COVID-19 sector impact: construction and building materials in Europe 2020 - Kearney
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COVID-19 sector impact: construction and building materials in Europe 2020
1. Introduction
The overall construction and building materials sector As the COVID-19 pandemic is developing, the scale of
accounted for 8 percent of the European Union’s impact on the sector is still difficult to quantify. As we
GDP, with over €1.2tr combined turnover and write, COVID-19 has affected over 2 million people,
employing 23 million people in 2019. The value chain and 138,000 people across the globe have died. Any
spans from development, planning, material, and vaccine remains a long way off, with predictions
equipment supply, distribution to construction, ranging between six and 18 months.
operations, and demolition.
While China—as the ground zero of the pandemic—
The largest contribution comes from the construction starts removing restrictions around mobility and
supply sub-sector, which includes raw materials travel, European countries have introduced
suppliers, building materials suppliers, and lockdowns, and US cases are rising rapidly. As
equipment manufacturers. Main segments in the countries are shutting down large swathes of their
construction sector are residential buildings, followed economies, the exact economic impact is not yet
by non-residential and infrastructure. For the most known. Leading indicators such as purchasing
part, the construction sector is contained within managers’ indexes (PMI) show drastic contractions
Europe, except construction machinery, where across the board: IHS Markit Eurozone Composite PMI
outside-EU sales represent 80 percent of fell by 39 percent to a lowest-ever level of 31.4
total production. throughout March, with Germany contracting by
34 percent to 34.5. In March, Goldman Sachs
projected a 24 percent fall in GDP in Q2 2020, the
largest ever in the history of modern GDP statistics.
IMF has stated expectations of a “recession as bad as
the financial crisis, or worse”.
In the World Economic Outlook report, our colleagues
at Kearney Global Business Policy Council, together
with Oxford Economics, have assessed what might
be expected of the global economy over the next
three years, through various coronavirus-shocked
global scenarios. The baseline scenario for 2020
foresees 0 percent growth with the bounce-back in
2021 varying between 1.1 percent and 6.2 percent—
depending on the level of international cooperation
and social cohesion during the crisis.
COVID-19 sector impact: construction and building materials in Europe 1
Figure 1 7%
Three scenarios imagine
the global economic future 6%
Global YoY output growth Quick recovery
(2016-2022) 5%
Average
growth
1 Quick recovery— 4%
2020-2022
“a moveable feast”
High international cooperation 3.5%
and high social cohesion forge 3% 2.5%
a quick recovery and return to Baseline
previous growth
2%
2 Baseline 0.3%
Medium international
cooperation and medium social 1%
cohesion stagnate the economy Long struggle
in 2020
0%
3 Slow recovery—
“for whom the bell tolls”
-1%
Low international cooperation
and low social cohesion cause a
recession and make return to
-2%
previous economic activity long
and slow 2016 2017 2018 2019 2020E 2021E 2022E
Quelle: Kearney Global Business Policy Council
To this potentially dire economic context, we expect We will attempt to prognose potential impact on the
each sector to be affected in a different way, sector by analyzing and aggregating indicators from
depending on what impact the lockdown has on industry professionals and already materialized
each. In the short term, this depends on whether an short-term impacts and actions taken by construction
individual sector is deemed “essential”—hence can businesses. Looking at how the sector was affected
keep operating—or “non-essential”: needs to shut by the last two European recessions in 2008-9 and
down according to public health advice. It also 2012, we can get an idea of the potential downturn
depends on whether sectors can continue their this time around. In both past recessions, the industry
business online or remotely (easiest for digital and started contracting one to two quarters later than the
e-commerce companies). Even when the initial crisis economy, but then fell deeper for the year—between
phase is over, the indirect effect on the economy will two and five times decline against the economy.
remain. Lost output, delayed consumer spending, Recovery started later than for the economy as well,
and reduced investment appetite all suggest a but by the second year post-recession construction
hangover that will remain well after the sector growth surpassed overall economic growth.
pandemic is over. We will also take into account such historic
macroeconomic trends, although this time we would
expect a more immediate correlation between the
decline of economic and construction activities as
many ongoing projects were shut down at the same
time as other businesses.
COVID-19 sector impact: construction and building materials in Europe 2
2. Impact on construction sector
We see impact in the short term, disrupting construc- Short term—“The shock”
tion sites, as well as in the medium to long term,
which will affect recovery. We have asked a panel of The short-term impact highly depends on the nature
21 decision-makers across the European construction of the work (residential or non-residential buildings,
value chain what their perspectives are on how the civil works, infrastructure) and restrictions that public
crisis will affect their company’s topline over the next authorities put in place. We are already witnessing a
12 months; their views are far from unanimous. More slowdown in building activity, with large contractors
than 40 percent expect a 30 percent topline such as Vinci in France and Strabag in Austria halting
decrease in the next three months, and while construction. According to Dr. Jochen Fabritius, CEO
65 percent expect up to a 15 percent decrease over of the Xella Group, which develops, manufactures,
the next six months, the view toward the end of the and markets building and insulation materials, the
year is far from certain. short-term effect in countries that have gone into full
lockdown can be “drastic”, with sales going “pretty
The divergence in the next three months reflects the much down to zero”. Countries with fewer restric-
different stages the countries are in, as southern tions, on the other hand, can see little or no impact
Europe (Italy, Spain, and France) sees a severe decline for the sector.
already. While the immense uncertainty in the sector
toward the 12-month time horizon is also clear to see, Jay Wratten, vice president in global engineering firm
what almost everyone expects is around a WSP’s property and buildings group, provided his
Figure 2
What topline impact do you expect for your company compared with last year?
N=21, % of respondents
43% 5% 15%
There are four main drivers to the — General preventive measures directly affect the
viability of ongoing operations. On-site activity at
coming short-term slowdown project level might slow down or cease, due to
of activity: having to protect workers and workforce shortages
(through sickness and quarantine shifts). “While 54
Countrywide restrictions due to public health percent of German companies can go to 100
measures: percent remote work, only a small percentage in
the construction industry are able to,” attests
— Most governments are taking drastic preventive Maruhn. Application of preventive health measures
action at regional or national level, closing down all such as socialdistancing is difficult to realize and
non-essential businesses, recommending would reduce productivity, as teams often drive to
(or enforcing) social distancing, and stay-at-home a job site in the same vehicle or work closely
policies. Unless construction is deemed together. In addition, emerging supply issues are
“essential”, projects will likely be stopped. At the also making planning process and site
same time, public authorities that approve new coordination less efficient. Nonetheless,
projects might not be operating, delaying new contractors are collaborating with public
project approvals, and backing up the system. authorities to potentially return to normal, with
increased safety equipment such as high-quality
— Currently we see the most severe restrictions in facemasks.
France, Spain, and Italy, although the situation
remains dynamic and we expect more restrictions
to be put in place. Some producers such as Almac Availability of temporary unemployment
in Italy have closed plants, following government mechanisms:
directives. Although Nordic countries such as — When a government is offering temporary
Sweden currently have few restrictions in place, we unemployment regimes, this is an attractive option
expect that to change if the virus spreads. for companies, as opposed to operating at low
efficiency; players such as Strabag and Vinci are
— With stay-at-home policies established, residential already doing this. Some governments, such as in
construction will be frozen. People are no longer Belgium, have expanded the application of force
moving house and are postponing renovation majeure as a valid reason for companies to apply
works. Ongoing projects are harder to manage too. for temporary unemployment.
Michél-Philipp Maruhn, CEO of Roobeo, a platform
service provider for builders, expects the volume
of residential renovation work to drop by Lower demand for construction materials and
50 percent over the next few months. equipment:
— However, building materials companies will likely
Implementation of health and safety measures: limit production because of an anticipated drop in
demand. As the sector is hit, a lower supply
— One of the hardest-hit countries, Italy, stopped demand will mean reduced operations in building
work on building sites except for hospitals, roads, materials, builders’ merchants, and
and railways. However, most governments so far equipment manufacturers.
have not compelled construction sites to shut
down. It’s mostly the sector itself that is self- — Reduced activity leads to an overcapacity at
shutting, as required health measures make it building materials suppliers, who are reducing their
impossible to operate certain projects efficiently. sales operations and shutting down factories. Dr.
Some contractors, such as Balfour Beatty in the Fabritius, Xella CEO, remarked: “There are
UK, have decided to keep open only sites where countries under full lockdown—for example,
safe working conditions are possible to maintain. France, Italy, or Spain—where toplines are severely
affected. There is almost zero economic activity
— For producers of equipment, social distancing is and our factories have been closed.” This is also
less difficult to implement, as blue-collar workers happening on the equipment manufacturer front:
can be spread out along production lines. Key for instance, Komatsu has temporarily shut down
challenges are avoiding people converging at the several plants in Italy, Germany, and the UK.
start and end of shifts, now done in a more
phased way.
COVID-19 sector impact: construction and building materials in Europe 5
Mid-to-long term: The signs of a downturn are already evident.
Applications for building permits in Europe went
“The Hangover” down significantly in March. Leading industry
Once the immediate health crisis has passed and platforms servicing private builders in CEE are
countries start to remove restrictions, the indirect reporting reduced activity in visitors, requests for
effect of the crisis will set in. A gap in consumer builders, and building materials orders in double
spending, due to lost income or retrenchment digits. In the medium term, plant closures in China
towards savings, will reduce demand. Buying a house (January-March) and Italy (since mid-March) will be
or doing renovation work is not top of mind if felt, as firms will have used their existing materials
consumers are worried about income. In parallel, stock and will experience a gap in new
sunk investor confidence leads to the postponement materials input.
of future projects, in turn creating overcapacity for
developers and planners who will revert to In the medium term, closed borders between
downsizing. All investment decisions delayed during countries complicate movement of labor. European
the crisis will have already resulted in an investment construction is typically fueled by workers from
gap. To help highly valuable companies survive, eastern Europe. In the short term, companies must
governments will extend loans or subsidies and pay ensure workers don’t return to their home countries
for extended temporary unemployment mechanisms. because of unemployment, which would make it
The question then is how much money will be left to harder to get them back quickly again.
invest in infrastructure, and how much will be left to
invest in green buildings. The amount of funding
needed to fuel the sector and the depth of
government pockets will determine the speed
of recovery.
Figure 3
Share performance for 15 largest public Europe-based construction sector companies and common indices
Since Feb 2020 global market crash until April 1
105
100
95
90
Relative share value
85
Feb 2020 = 100%
80
Total drop
75 CRH -27%
MSCI Europe -27%
70 LafargeHolcim -30%
Ferrovial -30%
65 STOXX EU 600 construction -32%
Saint-Gobain -36%
60 Vinci -40%
55
0
17.02.2020 24.02.2020 02.03.2020 09.03.2020 16.03.2020 23.03.2020 30.03.2020 06.04.2020
Sources: Factiva; Kearney analysis
COVID-19 sector impact: construction and building materials in Europe 6
Figure 4
Which long-term effects do you expect from the current crisis?
N=21, % of respondents
Insolvency of many players in the market 59%
Long-term recession including lower volumes 36%
Quick recovery 14%
No major changes 9%
Sources: Kearney analysis
The stock market performance for large, listed, Following Oxford Economics’ economic indicator
Europe-based companies in the sector paints a analysis in March 2018, we expect the European GDP
picture. Since the global stock market crash that to grow at an average of 1.1 percent until 2022, with a
started after February 20, the five largest listed 2.2 percent decline in 2020, followed by an upswing
companies by market cap lost an average of in 2021 and 2022. The related expected forecast for
32 percent in market cap. This tops the loss of the the sector predicts a slightly bigger contraction than
European stock market, as represented by the MSCI the economy this year, followed by a faster recovery
Europe Index, by 5 percentage points, and the loss of in 2021 and 2022. Due to this faster recovery, the
the US stock market, measured here by the Russell sector is expected to average at 1.6 percent until
1000, by 4 percentage points. The STOXX Europe 2022. Next to the return of the consumer sector to
600 construction index reports losses of 32 percent. pre-recession levels, public investment in
infrastructure as part of European and national
The sharp drop in these stocks indicates investor stimulus packages could be a driver for this
pessimism for the sector’s performance and future development, but this largely depends on the depth
earnings amid the crisis. Skanska—which was trading of government pockets and the most immediate
at its all-time high in mid-February—and Balfour investment needs, such as financing short labor.
Beatty announced they will freeze executive pay and
cut dividends as a response to tanking share prices Most of the construction professionals we surveyed
and uncertain outlook. Upcoming Q1 earnings will indicated that they expect a tough market
present first data on the economic impact of environment leading small and already struggling
containment measures introduced across players into insolvency, while providing M&A
Europe in March. opportunities for the larger and more financially
stable players. In the long term, while one in three
(36%) sees a deep recession on the horizon, another
quarter (23%) expects either a quick recovery or not
much change.
COVID-19 sector impact: construction and building materials in Europe 7
Figure 5
Annual % change of output
2017-2022E; Eurozone GDP 7%
and construction & building
materials sector 6%
Eurozone construction Average
5%
forecast - expected growth
2020-2022
4%
0.0%
The construction sector is 3%
expected to fall into
1.6%
% change to previous year
2%
recession deeper than the
1.1%
economy, but then resume 1% Eurozone
faster growth again by 2022 GDP forecast
0%
-1%
-2%
-3%
-4%
Eurozone construction
-5% forecast - baseline
-6%
2017 2018 2019 2020E 2021E 2022E
Sources: Oxford Economics; Eurostat; FIEC; Kearney
If the negative impact on construction activity were It is too early to predict how other megatrends driving
to be as large as in 2008, we would expect the sector the sector—such as affordability, sustainability, and
to contract more sharply than the economy as the urbanization—will be affected. Dr. Jochen Fabritius of
base case, at over 5 percent this year, and for this Xella predicts an acceleration of the affordability
effect to occur without delay as all economic activity trend due to an impending recession, potentially also
had to shut down at the same time. Due to the long affecting the investment available to drive
lead time in the industry, and longer payment terms, sustainability. Jay Wratten of WSP raises the question
we expect a slower recovery in the first post- whether urbanization will continue on a similar
recession year. If historic relationships between the trajectory or if remote working encourages people to
economy and the sector play out again, we would live further out. This may cause commercial real
expect stronger growth to pick up in the second estate tenants to re-evaluate their needs for office
year post-recession. space. “The mix of projects we are building will likely
change,” said Wratten. The majority (55 percent) of
our panel also expect an accelerated shift toward
online channels.
COVID-19 sector impact: construction and building materials in Europe 83. COVID-19 playbook: reacting to the crisis,
positioning for recovery
The times ahead are complicated, as businesses cope First, Survive is about taking the right short-term
with a significant decline in commercial activity. measures to ensure continuity, including operational
Actions taken will not only determine businesses’ issues such as employee protection and partner
survival in the short term, but also set the groundwork management, business continuity planning, and
to participate in the rebound that follows. The actions liquidity measures. Second, the objective in Operate
to be taken unfold in three stages: is to pursue profitability and business optimization
through cost-reduction measures and acceleration of
sales, to realize first quick wins across main functions.
Then outlining scenario-based action plans for the
next three, six, nine, and 12 months and defining
trigger points is vital. Third, Win is all about creating a
competitive advantage based on a permanent shift to
guarantee long-term business growth, which includes
both consolidations where improvements are
bringing new redundancies and long-term
investments into strategic priorities.
Figure 6
COVID-19 playbook, in three steps
1 Survive 2 Operate 3 Win
Respond and stabilize Adapt to the Create a competitive
during crisis new normal advantage based on
permanent shift
Ensure liquidity and Improve profitability and Set strategy and
business continuity optimize the business drive growth
– Manage risk to ongoing – Take cost-saving measures – Consolidate
projects
– Digitize sales operations – Manage shift to online
– Engage the value chain
– Hack online growth – Be on services
– Secure liquidity
– Spur on government policy – Continue to innovate
– Leverage government support
– Step up to the plate
Source: Kearney
COVID-19 sector impact: construction and building materials in Europe 9Survive Professor Dr. Michael Eisfeld of the University of
Bielefeld and chairman of its own planning office
The first horizon requires rapid action to protect the Eisfeld Ingenieure confirms that the lack in supply of
workforce and ensure business continuity on input materials is one of the main effects. Additionally,
operations, supply chain, and IT fronts. Companies he emphasizes that “building owners are partly
move to remote working where possible and required starting to withdraw from their contracts”, which in
and, where not, implement extensive preventive turn has a ripple effect on other companies. Therefore
measures in work locations. At the same time, it is vital to negotiate with customers regarding
delivery obligations, operational risks, liabilities, and obligations and potential delays to avoid penalties,
liquidity must be considered. We suggest four key while actively managing supplier risk and ongoing
actions to take at this stage to stabilize businesses sourcing needs. “Proactively seeking dialogue with
during COVID-19. our customers and ecosystem partners was one of
the first measures we took,” confirms Michél-Philipp
Manage risk to ongoing projects Maruhn, CEO of Roobeo.
After one week, Strabag announced it will re-examine
safety requirements and steadily resume construction Secure liquidity
work along with safety precautions. This example With the effects of COVID-19 posing unprecedented
illustrates how companies are doing their utmost to challenges, securing liquidity is among the top
resume operations. priorities. Potential measures include activating credit
lines, cutting dividends, and other short-term actions
To prevent the spread of coronavirus and to protect (for example selling unused assets). Leading players
employees, many companies are forced to take such as Balfour Beatty or Skanska have already
significant actions at short notice, which have a postponed dividend payouts and have frozen or cut
severe impact on operations. Strabag, Austria’s executive pay.
largest contractor, largely suspended construction
work within Austria on March 19 with immediate Simultaneously, many governments offer a wide array
effect for “several weeks”, affecting more than of measures. The German government, for instance,
1,000 projects. The company had initially considered provides a higher risk tolerance for credit programs,
maintaining sites open along with strict policy direct liquidity support and simplified application,
requirements; however, management decided to direct public sector investments and flexible tax
pursue stricter preventive measures on social deferral conditions. Yet to benefit from these
responsibility grounds. After one week, Strabag measures, companies must prove transparency over
announced it will re-examine safety requirements for financials, have a solid business model, and
each site and steadily resume work along with safety demonstrate that short-term liquidity issues can be
precautions wherever possible. attributed to COVID-19.
Jay Wratten of WSP stresses that health and safety of Leverage government support
employees and clients is the firm’s top priority. Aside Aside from offering liquidity support, many
from remote work and severe travel restrictions, WSP governments provide temporary unemployment
requires contractors to share preventive measures mechanisms. These short-time work schemes allow
taken, before sending employees to a construction companies to overcome the crisis without having to
site. “We are investigating ways of doing virtual site lay off large numbers, and most organizations take
visits, which will limit disruption and potential advantage of these programs.
exposure,” said Wratten. These examples illustrate
how companies are doing their utmost to resume Coming back to Strabag, after suspending
operations, while upholding employee safety. operations, the company instantly registered for
short-term work in Austria on March 20 for three
Engage the value chain months (six months is currently the limit). The scheme
Aside from the drastic measures taken to manage provided by the Austrian government implies that
risks in countries in which a company is operating, employees receive around 80 percent of their salary
COVID-19 points out the global interdependencies in and work 10 percent of the week, with the
value chains. For example, bottlenecks of equipment government compensating companies for almost the
and materials—particularly for commodities such as whole amount. Similar temporary unemployment
steel and glass from Asia—are leading to substantial schemes were introduced by governments
reductions in volumes produced for building across Europe.
materials and equipment manufacturers as well as
project delays. Bottlenecks for manufacturers of
building materials such as AAC and CSU could be
less severe, as raw materials are usually
sourced locally.
COVID-19 sector impact: construction and building materials in Europe 10Operate The response from the panel concurs that reducing
spend, external and internal, is all-important. Most
Once workforce safety, liquidity, and business professionals consider their companies to be in the
continuity have been ensured, how to keep busi- first two phases of the crisis and none is focusing on
nesses running as long as these circumstances what the new normal means for them.
prevail? It is important to initiate optimization
measures to increase efficiency and reduce costs, Interestingly, participants from southern Europe,
paving the way to return to profitability. The following where the crisis is more acutely felt, consider
five key actions allow for success during themselves still in phase 1, while northern Europe is
times of crisis. already on to operational stabilization.
Take cost-saving measures Digitize sales operations
Many companies are introducing cost-saving and As the lockdown disrupts the traditional B2B sales
optimization measures to ensure future profitability. channels, leveraging digital capabilities to bridge the
Swiss building materials producer LafargeHolcim is gap becomes paramount. Capabilities to assist
just one example, having announced a program to customers online, via chat or video call, offer online
reduce capital expenditure by 400 million Swiss quotes, negotiate conditions, organize, and track
Francs (about €378 million) and fixed costs by deliveries online are a few of the elements that come
300 million Swiss Francs (about €283 million to into play. Some companies are using the lockdown as
renegotiate energy prices and review all third-party a catalyst to upskill on digital and realign workforce.
products and services on the procurement side.
These measures are taken to absorb the negative
impact in Q2 2020 and the forecasted volume
declines in key markets, despite a gradual recovery of
the Chinese construction sector and all plants
reopening outside Hubei province.
Figure 7
In which phase of the crisis is your company and which measures have you taken in response to the crisis?
N=21, % of respondents
32%
Reduce external spend 32%
14%
27%
Reduce internal spend 23%
14%
23%
Delay internal projects (eg IT) 18%
9%
9%
Introduce short-term work 23%
14%
5%
Launch telesales 14%
9%
5%
Shift to online 5%
0%
Phase 1: Health measures, initiation of home office
Phase 2: Operational stabilization, topline initiatives, cost-cutting
Phase 3: Scenario analysis on the new normal, commercial actions
Source: Kearney analysis
COVID-19 sector impact: construction and building materials in Europe 11An example is the home improvement supplies
retailer OBI. Facing closure of its physical sales
locations, the company diverted salespeople to
consult customers via video call.
Importance of digital capabilities has been
highlighted. Construction professionals on our panel
rated digital as business-critical or highly important,
with >75 percent rating it business-critical or highly
important—from architects and engineers working
virtually on projects to building materials companies Now is the time to put growth-hacking measures and
selling online. teams in place, and to make sure products are
available for online delivery and the ordering
Hack online growth process works seamlessly.
The trend toward online was happening already, but
the COVID-19 crisis has put it into fast drive. Volumes Spur on government policy
started shifting online earlier, but shutdown of Government policy is playing a decisive role in
physical stores is accelerating the trend. determining the pandemic’s impact. Governments
must decide the level of restrictions, ensure the
The new normal requires craftspeople and installers provision of healthcare services and relevant
to get used to buying online—for most the daily supplies, and decide how to support the economy.
check-in at the hardware store before driving to site is Government response has been mixed across
a deeply rooted habit. The key question is whether geographies, although it is now clear that many
the share of online ordering will persist post-crisis. sectors will need government backing to stay afloat.
According to Michél-Philipp Maruhn of Roobeo, Our panel expect that short-term financial support
“Awareness of online will increase, yet many will be forthcoming, as well as subsidies for short-
companies lack the capabilities to leverage term labor.
this trend.”
Figure 8
How important are digital capabilities for your company today?
N=21, % of respondents
5 = Business critical 45%
4 32%
3 14%
2 5%
1 = Not important 0%
Sources: Kearney analysis
COVID-19 sector impact: construction and building materials in Europe 12Figure 9
Which government actions do you expect in your country?
N=21, % of respondents
77%
68%
32%
Short-term financial support Subsidies for short-term labor Low-interest debt funding
Sources: Kearney analysis
The sector has also taken an active role in minimizing Step up to the plate
financial risks by spurring on government policy. The Finally, some companies take an active approach in
approach undertaken by the European Construction leveraging capabilities and create solutions that
Industry Federation (FIEC) is to urge the EC to publicly support society during the crisis. Instead of turning
declare COVID-19 as a case of force majeure. This shipping containers into co-working spaces and
would free all parties involved in a contract with a student housing, Italian architect Carlo Ratti—
respective clause from its legal liabilities or together with a network of architects and
obligations. If not publicly declared, every individual engineers—developed CURA (Connected Units for
company needs to demonstrate that executing the Respiratory Ailments). CURA is a two-bed intensive
works is “impossible”, which would put a major care unit (ICU) equipped with all the necessary
burden on companies and consume features (for example extractors to create negative air
significant resources. pressure) inside a 20ft shipping container. These
containers are offered at a fraction of the price of
A similar yet milder form than force majeure is other options and can be transported anywhere and
referred to as “hardship”, another clause to a deployed in a few hours, enabling hospitals to rapidly
contract, which gives parties the right to negotiate expand ICU capacity. Across sectors, this stepping up
contractual terms in case certain events take place. to repurpose manufacturing capabilities to produce
Moreover, the federation asked EU member states to medical equipment is a key driver for social cohesion
abstain from applying penalties to contractors and to and crisis relief, while undoubtedly also aiding the
co-finance future projects to cover additional companies’ corporate image and income streams.
costs incurred.
COVID-19 sector impact: construction and building materials in Europe 13Win Manage the shift to online
It remains to be seen whether the share of online
After successfully mastering the crisis, strategy and ordering will be maintained after the crisis; what will
business growth are the top priorities to be addressed be undeniable is that the crisis served as an
to create a competitive advantage in the long run. As accelerant to this trend. If so, builders merchants and
they continue to put out fires and manage the crisis, other players will have to accelerate their shift
construction companies have to consider what the towards e-commerce, while rethinking their physical
recovery will look like and what actions need to be network structure to accommodate the more
taken to stay competitive. According to our panel, complex logistical challenges arising when customers
almost half the companies have already identified can order from anywhere. In the recovery, leading
market opportunities arising from the crisis, with companies will seek to anchor online ecosystems,
another 42 percent focusing on internal actions, such bringing together various aspects of the value chain.
as process improvements.
Bet on services
For the competitive advantage to be sustainable, it As budgets for capital expenditure get tighter during
must be accompanied by measures that facilitate a the recession, service-based offerings are likely to
permanent shift in how business is done through four gain popularity, with the overall objective being to
key actions: facilitate and automate the end customers’ job.
Therefore investing in and building new business
Consolidate models is vital for future success. The focus is shifting
Economic downturns typically result in a decrease in toward designing, delivering, and managing results-
company valuations and increase in bankruptcies. Yet as-a-service solutions throughout the product
once a crisis is over, consolidation is likely to continue lifecycle and acting as an end-to-end advisor
as comparatively low valuations for targets and to customers.
distressed assets on the market increase the
opportunity for higher future returns. Players along This shift from ownership to usership is creating new
the construction value chain are well advised to business models, including product-as-a-service
carefully examine attractive targets and assets, and to offerings, whereby charges for users are based on
leverage lower cost points for acquisitions, thereby equipment output and managed service solutions are
reinforcing their market position. This consolidation taking care of operating machines across the entire
wave will eventually slow down as the industry product lifecycle. Caterpillar, for instance, provides
recovers. customers with predictive maintenance tools through
connecting machinery to a cloud, facilitating optimal
Roobeo CEO Michél-Philipp Maruhn argues that small use of its machines, while simultaneously tapping
to medium-sized dealers will be severely affected by new revenue streams.
this wave, posing the question: “Will these smaller
businesses survive the crisis?” The reason behind this Ultimately, service-based offerings are not only
is that these companies often lack the required digital limited to equipment and materials manufacturers
capabilities needed to compete in these times. but may also be pursued by other players. Xella, for
instance, considers selling a wall-as-a-service instead
of only providing input materials and thus forward-
integrates along the value chain. While the actual
implementation poses both internal (for example
digital transformation of sales force) and external
challenges (for example creation of customer
mindset for services such as digital planning), this
services-focused approach will eventually enable
companies to foster customer relations and
increase revenues.
COVID-19 sector impact: construction and building materials in Europe 14Figure 10
Apart from crisis management, are you already thinking beyond the crisis?
N=21, % of respondents
10%
38%
52%
Yes, we have identified Yes, we have identified Not yet—we Total
internal actions market opportunities will start soon
Sources: Kearney analysis
Continue to innovate
Finally, aside from consolidating the competitive
position—managing the shift to online and betting on
services—continuing to innovate is critical to thriving.
While innovation and trends may have different
implications depending on the respective stage in
which a company operates, the following key trends
hold true for most companies: affordability,
digitalization (building Information modeling [BIM],
for instance), innovative building methods (such as
modular building, as opposed to onsite construction),
risk reduction within the supply chain (for instance
through dual and local sourcing), and sustainability
(green/CO2 neutral building).
Xella is already focusing on these trends. In addition
to large-format system wall elements, Xella is a
pioneer with its digital planning service blue.sprint.
Xella consistently uses BIM to coordinate the entire
planning process and virtually constructs the building
envelope before it is built. This saves time and money
and prevents mistakes. This digital twin provides
benefits not only during the construction phase but
also along the entire lifecycle of the building,
including the installation and operation phase as well
as dismantling and reutilization of components.
COVID-19 sector impact: construction and building materials in Europe 154. Conclusion
The months and years ahead do not look rosy for To capture the customer demand that is left,
businesses in the construction industry. The impact companies can turn to digital sales—both on the B2B
of COVID-19 will affect all players. Working backward and B2C front. Those that adopt digital interactions
from downstream businesses, which will see quickly will garner valuable share from those that are
construction stops short term and slow demand slow to respond and set themselves up for sustained
medium term, all agents in the chain will experience success post-crisis.
lessened demand. As a result, cost-reduction
measures need to be executed quickly to avoid The speed of recovery for the industry will be heavily
liquidity shortages. Construction is a key sector for affected by government support: investments into
the European labor market, with 23 million jobs. The infrastructure and finance support for private and
duration of the crisis and the speed of recovery will commercial investors. Companies that want to set
be key in the development of employment. For now, themselves up for a front row seat in the recovery
companies are turning to short-work schemes to race should invest early into the long-term shifts
avoid mass layoffs. toward a more digitally enabled infrastructure and
sales channels. Further, as in the financial crisis,
distressed assets will come on the market and allow
those that remained liquid to reinforce their value
proposition or expand across the value chain. The
winners of the crisis are bold in going lean today and
bold in investing tomorrow.
COVID-19 sector impact: construction and building materials in Europe 16Interview with Xella Group CEO
Dr. Jochen Fabritius
What do you see as the main root causes?
First of all, the uncertainty. For bare survival, every
company parks any activity that is not necessary.
Everything is on hold; nothing is canceled, but
everyone must look at how the situation evolves. At a
certain point in time, on the commercial side, the
liquidity questions will kick in. On the private side,
building a new house is one of the biggest decisions
anyone can take in life. Now, do you take this sort of
decision when your future is uncertain? You are less
What sort of impact do you expect COVID-19 to
likely to.
have on the construction sector in the short,
medium, and long term?
Which measures have you as a company taken, or
Short term, we are seeing huge differences are planning to take, to tackle the crisis?
between individual countries. There are countries
I have no doubt about our ability to weather the
where sales have pretty much gone to zero: for
crisis. We have very good liquidity; at the same time
example, France, Italy, and Spain, where toplines are
we have a business model that is extremely flexible.
severely affected in the short term. If you order a
We can very easily ramp up or down production,
country to be in full lockdown, what do you expect?
based on market needs. Fixed cost is not our issue, so
There is almost zero economic activity and our
we are blessed with a business model that is
factories have been closed. Therefore the economic
extremely resilient in crisis. We did everything you
impact short term is drastic. There are other countries
could do in such a situation. We went through the
where restrictions are lighter, where construction
whole P&L and balance sheet to look at the positions
sites continue to operate. So short-term impact can
where we can take action. We review this constantly
range from full impact—as severe as you can
and will switch gears up or down as needed.
imagine—to pretty much no impact at all. We are
lucky in the sense that our footprint is heavily tilted
To what extent could this crisis transform the
towards the countries with limited and no impact.
construction sector?
What will happen in a couple of weeks, or months? I see it as a catalyst, when you look at the two basic
trends that affect the construction sector—
We start to see that this is a crisis bigger than
affordability and sustainability. Housing is pretty
anything we have experienced before. What kind of
expensive. That means that affordability—everything
impact this will have on the banking sector, on
that brings down the cost of housing, process, or
liquidity of countries or the EU, is still to be seen. The
product innovation—is a big trend. The second one is
construction industry will rather be hit in the medium-
sustainability, because we have finally understood
term. If we believe we can draw on the example of the
that in the long run we cannot go on as a society in
financial crisis of 2008, we saw that construction
the same way mistreating the planet.
sites that had been started were also completed. So I
expect a rebound effect. The question is rather what
For affordability, the crisis will for sure be a positive
will happen to the start of new construction projects.
catalyst. Consumers will have less money to spend,
Here I expect to see a significant drop in activity,
therefore new methods of construction and ways of
which will surface in six to 12 months from now,
working will benefit from the increased need for
depending on the length of lockdowns.
affordability. On the second front, sustainability, I am
undecided. What I fear is that in a world where we
have significantly fewer resources, much-needed
investments into clean tech and better production
will not be a priority. I am afraid this will give the
second trend a pushback. Nevertheless, this will not
be true for each and every company. At Xella, we will
keep pushing for sustainability.
COVID-19 sector impact: construction and building materials in Europe 17Figure 11
Survey legend background
Segments represented Countries represented
21 responses from firms across the construction Survey participants represent a cross-section
sector value chain were collected, with a strong of EU countries, representing 55% of
representation of large firms Euroconstruct countries (EU-19)
General
Real Estate Contractor
5% Other
Software 5%
Provider 19% Germany
5%
29%
Engineering
10% Construction
43% Company
France 10%
Architecture & 14% 10%
Planning Italy
33%
19%
Spain
Building
Materials
Sources: ABC Company; Kearney analysis
COVID-19 sector impact: construction and building materials in Europe 18COVID-19 sector impact: construction and building materials in Europe 19
Authors
Patrick Brown Dr. Sebastian O. Schoemann
Partner Partner
patrick.brown@kearney.com sebastian.schoemann@kearney.com
Isik Aysev Nils Löfgren
Principal Principal
isik.aysev@kearney.com nils.loefgen@kearney.com
Contributors
Roberta Roeller Kilian Dorner
Consultant Consultant
roberta.roeller@kearney.com kilian.dorner@kearney.com
The authors wish to thank:
Dr. Jochen Fabritius (CEO Xella), Jochen Friedrichs (CEO URSA), Michél-Philipp Maruhn (CEO Roobeo),
Jay Wratten (Vice President WSP), Prof. Dr. Michael Eisfeld (Chairman of the Board Eisfeld Ingenieure)
for their valuable insights.
COVID-19 sector impact: construction and building materials in Europe 20About Kearney As a global consulting partnership in more than 40 countries, our people make us who we are. We’re individuals who take as much joy from those we work with as the work itself. Driven to be the difference between a big idea and making it happen, we help our clients break through. de.kearney.com For more information, permission to reprint or translate this work, and all other correspondence, please email insight@kearney.com. A.T. Kearney Korea LLC is a separate and independent legal entity operating under the Kearney name in Korea. A.T. Kearney operates in India as A.T. Kearney Limited (Branch Office), a branch office of A.T. Kearney Limited, a company organized under the laws of England and Wales. © 2020, A.T. Kearney, Inc. All rights reserved.
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