October 27, 2025 • 46 mins
Everyone has an opinion on why housing is so expensive in America -- and to be fair, there are probably a lot of reasons for it. But one simple factor is that homes are expensive to build. Unlike many other physical objects, they haven't gotten cheaper over time. So why is this? And why haven't we found a way to bring down the cost curve by building modular housing in factories or on assembly lines? On this episode, we speak with Brian Potter the author of the new book The Origins of Efficiency. Potter also worked at a modular homes startup that failed, and is also the author of the excellent Construction Physics newsletter. So we talk about what he's learned about housing, as well as broader questions about how operational efficiency is achieved over time across a range of industries.
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Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
Speaker 1 (00:02):
Bloomberg Audio Studios, Podcasts, radio News.
Speaker 2 (00:18):
Hello and welcome to another episode of the All Thoughts podcast.
Speaker 3 (00:21):
I'm Tracy Alloway.
Speaker 4 (00:22):
And I'm Joe. Wasn't all Joe?
Speaker 3 (00:24):
You're a homeowner now right?
Speaker 4 (00:26):
Yeah, it's very fun.
Speaker 3 (00:27):
Tell me, tell me how fun it is.
Speaker 2 (00:28):
I know you've had a few issues that cropped up
basically as soon as you brought your new place.
Speaker 4 (00:33):
I don't want to talk.
Speaker 5 (00:33):
Let's go, let's move on.
Speaker 2 (00:34):
No, this is part of my carefully planned Yes, I know.
Speaker 4 (00:38):
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,
(01:00):
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?
Speaker 3 (01:11):
So who did you find to fix the window.
Speaker 4 (01:14):
Dad, I don't remember. There is still a super of
the building of the super, but we had to write
a check.
Speaker 3 (01:18):
Okay.
Speaker 2 (01:19):
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.
Speaker 3 (01:40):
Right, it all seems very old.
Speaker 5 (01:42):
What did you think was going to happen?
Speaker 4 (01:43):
But is it gonna be like some like unit tree
like robots crawl up? Then?
Speaker 2 (01:48):
No, Seriously, it's the year twenty twenty five and we're
still putting houses together with like, you know, the hammers.
Speaker 4 (01:55):
And someone someone comes with the box and they look
through to the difference like, no, this doesn't fit this
does it?
Speaker 1 (02:00):
Oh?
Speaker 4 (02:00):
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.
Speaker 2 (02:11):
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,
(02:32):
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.
Speaker 4 (02:43):
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
(03:05):
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,
(03:25):
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.
Speaker 5 (03:43):
Well.
Speaker 2 (03:44):
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
(04:06):
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.
Speaker 3 (04:22):
He is also the.
Speaker 2 (04:22):
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.
Speaker 5 (04:31):
Thanks for having me.
Speaker 2 (04:32):
Congrats on the book Origins of Efficiency. Are we right
in thinking that housing hasn't become that much more efficient
of a process?
Speaker 6 (04:41):
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.
(05:03):
Housing is not like that at all.
Speaker 4 (05:05):
And you worked for several years for a prefab housing
company or something like that.
Speaker 6 (05:11):
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.
(05:31):
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.
Speaker 5 (05:40):
You know.
Speaker 6 (05:40):
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
(06:04):
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,
(06:24):
about like two or three billion dollars in VC.
Speaker 5 (06:27):
And they burned through it in a few years and.
Speaker 6 (06:30):
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
(06:51):
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.
Speaker 2 (07:06):
So why are houses, I guess so customized and not
standardized to your point.
Speaker 6 (07:12):
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
(07:32):
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
(07:54):
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.
Speaker 4 (08:06):
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
(08:27):
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.
Speaker 6 (08:38):
Yeah, so prefab is like this perennially popular Yahni.
Speaker 4 (08:42):
It's always it's always the next time.
Speaker 6 (08:43):
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
(09:06):
World War Two you have this company called the Lustron
Home Company, which made these very interesting homes, many of
which are still around.
Speaker 5 (09:11):
You can actually go look at them.
Speaker 6 (09:13):
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.
Speaker 4 (09:29):
Well they looked pretty cool.
Speaker 5 (09:30):
Yeah, they're very neat.
Speaker 6 (09:31):
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.
Speaker 5 (09:46):
Yeah, they were.
Speaker 6 (09:47):
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
(10:08):
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
(10:29):
do what everybody is trying to do, which is like,
you know, be the Henry Ford of housing.
Speaker 3 (10:34):
Okay, what's the sticking point? Then?
Speaker 2 (10:35):
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?
Speaker 6 (10:48):
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
(11:10):
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.
Speaker 5 (11:17):
Or something like that.
Speaker 6 (11:18):
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.
Speaker 4 (11:33):
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.
Speaker 6 (11:41):
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.
Speaker 2 (12:01):
You know.
Speaker 6 (12:02):
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
(12:23):
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.
(12:46):
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.
Speaker 4 (13:01):
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.
Speaker 2 (13:21):
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.
(13:45):
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.
Speaker 6 (14:05):
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
(14:25):
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
(14:48):
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.
Speaker 4 (15:12):
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
(15:36):
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?
Speaker 6 (15:47):
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
(16:09):
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
(16:33):
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
(16:54):
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
(17:15):
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.
Speaker 2 (17:32):
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.
Speaker 4 (17:41):
He said, down, We're like, by the way, can we
talk about this?
Speaker 3 (17:44):
Yes?
Speaker 2 (17:45):
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.
Speaker 6 (17:54):
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
(18:14):
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
(18:35):
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
(18:55):
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.
Speaker 4 (19:08):
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.
Speaker 3 (19:26):
The soil of.
Speaker 4 (19:27):
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.
Speaker 5 (19:35):
Yeah, so yeah.
Speaker 6 (19:36):
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.
Speaker 5 (19:47):
One is called and.
Speaker 6 (19:48):
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
(20:10):
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
(20:30):
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.
Speaker 5 (20:52):
But for a very.
Speaker 6 (20:53):
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.
Speaker 5 (21:08):
Modular reactors were better.
Speaker 6 (21:10):
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.
Speaker 2 (21:26):
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.
(21:46):
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.
Speaker 6 (21:56):
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
(22:19):
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.
Speaker 5 (22:38):
So like one.
Speaker 6 (22:38):
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
(23:01):
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
(23:23):
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
(23:44):
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.
Speaker 4 (23:52):
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
(24:13):
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.
Speaker 6 (24:29):
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
(24:50):
there is that they went into this merger with McDonald douglas,
the finance people.
Speaker 4 (24:56):
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,
(25:18):
I'm like skeptical.
Speaker 6 (25:19):
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.
Speaker 5 (25:40):
You know.
Speaker 6 (25:41):
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.
Speaker 5 (25:48):
Basically gave up just because it was so difficult.
Speaker 6 (25:51):
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
(26:13):
the twenty first century you have air Bus having a
lot of struggles.
Speaker 5 (26:15):
They had all sorts of problems.
Speaker 6 (26:17):
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.
Speaker 4 (26:47):
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
(27:10):
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
(27:31):
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.
Speaker 6 (27:42):
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.
(28:04):
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
(28:26):
you know, switch to like software development and make a
lot more money and have a much less stressful job.
Speaker 5 (28:31):
Yere's there's like this is I.
Speaker 6 (28:33):
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.
Speaker 5 (28:55):
Somewhere else just quickly.
Speaker 2 (28:57):
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.
Speaker 3 (29:12):
What were the.
Speaker 2 (29:12):
Conditions that existed back then that allowed us to ramp
up that kind of production so fast?
Speaker 6 (29:19):
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.
Speaker 5 (29:31):
It's because we built, you know, so many of.
Speaker 6 (29:33):
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,
(29:55):
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.
Speaker 5 (30:09):
I think that was a very large part of it.
Speaker 4 (30:11):
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.
Speaker 2 (30:17):
Eric Adams, Yeah, the China China.
Speaker 4 (30:22):
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
(30:44):
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
(31:06):
of dictate that one will be the powerhouse.
Speaker 6 (31:09):
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
(31:29):
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.
(31:50):
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.
(32:10):
I don't know, but it's an interesting way of your
interesting question.
Speaker 3 (32:14):
Just going back to Boeing for a second.
Speaker 2 (32:16):
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
(32:36):
finance execs.
Speaker 3 (32:37):
On the top.
Speaker 2 (32:38):
Or are there companies out there who have like cracked
that relationship where finance and manufacturers engineers kind of work together.
Speaker 6 (32:47):
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
(33:10):
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
(33:34):
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
(33:54):
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
(34:15):
nothing to being the largest steel manufacturer in the US.
Speaker 2 (34:18):
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?
Speaker 5 (34:25):
Oh? Good question.
Speaker 6 (34:28):
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
(34:49):
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.
Speaker 3 (35:04):
Right, this physical thing, you can plaint so you can.
Speaker 6 (35:06):
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.
Speaker 5 (35:14):
I don't know, but those are some of my theories.
Speaker 4 (35:16):
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,
(35:38):
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.
Speaker 6 (35:46):
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.
Speaker 5 (35:58):
I've talked about these a little bit.
Speaker 6 (36:00):
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,
(36:21):
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
(36:43):
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
(37:05):
foot terms. They're basically as cheap as anything that civilization produces.
It's not easy to make those things cheaper than.
Speaker 5 (37:12):
They already are.
Speaker 6 (37:13):
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.
Speaker 2 (37:29):
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.
Speaker 6 (37:43):
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
(38:05):
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
(38:26):
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.
Speaker 4 (38:35):
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.
Speaker 3 (38:49):
You should tell us what happened to the company you
were working for as well.
Speaker 6 (38:52):
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.
Speaker 5 (39:08):
That they were trying to sell.
Speaker 6 (39:09):
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
(39:31):
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
(39:52):
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
(40:14):
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.
Speaker 2 (40:23):
So we could get the drones that go up on
the roof and fix leaks and stuff like that.
Speaker 5 (40:28):
Anything's possible, all right.
Speaker 2 (40:30):
Brian Potter, thank you so much for coming on all thoughts.
Really appreciate it.
Speaker 5 (40:34):
Thank you. It's great to be here.
Speaker 3 (40:48):
Joe, that was a really fun conversation.
Speaker 4 (40:50):
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.
Speaker 2 (40:59):
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.
Speaker 4 (41:13):
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.
Speaker 3 (41:28):
Talk about stuff. I should probably read that.
Speaker 5 (41:30):
Yeah, totally.
Speaker 2 (41:31):
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
(41:56):
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.
(42:17):
That's kind of interesting.
Speaker 4 (42:18):
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
(42:39):
get those learning curves at least on some limited effect?
I would be curious about that.
Speaker 2 (42:45):
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.
Speaker 4 (42:51):
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
(43:13):
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
(43:35):
into that constraint.
Speaker 3 (43:36):
That's what I was thinking.
Speaker 2 (43:37):
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.
Speaker 3 (43:57):
Their tiny but you can't do it for some.
Speaker 4 (44:00):
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
(44:21):
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.
Speaker 3 (44:34):
I'm very interested in, you know, what Boing needs go on?
Speaker 2 (44:37):
They need like a Madman style TV series that glamorizes
the aircraft manufacturing process and gets people interested in it again.
Speaker 4 (44:45):
Yeah, no, that's a really good idea.
Speaker 3 (44:46):
All right, that's a free idea for Boeing. All right,
shall we leave it there, Let's leave it there.
Speaker 2 (44:51):
This has been another episode of the All Thoughts podcast.
I'm Tracy Alloway. You can follow me at Tracy Alloway.
Speaker 4 (44:56):
And I'm Jill Isenthal. You can follow me at The Stalwart.
Follow our our guest Brian Potter, He's at Underscore Brian Potter.
Follow our producers Carmen Rodriguez at Kerman armand Dashel Bennett
at Dashbot and Kelbrooks at Keilbrooks. From Oddlots content, go
to Bloomberg dot com, slash oddlock, the daily newsletter and
all of our episodes, and you can chat about all
these topics twenty four to seven in our discord Discord
(45:18):
dot gg slash online.
Speaker 2 (45:20):
And if you enjoy all thoughts, if you like it
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And remember, if you are a Bloomberg subscriber, you can
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Apple Podcasts and follow the instructions there. Thanks for listening, then,
(46:04):
in the e
Bloomberg Audio Studios, Podcasts, radio News.
Speaker 2 (00:18):
Hello and welcome to another episode of the All Thoughts podcast.
Speaker 3 (00:21):
I'm Tracy Alloway.
Speaker 4 (00:22):
And I'm Joe. Wasn't all Joe?
Speaker 3 (00:24):
You're a homeowner now right?
Speaker 4 (00:26):
Yeah, it's very fun.
Speaker 3 (00:27):
Tell me, tell me how fun it is.
Speaker 2 (00:28):
I know you've had a few issues that cropped up
basically as soon as you brought your new place.
Speaker 4 (00:33):
I don't want to talk.
Speaker 5 (00:33):
Let's go, let's move on.
Speaker 2 (00:34):
No, this is part of my carefully planned Yes, I know.
Speaker 4 (00:38):
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,
(01:00):
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?
Speaker 3 (01:11):
So who did you find to fix the window.
Speaker 4 (01:14):
Dad, I don't remember. There is still a super of
the building of the super, but we had to write
a check.
Speaker 3 (01:18):
Okay.
Speaker 2 (01:19):
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.
Speaker 3 (01:40):
Right, it all seems very old.
Speaker 5 (01:42):
What did you think was going to happen?
Speaker 4 (01:43):
But is it gonna be like some like unit tree
like robots crawl up? Then?
Speaker 2 (01:48):
No, Seriously, it's the year twenty twenty five and we're
still putting houses together with like, you know, the hammers.
Speaker 4 (01:55):
And someone someone comes with the box and they look
through to the difference like, no, this doesn't fit this
does it?
Speaker 1 (02:00):
Oh?
Speaker 4 (02:00):
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.
Speaker 2 (02:11):
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,
(02:32):
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.
Speaker 4 (02:43):
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
(03:05):
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,
(03:25):
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.
Speaker 5 (03:43):
Well.
Speaker 2 (03:44):
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
(04:06):
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.
Speaker 3 (04:22):
He is also the.
Speaker 2 (04:22):
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.
Speaker 5 (04:31):
Thanks for having me.
Speaker 2 (04:32):
Congrats on the book Origins of Efficiency. Are we right
in thinking that housing hasn't become that much more efficient
of a process?
Speaker 6 (04:41):
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.
(05:03):
Housing is not like that at all.
Speaker 4 (05:05):
And you worked for several years for a prefab housing
company or something like that.
Speaker 6 (05:11):
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.
(05:31):
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.
Speaker 5 (05:40):
You know.
Speaker 6 (05:40):
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
(06:04):
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,
(06:24):
about like two or three billion dollars in VC.
Speaker 5 (06:27):
And they burned through it in a few years and.
Speaker 6 (06:30):
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
(06:51):
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.
Speaker 2 (07:06):
So why are houses, I guess so customized and not
standardized to your point.
Speaker 6 (07:12):
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
(07:32):
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
(07:54):
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.
Speaker 4 (08:06):
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
(08:27):
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.
Speaker 6 (08:38):
Yeah, so prefab is like this perennially popular Yahni.
Speaker 4 (08:42):
It's always it's always the next time.
Speaker 6 (08:43):
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
(09:06):
World War Two you have this company called the Lustron
Home Company, which made these very interesting homes, many of
which are still around.
Speaker 5 (09:11):
You can actually go look at them.
Speaker 6 (09:13):
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.
Speaker 4 (09:29):
Well they looked pretty cool.
Speaker 5 (09:30):
Yeah, they're very neat.
Speaker 6 (09:31):
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.
Speaker 5 (09:46):
Yeah, they were.
Speaker 6 (09:47):
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
(10:08):
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
(10:29):
do what everybody is trying to do, which is like,
you know, be the Henry Ford of housing.
Speaker 3 (10:34):
Okay, what's the sticking point? Then?
Speaker 2 (10:35):
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?
Speaker 6 (10:48):
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
(11:10):
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.
Speaker 5 (11:17):
Or something like that.
Speaker 6 (11:18):
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.
Speaker 4 (11:33):
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.
Speaker 6 (11:41):
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.
Speaker 2 (12:01):
You know.
Speaker 6 (12:02):
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
(12:23):
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.
(12:46):
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.
Speaker 4 (13:01):
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.
Speaker 2 (13:21):
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.
(13:45):
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.
Speaker 6 (14:05):
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
(14:25):
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
(14:48):
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.
Speaker 4 (15:12):
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
(15:36):
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?
Speaker 6 (15:47):
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
(16:09):
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
(16:33):
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
(16:54):
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
(17:15):
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.
Speaker 2 (17:32):
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.
Speaker 4 (17:41):
He said, down, We're like, by the way, can we
talk about this?
Speaker 3 (17:44):
Yes?
Speaker 2 (17:45):
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.
Speaker 6 (17:54):
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
(18:14):
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
(18:35):
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
(18:55):
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.
Speaker 4 (19:08):
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.
Speaker 3 (19:26):
The soil of.
Speaker 4 (19:27):
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.
Speaker 5 (19:35):
Yeah, so yeah.
Speaker 6 (19:36):
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.
Speaker 5 (19:47):
One is called and.
Speaker 6 (19:48):
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
(20:10):
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
(20:30):
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.
Speaker 5 (20:52):
But for a very.
Speaker 6 (20:53):
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.
Speaker 5 (21:08):
Modular reactors were better.
Speaker 6 (21:10):
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.
Speaker 2 (21:26):
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.
(21:46):
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.
Speaker 6 (21:56):
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
(22:19):
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.
Speaker 5 (22:38):
So like one.
Speaker 6 (22:38):
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
(23:01):
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
(23:23):
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
(23:44):
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.
Speaker 4 (23:52):
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
(24:13):
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.
Speaker 6 (24:29):
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
(24:50):
there is that they went into this merger with McDonald douglas,
the finance people.
Speaker 4 (24:56):
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,
(25:18):
I'm like skeptical.
Speaker 6 (25:19):
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.
Speaker 5 (25:40):
You know.
Speaker 6 (25:41):
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.
Speaker 5 (25:48):
Basically gave up just because it was so difficult.
Speaker 6 (25:51):
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
(26:13):
the twenty first century you have air Bus having a
lot of struggles.
Speaker 5 (26:15):
They had all sorts of problems.
Speaker 6 (26:17):
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.
Speaker 4 (26:47):
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
(27:10):
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
(27:31):
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.
Speaker 6 (27:42):
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.
(28:04):
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
(28:26):
you know, switch to like software development and make a
lot more money and have a much less stressful job.
Speaker 5 (28:31):
Yere's there's like this is I.
Speaker 6 (28:33):
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.
Speaker 5 (28:55):
Somewhere else just quickly.
Speaker 2 (28:57):
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.
Speaker 3 (29:12):
What were the.
Speaker 2 (29:12):
Conditions that existed back then that allowed us to ramp
up that kind of production so fast?
Speaker 6 (29:19):
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.
Speaker 5 (29:31):
It's because we built, you know, so many of.
Speaker 6 (29:33):
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,
(29:55):
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.
Speaker 5 (30:09):
I think that was a very large part of it.
Speaker 4 (30:11):
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.
Speaker 2 (30:17):
Eric Adams, Yeah, the China China.
Speaker 4 (30:22):
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
(30:44):
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
(31:06):
of dictate that one will be the powerhouse.
Speaker 6 (31:09):
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
(31:29):
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.
(31:50):
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.
(32:10):
I don't know, but it's an interesting way of your
interesting question.
Speaker 3 (32:14):
Just going back to Boeing for a second.
Speaker 2 (32:16):
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
(32:36):
finance execs.
Speaker 3 (32:37):
On the top.
Speaker 2 (32:38):
Or are there companies out there who have like cracked
that relationship where finance and manufacturers engineers kind of work together.
Speaker 6 (32:47):
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
(33:10):
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
(33:34):
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
(33:54):
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
(34:15):
nothing to being the largest steel manufacturer in the US.
Speaker 2 (34:18):
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?
Speaker 5 (34:25):
Oh? Good question.
Speaker 6 (34:28):
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
(34:49):
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.
Speaker 3 (35:04):
Right, this physical thing, you can plaint so you can.
Speaker 6 (35:06):
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.
Speaker 5 (35:14):
I don't know, but those are some of my theories.
Speaker 4 (35:16):
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,
(35:38):
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.
Speaker 6 (35:46):
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.
Speaker 5 (35:58):
I've talked about these a little bit.
Speaker 6 (36:00):
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,
(36:21):
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
(36:43):
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
(37:05):
foot terms. They're basically as cheap as anything that civilization produces.
It's not easy to make those things cheaper than.
Speaker 5 (37:12):
They already are.
Speaker 6 (37:13):
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.
Speaker 2 (37:29):
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.
Speaker 6 (37:43):
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
(38:05):
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
(38:26):
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.
Speaker 4 (38:35):
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.
Speaker 3 (38:49):
You should tell us what happened to the company you
were working for as well.
Speaker 6 (38:52):
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.
Speaker 5 (39:08):
That they were trying to sell.
Speaker 6 (39:09):
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
(39:31):
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
(39:52):
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
(40:14):
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.
Speaker 2 (40:23):
So we could get the drones that go up on
the roof and fix leaks and stuff like that.
Speaker 5 (40:28):
Anything's possible, all right.
Speaker 2 (40:30):
Brian Potter, thank you so much for coming on all thoughts.
Really appreciate it.
Speaker 5 (40:34):
Thank you. It's great to be here.
Speaker 3 (40:48):
Joe, that was a really fun conversation.
Speaker 4 (40:50):
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.
Speaker 2 (40:59):
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.
Speaker 4 (41:13):
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.
Speaker 3 (41:28):
Talk about stuff. I should probably read that.
Speaker 5 (41:30):
Yeah, totally.
Speaker 2 (41:31):
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
(41:56):
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.
(42:17):
That's kind of interesting.
Speaker 4 (42:18):
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
(42:39):
get those learning curves at least on some limited effect?
I would be curious about that.
Speaker 2 (42:45):
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.
Speaker 4 (42:51):
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
(43:13):
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
(43:35):
into that constraint.
Speaker 3 (43:36):
That's what I was thinking.
Speaker 2 (43:37):
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.
Speaker 3 (43:57):
Their tiny but you can't do it for some.
Speaker 4 (44:00):
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
(44:21):
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.
Speaker 3 (44:34):
I'm very interested in, you know, what Boing needs go on?
Speaker 2 (44:37):
They need like a Madman style TV series that glamorizes
the aircraft manufacturing process and gets people interested in it again.
Speaker 4 (44:45):
Yeah, no, that's a really good idea.
Speaker 3 (44:46):
All right, that's a free idea for Boeing. All right,
shall we leave it there, Let's leave it there.
Speaker 2 (44:51):
This has been another episode of the All Thoughts podcast.
I'm Tracy Alloway. You can follow me at Tracy Alloway.
Speaker 4 (44:56):
And I'm Jill Isenthal. You can follow me at The Stalwart.
Follow our our guest Brian Potter, He's at Underscore Brian Potter.
Follow our producers Carmen Rodriguez at Kerman armand Dashel Bennett
at Dashbot and Kelbrooks at Keilbrooks. From Oddlots content, go
to Bloomberg dot com, slash oddlock, the daily newsletter and
all of our episodes, and you can chat about all
these topics twenty four to seven in our discord Discord
(45:18):
dot gg slash online.
Speaker 2 (45:20):
And if you enjoy all thoughts, if you like it
when we talk about how stuff gets built, then please
leave us a positive review on your favorite podcast platform.
And remember, if you are a Bloomberg subscriber, you can
listen to all of our episodes absolutely ad free. All
you need to do is find the Bloomberg channel on
Apple Podcasts and follow the instructions there. Thanks for listening, then,
(46:04):
in the e
Hosts And Creators
Joe Weisenthal
Tracy Alloway
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