or something, it's literally either you or some guy that you hire going up on a ladder and like putting down a few more shingles with a nail gun.
Right, it all seems very old.
What did you think was going to happen?
But is it gonna be like some like unit tree like robots crawl up? Then?
No, Seriously, it's the year twenty twenty five and we're still putting houses together with like, you know, the hammers.
And someone someone comes with the box and they look through to the difference like, no, this doesn't fit this does it?
Oh?
I got it? And then the one second I don't have the right screw it, and they go around to a construction store a little right back, I got this, I got Yeah. Yeah, it's still pretty probably the way it looked when we were kids.
Okay, well, anyway, I've been thinking about it because a couple months ago the Richmond Fed put out this paper and it was all about productivity in housing construction and the fact that construction labor productivity in housing has fallen by more than thirty percent from nineteen seventy to twenty twenty.
So you think about the arc of economic development. You know, normally there are productivity improvements as we invent new efficiencies and as we invent new technology and ways of making things. That hasn't happened in housing. It's still the guy showing up with a toolbox.
This strikes me as a really important element of the housing affordability conversation that I don't think gets enough attention, which is, it's easy to talk about zoning, and I'm sure there are issues there that need reform. It's easy, you know, permits and all that stuff. It's easy to talk about financing, et cetera. However, housing is a product and things get built at a cost and then sold
as some profit margin above that. And if that underlying cost keeps going up, and it definitely has in say New York City and other areas, if that underlying cost keeps going up, then that is going to push up the cost of housing regardless of what you do on now again, like maybe zoning can make help with productivity gains, et cetera. Nonetheless, it continues to get more expensive for
the actual construction of a home, unlike many other built goods. Right, I mean, the issue is that we don't build homes in China. Unfortunately, if we did, that would solve the problem. We don't, and maybe we could talk a little bit about why we don't, but maybe one day will but that would help a lot.
Well.
On that note, I mean, there happen attempts through history to have prefab houses, right, And some of the old prefab houses that you order from, like the Sears catalog in the nineteen twenties or nineteen thirties, those are gorgeous and I would happily live in one of those today.
But we should talk about why it seems difficult to build houses or at least more expensive than some other things, and also why it seems that manufacturing other products seems to get more efficient over time while housing seems to kind of sect up all right, So we do, in fact have the perfect guest, I'm very happy to say we have Brian Potter, who is the author of the Construction Physics newsletter on Substack. I subscribe to this and it's fantastic.
He is also the.
Author of the new book The Origins of Efficiency, and a senior infrastructure fellow at IFP. So really the perfect guest. Brian, Thank you so much for coming on the show.
Thanks for having me.
Congrats on the book Origins of Efficiency. Are we right in thinking that housing hasn't become that much more efficient of a process?
You are correct, and you know the productivity metrics. Those metrics are quite complicated and you can measure in different ways and different things right, slightly different trends. Some of them just show flat productivity rather than fall in productivity. But the general point is yet, yes, it has not improved. Unlike almost every sort of other like physical good has gotten you know, cheaper and less expensive to make overtime. Housing is not like that at all.
And you worked for several years for a prefab housing company or something like that.
Yeah, my background is as an engineer. I worked as a structural engineer for about fifteen years. That's what my training is and just that is basically just designing buildings. So I designed parking garages and water treatment plants and apartment buildings and stuff like that. And I had, yeah, worked at different facets of the industry, and as you say, it seemed extremely inefficient to me. We're putting up these buildings. We're putting up these houses, you know, on site by
hand with a guy with a hammer. You know, it doesn't look that different than it did one hundred years ago.
You know.
On my side, it was like, we're designing these buildings from scratch every single time, instead of designing at once and then making you know, a million copies of it like you do with a car or something like that. So, yeah, it seemed when I was, you know, much younger, it
seemed like incredibly backward and inefficient to me. And then in about twenty eighteen, I had a chance to join an extremely well did constructions prefab startup called Kata that promised like, oh, we're going to come in, we've raised all this money, we're going to change all that. We're going to build buildings and in factories and it's going
to be so much more efficient. We're going to be the Henry Ford of housing, and we're just going to sweep away these old methods of building and uh it, long story short, they did not work out at all. They had raised a very very large amount of venture capital, about like two or three billion dollars in VC.
And they burned through it in a few years and.
Declared bankruptcy and then the Yeah, and in the aftermath of that, I wanted to understand why had it all gone so wrong? Beyond just you know, startups are hard, right, startups to have a high, you know, a naturally high failure rate, you know, and whatever operational missteps they may have made. I kind of came to believe that there's sort of fundamental thesis that if you build these things and in factories like we build everything else, it will
get cheaper. I came to believe that was either sort of not quite correct or at least missing a very big piece such we didn't know specifically what we needed to do in these in these factories to make the cost fall.
So why are houses, I guess so customized and not standardized to your point.
Yeah, So there's a lot of reasons. One is just you know, to go back to your point about permitting, there's a very very large number of permitting jurisdictions in the US something like twenty thousand different jurisdictions, which each might have their own slightly different versions of building codes that sort of need to be enforced. There's just you know, different building sites or different sizes and shapes and have different you know, soils will which require different things, different
environmental design factors. You know, different wind speeds. If you're in California, you need to design for earthquakes, if you need in Florida, you need to design for hurricanes. So there's all these factories that kind of conspire to make these sort of housing market very kind of fragmented, and it's hard to build a very very large number of like a uniform product. The builders do try to do that,
they have somewhat standardized designs. It will punk down in like different developments across the country, but it's quite difficult to do in really really large numbers.
Talk to us a little bit more about prefab housing specifically, or housing in a factory. There have been multiple attempts, and as Tracy mentioned, you used to be able to buy a home from seers. Talk a little bit about the sort of recent trends in this area, because you do over the last several years, you've heard a lot of maybe the last decade you've heard a lot of excitement about this idea. And as you mentioned, you worked
for a well funded startup. Why now, like what's the general thinking and then maybe we could get into the sort of the gap between the theory and then what happened in practice.
Yeah, so prefab is like this perennially popular Yahni.
It's always it's always the next time.
Yeah, It's always the next big thing that's going to come along. And so every you know, decade or two, you will kind of see these trends, like some big company will come along like, oh, I'm going to revolutionize the building with the housing industry with prefab construction. So and yeah, these these attempts stretch back a pretty long way, you know, And I became something of a student of
these companies that have tried and failed. So right after World War Two you have this company called the Lustron Home Company, which made these very interesting homes, many of which are still around.
You can actually go look at them.
But they're made these like steel panels covered in porcelain that turned out to be quite well made and quite durable. And they got government financing to sort of fund their operation. They had set up shop in this big what was once one time the biggest factory in the world. It was three purpose to aircraft engine factory.
Well they looked pretty cool.
Yeah, they're very neat.
I live in Atlanta, and there's some in Atlanta that you can go and look at. But they went bankrupt after quite a few years. In the nineteen sixties, there was this company called Sterling Homes that said, oh, we're going to be the next you know, Henry Ford of construction. They went bankrupt in a few years.
Yeah, they were.
Part of this government program called Operation Breakthrough, which was trying to fund the development of like mass production housing techniques. That program basically failed. None of their companies that they funded, and there were quite a few of them ended up sort of succeeding and breaking through and creating sort of these mass produced housing products. So you kind of see the same thing happening over and over and over again where people are trying to use prefab to like dramatically
reduce the cost of construction. And there's ways that you can do that in kind of like a very limited sense, and you can also like build a successful business off of prefab where you're not necessarily trying to compete on low cost, but things like oh we can build much faster or stuff like that, but nobody has managed to do what everybody is trying to do, which is like, you know, be the Henry Ford of housing.
Okay, what's the sticking point? Then?
I know you walk through some of the reasons that houses tend to be customized, things like soil types and zoning and regulation. But is that just the story of why we can't have prefab houses that are like across America?
So there's yeah, I kind of look at this in two ways. I think of it as terms of it's very hard to introduce some of these like improvements, these sort of strategies you have for improving efficiency into the construction process without accumulating like more costs elsewhere in the process.
And then so at the same time that the gains that we've found in terms of like these strategies for efficiency improvement have historically been much more limited than you see and like if you're producing you know, a car or a light bulb.
Or something like that.
And at the same time we've continually added like more regulations and more difficulty you know, more administrative overhead and getting stuff built, which is slowly like driving up the cost even as like a you know, we're not sort of accumulating these productivity improvements.
What's an example of Okay, this on paper looks like a productivity gain that we get in a factory, but then you pay for it somewhere else.
Sure, so you know a very simple example. You know, if you're building a car in a factory, you build the entire car right, it rolls out of the factory line and the car is complete. A building is too big to come out of the factory all in one piece and get sent to the job site or whatever. So what happens is you have to sort of build you're building in chunks.
You know.
That's why prefab construction is often called modular construction, because you build it in these modules. And there's different strategies for like how you break a building into modules, but you're always like breaking it into these pieces. And what happens when you break it into pieces is that you have to add a bunch of extra stuff that you wouldn't have had to add if you were just building
it on site. So transporting it down the road, you have to sort of design that to be rigid enough to like not collapse under like the load of like being bounced along on a truck. I used to work at a company that build concrete parking garages, which are built from prefabricated you know materials. They build these like big concrete pieces and then drive them down the road, and that was like the controlling design factor is designing to survive the loads that it would concur during transportation.
And then once you have those pieces driven down and gotten to the job site, you have to like stitch them together, and so you have all these extra connectors and this extra complexity and attaching them together that again doesn't exist in sort of the conventional construction process.
It's kind of crazy to think that, whether we're talking about a house or a parking garage that's presumably designed to last for decades, that a very significant factor in engineering is that few hours that it goes down the road. I mean, that's what sounds like, yeah, like that that's like that's going to last forever, but it has to be there just for that, like that short transport perer.
In the case of parking garages, for sure. I guess that's why We do have some prefab houses in the US, and they're called trailers because you can actually move them, right. How much of this is also maybe a liability question where if you were producing prefab houses, presumably it's not the company that's putting them together on site. It's usually
contractors or someone you hire to do it. And I imagine there's like a disconnect between the contractors on the ground who are putting this stuff together and the company that's building the parts.
There is to some extent, I think that specific liability is not necessarily the biggest controlling factor. What is a big controlling factor, and I've written an essay about this, is that the construction cost, like the cost of developing and putting up a new building, the sort of distribution
of that is extremely fat tailed and right skewed. Which so basically what that means is that a construction project that goes under budget, that goes really really really well, maybe you're like ten percent over budget or under budget, maybe you're fifteen percent under budget. You know, you can't push down that cost very much. But a project that goes over budget can be one hundred or two hundred
or three per hundred percent over budget. So what that means is that the risk involved in like introducing some new system that you're not sure really how it works,
it's just the payoff is so asymmetrical. It's so much more likely to cause like a massive overrun than to sort of save a relatively small amount that these sort of builders are like rationally incentivized to not introduce some radically new technology that's going to dramatically change how things go because the potential costs are so extremely high.
Sort of maybe dovetailing with Tracy's question, you know, or maybe in the case of Kata or some of these others, it's like, Okay, they have some vision, but because they're not doing the entire thing all around the country, including presumably transport, et cetera, how much is the issue like maybe scale on those ends experience with that, Like in theory, if you had a really big experience on the ground distribution and final assembly workforce or whatever, it is, like,
how much would that help? And how much is the issue that people who work on the ground, etc. Just aren't doing this full time?
Yeah, that's like a part of it is, like, you know, this modular construction is kind of a somewhat niche aspect of the construction industry. There are quite a few experts in it that know how to do it, and they do it fairly regularly, and you can usually find them in like any given market. I would say a different
point that you kind of alluded to. Scale is like another definitely big issue where it's like it's not like a semiconductor where you can make a million of them in a factory in Taiwan and ship them all over the world. Right, That's another big aspect that makes it hard to sort of gain efficiencies from factory production and goes to what I was talking about where it's hard to do that without introducing costs elsewhere in the system.
The cost of like moving these modules around is so large that it's typically not economic to ship it like more than a day's drive, because then the costs just gets so high. And so what you have instead of like one giant factory that can like produce really really large scales, even sort of these modular companies that are doing like large amounts of business, they all tend to be like done in factories like that are spread across
the Yeah. So like so like you talked about, like trailers like manufactured homes, which is one area that you can actually see some pretty substantial loss reductions due to various things. Partly, it's like they're targeting a lower end of the market and stuff like that, so like the finishes and stuff aren't quite as nice. But if you look at like the way that their business is structured, they have like more than a dozen factories spread all across the US, and then each one is serving like
a day's drive catchment area. So they're not building like fifty thousand houses or whatever in one factory. It's more it's closer to like five hundred or a thousand or something in one factory. And so the economies of scale that you can capture in like a given operation are just fairly limited.
Joe, I have to mention here, we didn't tell Brian that we were going to be talking about housing construction and trailers and all of that. This is all just off the top of his head.
He said, down, We're like, by the way, can we talk about this?
Yes?
Okay, you kind of alluded to it in your previous answer, But if you were going to choose a manufacturing process that was the polar opposite of housing.
What would it be, oh interesting, probably something like chemical manufacturing, you know, or like you know, raw met real manufacturing,
something like steel or something like that. Because chemical manufacturing it's you know, the sort of ultimate form of like a manufacturing process, which I kind of talk about in the book, is what's called like a continuous flow process where it just like continuously transforms your group of inputs into the output of what you're doing just one you know, continuously without any sort of waiting, interrupting or batching or anything like that is all flows and it's continuously transformed
during the process. And that's what like chemical manufacturing, you know, very efficient chemical manufacturing is done, and most other like really efficient manufacturing processes they ultimately tried to sort of converge on something that looks like that. So like the assembly line and like mass production is kind of a way to like get something that approaches like a continuous flow process in these like very complex manufactured goods with
like thousands of parts. That was why it was such a huge transformative thing, is because now you could have this continuous flow process which existed before for you know, much simpler things, but now you could adapt that to like these really really complex goods like cars, and that's why it was such a transformative thing when it was sort of invented in the early twentieth century.
I'm curious do the economics or the dis economics of building houses in this way do they inform your perspective at all on the prospect for small modular nuclear reactors. I mean, there sounds like there are some similarities, especially when it comes to like learning curves, et cetera.
The soil of.
Yeah, do you have any views on that? Yeah, having come, do you think there's any parallels? So, yeah, because this is also something that is always the next decade away, right yeah, yeah.
Yeah, so yeah.
So I talk about economies of scale in the book, and we're talking about like nuclear stuff. There's like kind of two related economies of scale that in some ways kind of pull in different directions.
One is called and.
You see this with like other sort of processing equipment, which is I called geometric scaling, which is basically, as you build a piece of equipment physically larger, it costs less per unit of whatever it is that you're producing, basically because of like area volume relationships. As you double the volume of something, you less than double the amount of like surface area required to enclose it and be
that like tanks or pipes or stuff like that. So, like chemical process and equipment or like power plant equipment, tends to get cheaper per unit of what you're producing up to a certain point, and eventually you run it gets you run into difficulties, and those scaling and loss stop working. And this is one reason why power plants, you know, in electricity, got cheaper over sort of most of the course of the twentieth century, is because we're
building these power plants physically larger. But with nuclear you run into these very nasty dis economies of scale around the same thing was because as a nuclear plant gets bigger, the accidents that could have get more dangerous. For like a very small reactor, you can make it so you basically can't have a melt down, there's just not enough heat in there to like melt through your container or whatever.
But for a very.
Large one, the heat gets so large that the accidents become the risk becomes much much larger, and so you have to have these like very involved safety systems that maybe you don't need to have on like a smaller reactor. So that is something that maybe points to a reason why these maybe small.
Modular reactors were better.
Plus, as you say, now you're getting it's sort of the benefits of like getting yeah, series production and repeating it over and over and over again. But there is that trade off is that you're not getting those geometric effects that traditionally, like a lot of this like processing type equipment, has relied on to get cheaper.
This actually reminds me of something I wanted to ask, not necessarily about nuclear but just manufacturing in general. When I think about efficiencies, I think about stuff like reducing costs as much as possible, maybe just in time, inventory management and stuff like that. The problem is that if something goes wrong, there's very very little cushion for protection.
And I'm curious, when it comes to efficiency, how do people balance streamlining production with I guess building in redundancies in case the worst happens.
Yeah, that's that's really interesting. And the Toyota producttion system slash Lean, which is like a descendant of it, which I talk a lot about in the book, is kind of an interesting balance of these two things. Because everybody thinks Lean or Turte production system, it's like, oh yeah, just in time, get rid of inventories. You don't have all the costs. You know, your factories can be smaller,
blah blah blah. But really what it is, it's sort of a balance of like, for every factor that you can control, try to like have like the flow be like as smooth as possible and eliminate all this like you know, slack and waste in the system. But for the things that like you can't control, you should have your system adaptable to sort of accommodate that and be have sort of a flexibility built into it.
So like one.
Example is after the sort of you know, to bring back to nuclear, after I believe the sort of Fukushima nuclear accident in Japan, Toyota had a ran into like a shortage of like automotive semiconductors for a while, and they realized that this was like a big like potential
like just bottleneck in their process. So after that, even though they're like so focused on you know, inatory minimization and whatever, after that accident, they basically decided they were going to like stockpile certain critical things that maybe had difficult lead times or something like that, and so they
stockpiled like serio automotive semiconductors. And so during COVID, when all of a sudden there was all of a sudden a huge like shortage of like automotive semiconductors, Toyota for a while was like much less affected by some of these other than other car manufacturers because they had learned the lesson that oh yeah, in sort of you know, logistics crunches, these semiconductors can be quite difficult to get. And so basically people were saying, Hey, I thought you
were all about like inventory minimization or whatever. But then somebody, you know, some spokesman basically responds like, no, this is basically a standard lean solution, where it's you try to minimize the sort of waste in the sort of areas that you can control, but in the stuff that you can't control, you need to sort of adapt your system to accommodate it.
I want to talk more about housing, but I want to do a little detour. America seems to have gotten because I'm trying to understand sort of big picture the trajectory is in this country for various things. You know, I joked in the beginning, the problem with housing is that we haven't found a way to offshore to China. If we did, then probably housing would have gotten cheaper
like everything else that we have manufactured there. But I'm curious some do you have like a theory because I have heard a satisfactory answer why the US seems to have gone backwards in plane construction, Like why does Boeing seem to be worse at the job of building an airplane than it was, say twenty years ago.
Oh yeah, that's interesting. One point about your housing construction in China. They're actually our companies that like try to do this stuff in China. They were like manufacture these modules. But again to my point about you know, you incur all these shipping and all that, you know, they have to they have to break them into modules and put them on these boats and bring them over. So it's you know, it's a very sort of niche business in
terms of bowing. I mean the standard you know story there is that they went into this merger with McDonald douglas, the finance people.
I don't like the standards. Yeah, and here's why, because I love it so much, right, and so it's like, oh, it's such a good story. Perfect, it's too perfect. They brought in the finance people. They care about the shareholders too much. Looking at the Boeing stock chart, you would not think this is a company that cares a lot about shareholders, right, They care about shareholders too much. And
if they had just stuck with the engineers. I love that story, and because it feeds all of my biases, I'm like skeptical.
Yeah, And I mean, you know, a big part of it is just manufacturing commercial aircraft is like extremely hard. There's like a reason that only like right now to maybe three maybe four companies in the in the entire world do it. Boeing Airbus, Embraer in Brazil of all places, and then promac Is looks like it's going to be the big fourth one.
You know.
Japan tried for many years to sort of break into the commercial aircraft manufacturing market, and they were, you know, after spending like billions of dollars, they were.
Basically gave up just because it was so difficult.
There used to be many more competitors in the nineteen seventies and they sort of got winnowed down one by one. One or two plane projects that don't pan out and you're basically out of business. That's essentially what happened to Lockheed, and so it's just a very very difficult business to sort of be in. And so Boeing is having a lot of struggles right now, but you know, earlier in the twenty first century you have air Bus having a lot of struggles.
They had all sorts of problems.
I think on their A three eighty that they were rolling out, they're at like a lot of delays and stuff they had to fix on it as well. So a big part of it is just it's a very difficult business to be in. There's very few people that can kind of really do it effectively.
Here's a question that I've wondered about, and maybe it relates to planes, and maybe it relates to housing, maybe it relates to other things like when you see us going backwards or stalling out, Like here's my question, could we have some sort of I don't know if Dutch disease is the right answer, where it's like maybe in the middle of the twentieth century there were people who were working on the floor or working in management at Boeing in a plant somewhere in Washington who are really
on the ball and really whatever. And now in that same person in twenty twenty five could make ten times as much money working for a startup in Silicon Valley
or Wall Street, et cetera. That there's some sort of like levels of you know, awareness or skill or agentickness or whatever, et cetera, and that because we have these other areas where there's so much money, that there's like a type of individual who used to maybe work in a sort of construction related field that left that and then it's changed the talent distribution with you.
Yeah, I think that's definitely a part of it. There's like a theory in certain circles that we've just we've gotten like in a sense, too good at like allocating talent efficiently or whatever. So like somebody extremely like talented and smart, it's like, okay, we're going to send you to be a software developer or an AI programmer or work in finance or whatever, and your the value that you can contribute there is going to be very highly rewarded.
What that means is like there's you know, there's fewer people going into sort of these other sort of you know, engineering disciplines. I worked as a structural engineer, which is you know, it plays reasonably well but doesn't you know
not Silicon Valley software developer. And I used to sort of tell very young engineers or engineers thinking about in college or whatever, you say, you know, if you're smart enough to be a structural engineer, you're smart enough to you know, switch to like software development and make a lot more money and have a much less stressful job.
Yere's there's like this is I.
Think one part of the reason why you know, Bell Labs very famous at and D R and D Lab, the US invention factory for most of the twentieth century, Why it would be very hard to have a sort of organization like that today is because the quality of talent that you could a place like that demanded would be so much more reward.
Somewhere else just quickly.
On aircraft, It's not like the US doesn't have a history of producing like large scale amounts of planes. And the example that everyone tends to turn to is in World War Two, right, we produced I think hundreds and thousands of aircraft very very quickly.
What were the.
Conditions that existed back then that allowed us to ramp up that kind of production so fast?
Yeah, I've written about aircraft manufacturing during World War Two. The US actually built more airplanes during World War Two that have actually been built during for commercial purposes for the entire history of aviation.
It's because we built, you know, so many of.
Them, and not that many commercial aircraft get built. I think a big part of it is just the US was just such a huge manufacturing power at like the mid twentieth century. You know, we weren't building very large amounts of airplanes, but we were building more cars than
anybody else. We're building more machine tools anybody else. We're making more steel than the US was, like you know, the China of today, it was like the by far the largest manufacturing country in the world, and so we just have the ability to sort of redirect this manufacturing capability and talent into sort of these these new industries.
I think that was a very large part of it.
You know, people think about maybe since we're talking about war, we're talking about the US as the China of the twentieth century, which is kind of cuncary.
Eric Adams, Yeah, the China China.
I'm curious when you think about it, like could there be more than one global manufacturing hub, because when you think about economies of scale and you think about network effects.
You know, it's like, how many other cities in the US have tried to be the San Francisco or the Silicon Valley and they've never You've really never replicated when you think about sort of agglomeration and network effects, et cetera, and you think about what it takes for manufacturing, and you think about, Okay, now in the twenty first century, China is the China of the twenty first century, and you think about the efforts at US sort of reindustrialization
because there's all this angst about whatever, we can't build advanced things. It's like, glob can we have advanced things if we don't also do the simple things like washing machines, et cetera. Can there be more than one in the world at any given time or does market logic sort of dictate that one will be the powerhouse.
Yeah, that's a really interesting question. And so my first answer is that I don't know. And the second answer is I think historically kind of what you see is that, like transportation costs have kind of been something of a barrier to preventing one country from like just dominating production
of a certain thing. So even like when in the eighties and nineties, when Japanese like chower manufacturers were like trouncing the US, it was still so expensive to like ship them from Japan or whatever that you you know, they still it was still valuable to like set up local manufacturing operations in the US. They still wanted to build their plants in the US to sort of make it not so expensive to sort of transport these things.
So I wonder if, like, as transportation has gotten more and more inexpensive, I wonder if that has like shifted the logic of this. You can have this sort of like concentration of production in a way that maybe it wasn't quite didn't quite make sense to do before when like these transportation costs a bit a little bit harder. I don't know, but it's an interesting way of your interesting question.
Just going back to Boeing for a second.
So we talked about the classic story of what went wrong at Boeing, and it's that tension between I guess the manufacturers on the ground and the executives in the boardroom who are trying to cut costs and boost the share price and things like that. Is that like a trend or a thing that you tend to see across manufacturing where the manufacturers are constantly under pressure from the finance execs.
On the top.
Or are there companies out there who have like cracked that relationship where finance and manufacturers engineers kind of work together.
Yeah, I think, you know, the pressure definitely seems to be constant pushing to find lower costs, and which is one reason why, you know, the trend in the second half of the twentieth century was like just outsourcing finding new places to sort of make this stuff that is cheaper. I talk about Nike in the book, and there's sort of an interesting path that Nike takes where it's like constantly hunting the cheapest sources of labor, where they start
out manufacturing somewhere cheap. Right, They start out manufacturing their shoes in Japan because it's much cheaper to make them there than in the US. But then as the Japanese labor starts getting more expensive, they move their manufacturing too Taiwan, and then from Taiwan to China, and I think now it's almost all done in like a Vietnam and Indonesia. So it's just constant hunt for the new sources of labor.
And you see that just broadly across industries, like where New York which used to be sort of a garment manufacturing center, but as New York labor got more and more expensive, they moved you know, acroft first, you know, out of state into New Jersey, and then to the
south and then overseas. So there's this constant pressure. But then there's also companies that have like I think, bucked that trend and been you know more like we think the returns from like investing in our workforce and its capabilities is going to be valuable enough that we're going to do it. I think, you know, it's a company like Newcore, which is a steel company in the US, which is like very famous in terms of like how it invests in its workforce and things like that, and
they've been extremely successful in doing that. They grew from nothing to being the largest steel manufacturer in the US.
I believe that just reminded me something that I really want an answer to, and you might actually have it. Why are communists obsessed with steel?
Oh? Good question.
I just think in the you know, sort of the early twentieth century, late nineteenth century, these were the things that like represented like industrial might and like successful country or whatever, and then they never kind of like got out of that sort of framework or whatever. So like one criticism of you know, the Soviet Union was that, you know, they were really maybe good at sort of building these like industrial things, but they never managed to
build like a successful computer or anything like that. They couldn't get out of their sort of mindset. It's sort of maybe easy to measure like success in terms of like output or whatever. It's just like relatively relatively simple commodity that you can.
Right, this physical thing, you can plaint so you can.
Point the more tons you have, the better you've done with more complex things. Maybe it's not maybe so amenable to sort of this like top down management style.
I don't know, but those are some of my theories.
Let's get back to housing, because when we started and Tracy was talking about the fact that even setting aside the prefab stuff, and you're talking about it the actual on the ground one off et cetera, home building, it's arguably by some measure of productivity has gone backwards, or maybe it's flat setting aside like prefab. You mentioned zoning regulations,
et cetera. What is your view for why just the normal sort of style of housing construction hasn't gotten any more efficient over the years.
Yeah, and so I talk about the kind of this in the book. This goes to sort of this main thesis of the book where I sort of break down there's a specific points of intervention that you can do in any process to make it cheaper.
I've talked about these a little bit.
You know, economies of scale, You can make more of what you're doing, you can introduce some fundamentally new technology. You know, an example of this to talk about steel, like the best of our process for making steel, which like fundamentally was simpler and took less inputs than the processes that came before it. So I kind of break down these different factors in the book of like what you need to do to make some process more efficient, and if you can do those things, your process can
get cheaper and you can sell it for less. And if you can't do those things, you're if you know, you can't make the process any cheaper. And all those basically paths to improvement are either like blocked or like very difficult to do in construction. So, like we talked about economies of scale, that's a big one. We talked a little bit about risk aversion. It's hard to kind of introduce like fundamentally new technology. The cost of your
inputs is like a big one. You know, the materials and sort of energy and labor that you're using in the process. Those costs are hard to sort of reduce in construction sort of, It's very hard to make building materials and cheaper than they already are, kind of like you know, dollars per pound or dollars per like cubic foot terms. They're basically as cheap as anything that civilization produces. It's not easy to make those things cheaper than.
They already are.
It's also hard to use less of them in a way that doesn't make the house worse. And so all these paths are that you have, you know that a process can take advantage of to sort of get less expensive. They're all very difficult to do in construction.
I just remembered another question that I always want to ask people, and I feel like you will also know the answer to this one, which is why does America build houses out of wood frames and timber versus the rest of the world where they tend to use a lot more cement and concrete.
Yeah, so the wood US has historically built a lot of stuff out of wood because we had such huge supplies of it. In places like Europe, a lot of those you know, large forests got cut down way earlier and so they just didn't have the huge, huge supplies of wood that the US had, and so that kind of, you know, shaped how the technology developed. Because what is very very inexpensive, you can use it. It's a very
inexpensive way to sort of build a house. They do actually do sort of still timber frame construction in other parts of the world. It's maybe not quite so dominant, but it's like used in the UK. Germany uses it. Germany actually they have some like prefab construction startups that are using like timber frame timber panel construction. It's using a lot of the Nordic countries they don't have a decent amount of supply of woods, so it's not like
unheard of. It's it's most dominant in like the US and in Canada, but in other places that have a decent amount of wood they tend to use it as well.
Should we completely give up on prefab or major efficiency gains in housing in the us, or like, is it just there's not a way to do this or is there still out there some magic bullet that's waiting to be found.
You should tell us what happened to the company you were working for as well.
Yeah, so they, Yeah, they raised a huge amount of money and they basically after raising like several billion dollars and building all these factories to like fat you know, mass produce housing, they basically ended up going bankrupt partly because they were never able to you know, sell enough of these buildings.
That they were trying to sell.
It's very hard to like pivot your operations when you're like invested in all this like physical infrastructure. And then COVID, you know, was kind of the final nail in the coffin. I'm not completely pessimistic. I mostly just think if you're going to sort of try to change the industry with PREFRAB, you need to have a very strong thesis as to what specifically this time is different and you know why it didn't work previously and what is now has changed?
What constraints have been relaxed that will make it possible now? And I don't have any number of things could change that you know, certain materials get cheap enough, it gets like inexpensive enough to build a factory, you know, any
number of things. I think that very very good automation and robotics have a good chance of changing this, just because even if nothing else toware you know, I'm not the most creative person in the world, you know, I can't necessarily come up with like some amazing new way of putting a house together. But if even if nothing else works, if you have like a robot that costs five thousand dollars and like basically duplicate you know, ninety ninety five percent of what a person can do, that
would effectively solve your problem. Right, you drop in these robots and you build you know, whatever it is that you're trying to build using this robotic much less expensive labor. And I have a sort of like vignette in the conclusion of the book as to what that might look like in the future.
So we could get the drones that go up on the roof and fix leaks and stuff like that.
Anything's possible, all right.
Brian Potter, thank you so much for coming on all thoughts. Really appreciate it.
Thank you. It's great to be here.
Joe, that was a really fun conversation.
Yeah, that's really fun. I love Brian's stuff, and I feel like one of those conversations where both of us could just ask a bunch of questions we've been meaning to ask for a long time.
I did read currently, his new book, The Origins of Efficiency has a bibliography that's like six hundred items long. Amazing, which is incredible to think about him pouring over like six hundred different reference sources.
We didn't get into it in this conversation, but he's written about his process before. Yeah, like, okay, I want to learn about some new industry like fighter jets or whatever it is, and how he goes about diving into it, et cetera. And yes, it seems like we.
Talk about stuff. I should probably read that.
Yeah, totally.
Speaking of which, I am very proud of us for not mentioning the word deflator at all in a conversation about housing productivity, housing construction productivity. I should just mention that Richmond fed paper that I talked about in the intro. So their conclusion was sort of an amalgamation of all
the factors that we talked about in this conversation. So they basically said they think that smaller construction firms have reduced incentives to invest in technological innovation because you don't get that economy of scale. And in fact, if you look at areas with stricter zoning laws and things like that, you can see that they actually have even less construction productivity than other areas. Again because like the incentives and the economies of scale just shrink and shrink and drinks.
That's kind of interesting.
It would be interesting. Something I was sort of curious about during that is I wonder if if you just look at one market where it's very flat and dry, I just think about Arizona or anything like that, Like, have they seen productivity gains there? Especially think about some of our conversations with Chase Emerson where there's one master plan and a bunch of houses we all have driven by them that all look exactly the same. Do you get those learning curves at least on some limited effect?
I would be curious about that.
I feel like to some extent that is the story of the Sun Belt States, Right, you have cheaper houses there because you can have these big development, but.
Its scale and scale all the way down, And so I like that point that he made, which is that you can identify the sources of efficiency gains. Scale is one, a scientific breakthrough such as the best of our process in steel is another one, et cetera. But they're not magic, right,
They're not just going to emerge. You know, you probably get some efficiency gains just from you know, repeatable process or sales as labor force that gets better over time, but by and large, you're not just gonna the silver bullet isn't gonna come out of nowhere. Yeah, and especially the fact that there are all these sort of very fundamental reasons why you can't have scale, or even in the factories that build the prefab homes cannot be a
gigafactory due to distribution costs. You see why you run into that constraint.
That's what I was thinking.
It's like the tyranny of physics. Basically, like, even though we have all these technological breakthroughs, transportation has gotten cheaper over time, you're still limited by geography and the realities of you know, real world objects. And I guess that's why you can have gigafactories for something like chips, yeah, which are really easy to send abroad.
Their tiny but you can't do it for some.
Large and I really am curious about the sort of the point about talent distribution and whether they're you know, in the nineteen fifties, for a certain type of talent, the Boeing factory was the best place they could have gone and the cutting edge, and that was the cutting edge. And now the Boeing factory still more or less resembles the Boeing factory of the nineteen fifties, with maybe similar
pay scales and so forth. I'm sure the nominal pay has gone up a lot, but there are just so many great opportunities to make ten times or much more money elsewhere, and so that there's sort of remaining talent, whether that has an effect on how well it can operate.
I'm very interested in, you know, what Boing needs go on?
They need like a Madman style TV series that glamorizes the aircraft manufacturing process and gets people interested in it again.
Yeah, no, that's a really good idea.
All right, that's a free idea for Boeing. All right, shall we leave it there, Let's leave it there.
This has been another episode of the All Thoughts podcast. I'm Tracy Alloway. You can follow me at Tracy Alloway.
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