Katerra Gets Bailed Out Again

According to the Wall Street Journal, the construction "startup" Katerra has been bailed out yet again with $200 million from SoftBank.

Katerra has been buying up companies that produce just about everything in the construction industry and recently opened a vast factory near Spokane, Washington, to manufacture cross-laminated timber (CLT). 

We described earlier how the company was "applying methods and tools such as digital technology, offsite manufacturing, and fully-integrated teams in an effort to improve construction productivity." They were trying to be so vertically integrated that they bought architecture firms like Michael Green Architects and engineering firms to do it all in-house. Their elevator pitch:

"Katerra is bringing fresh minds and tools to the world of architecture and construction. We are applying systems approaches to remove unnecessary time and costs from building development, design, and construction."

However, according to the WSJ, "some of the projects were plagued by delays and cost overruns, while its aggressive growth strategy and a high debt load depleted its cash reserves. The Covid-19 pandemic, which delayed construction projects in some cities, added another challenge."

Indeed, there were significant challenges and problems before the pandemic hit. Fritz Wolff was a founding partner and Katerra was going to build thousands of units for his family company that owned lots of seniors homes. Midway through the first, he bailed, and Katerra bought the unfinished project from him for 26 million, then sold it in the fall at a $21 million loss.

In February 2020, founding partner and CEO Michael Marks gave up the CEO position and was replaced with the former head of the big oil services company, Schlumberger. According to the WSJ, 

"SoftBank’s new investment will enable Katerra to avoid having to seek bankruptcy protection, according to Katerra’s chief executive, Paal Kibsgaard. The company needed SoftBank’s latest investment “to continue as a going concern,” he said in a notice to shareholders about Wednesday’s meeting."

Katerra has built some interesting projects, including the Catalyst building that we recently covered in Treehugger. Katerra's Design Director, Craig Curtis, told Treehugger that Katerra's new way of building was catching on.

"There's a tidal wave of work coming.... Codes are changing, plants are being built, there's enough interest. Contractors are now getting used to it. They're not so afraid." 

Craig Curtis left Katerra in November 2020 and is now working with Mithun Architecture. 

So What Went Wrong? 

When you look at Glassdoor, the employment website where employees can leave comments, the consensus appears to be that "management is a mess"; a typical comment:

"Top management lacks vision and it seems to be an on-going process in trying to figure out how to make this firm successful. The former CEO stepped down and new leadership came and tried to restructure the firm leading to massive layoffs. There were massive layoffs before, there was massive layoffs now, and there will be more to come every few months. The firm is not stable. "

One problem is the CLT factory, which probably cost $200 million. "At full capacity, the factory will produce the highest volume of CLT in North America – 185,000 m3 or the equivalent to 13,000,000 ft2 of 5-ply panels annually on a 2-shift, 5-days a week operation." Opening that in the face of the pandemic and reduction in demand has to be a problem.

Another problem is the price of lumber that goes into CLT, which has gone through the roof this year thanks to increased demand for housing from people who want to get out of cities and decreased supply because of the pandemic.

CEO Kibsgaard also tells the WSJ that they perhaps took on too much: "I think we underestimated the complexity of executing self-perform [?] projects at a large scale, including manufacturing and material sourcing and managing our own labor."

We've Seen This Movie Before

I have watched Katerra since it started and have tried not to be too critical because as I noted earlier, I really want them to succeed. I thought they had a good chance, noting:

"Katerra has avoided many of the pitfalls that have bedeviled previous attempts at large scale prefabrication. It is keeping away from single-family housing, and one of its founding partners is the Wolff Co, which is big in the seniors' housing market."

I thought that as long as they were feeding product to Wolff, then at least they were a bit insulated from the open market. But as noted earlier, Wolff bailed on it. 

I had also noted previously that construction technology has never been the problem; everything that Katerra has been using was bought off the shelf in Europe, where they have been doing this for decades. In Scandinavia or Germany, the building codes are much tougher, and the single-family housing market much smaller, the employees more expensive, and the quality standards much higher, so that this kind of construction is competitive. This is not the case in North America. The housing industry is also not nearly so cyclical in Europe because governments play such a big role in it.

Three years ago I was worried that this might not end well, that previous attempts at such vertical integration new technologies did not often work out in North America. I concluded then as I do now:

"I will say this again: I really, really want Katerra to succeed. I really want their CLT construction to take over the world. I am a huge fan of Michael Green. But I have seen this movie before. In fact, it gets remade every generation."