The Deafening Silence Of Entekra’s Demise—And What It Means For Off-Site Construction
A few months into my professional career at Pulte Homes (now PulteGroup), I was shown a video of the future of building. It was early winter in the year 2000.
The time-lapse video showed our corporate cousins in action—Pulte Building Systems—as they built an Arizona home (well, assembled the building envelope) on a slab in one day.
The video begins as walls are craned in.
People speedily race in and out of view.
The trusses land as the sun slides past noon.
Sheathing is slapped on.
Windows and doors pop in the openings.
One day of glorious productivity crammed into a 2-minute video.
The future is here, I was told.
It’s called off-site construction.
It looked pretty fantastic.
Jerked back to the reality of our 108-day build cycle, our decidedly non-Arizona climate, and our very much on-site construction—decentralized manufacturing with hundreds of people, thousands of products, and millions of variables—our homes under production were receiving their first dusting of snow.
Being a clueless FNG (_____ new guy), I was told to lug the crusty black “blankets” off the trailer stationed outside. They had to be dragged out to each of the two dozen recently installed foundations so they wouldn’t heave as the inevitable freeze set in.
In a speech several years ago, Gerry McCaughey, the entertaining and insightful off-site Irish evangelist compared modern home building—and much of commercial construction, for that matter—to assembling a car in your driveway.
Why would you ever want to do that? he said rhetorically. That’s not smart. Build it indoors, in a climate controlled environment, assemble it into larger building units, and deliver them to the job site to be installed in a fraction of the time.
If the car analogy was going to resonate with anyone, it was Pulte leadership. Headquartered in the shadow of Detroit’s Big Three—Ford, GM, and Chrysler—auto manufacturing analogies were common.
Before I started in August of 2000, I was shipped two books to read: Customers For Life, by Carl Sewell, a car dealer in Dallas, and The Deming Management Method, by Mary Walton.
Both books talked a lot about cars.
Not a single mention of construction.
I learned of Entekra’s demise from John McManus on his The Builder’s Daily site. It was April 24, 2023.
The headline read, “Entekra to Dissolve and Shut Down Operations By June 30.”
Subtitle: “Six-year old off-site home construction juggernaut—lacking a big new capital investment infusion—becomes a casualty, as majority-owner LP focuses on its core OSB, siding, and structural solutions businesses.”
Being a fan of the off-site construction movement, Entekra, and McCaughey, I was stunned.
Didn’t LP just dump a truckload of money into this company—twice—and become the majority owner in 2021?
Why pull the plug so quickly?
Was there no other suitor interested?
(Short answers: Yes. LP invested $45MM in 2018 and then millions more in 2021. Multiple reasons. Apparently not. )
Since late April, I’ve been asking more questions about off-site and Entekra. Here’s five things I think I think.
1. Interest rates are like gravity.
The cost of capital was at historic lows in 2018 when LP invested $45MM. In 2021, when it reinvested to acquire a majority ownership of Entekra, money was essentially free.
Not so much anymore as the Fed has steadily raised rates post-pandemic.
Warren Buffett said, “Interest rates are to asset prices like gravity is to the apple. They power everything in the economic universe.”
2. Builders see the productivity curves too.
Home builders aren’t idiots. They see the same charts and graphs showing the declining productivity rate in the construction industry compared to every industry from agriculture to mining to retail.
I asked a national purchasing buyer from one of the largest home builders (No, not Pulte.) about the viability of off-site construction to date. “In other industries, when you combine technology and innovation to drive automation and scale,” he said, “the costs go down. Except in off-site. It seems to only go up year after year.”
3. The Billy Beane Rule of Common Sense
In the film, Moneyball, Billy Beane (played by Brad Pitt) challenges one of his scouts regarding a supposed top prospect that deserved consideration for one of their top draft picks.
“If he’s such a good hitter, then why doesn’t he hit good?”
If off-site construction is so much better—per Entekra’s website, faster, better, smarter, and more sustainable . . . a proven process for productivity gains—then why wouldn’t builders be more profitable using it?
I asked a regional California builder why they didn’t partner with Entekra. “We conducted a pair of long, intensive evaluations in 2018 and 2021. The simple truth is the math told us we’d be less profitable with off-site.”
That’s one builder’s perspective on profitability.
What about Entekra?
If off-site is so much better, why couldn’t Entekra make money doing it?
During a Q3 2021 earnings calls, LP CEO Brad Southern highlighted the fact that Entekra was "gross profit positive in the quarter.”
Sounds like Entekra was net profit negative in the quarter.
If a company isn’t profitable—and its products and services don’t make its customers more profitable—then this result is unsurprising.
4. Good ideas do come from abroad.
In the mid-nineteenth century, Andrew Carnegie witnessed the Bessemer steel process in action in England. Immediately recognizing its potential to improve steel production—faster, better, smarter, and more sustainable . . . a proven process for productivity gains—Carnegie brought it to the United States. The Bessemer process made Carnegie one of the world’s wealthiest men, transformed the construction industry, and changed the trajectory of the nation.
McCaughey often cites the success of off-site construction in Europe. He challenges American audiences by saying that the problem isn’t off-site construction—it’s the limited thinking of American home builders.
If you’ve spent any time in the construction industry, you’ve heard the infamous one-two punch of inertia.
This is the way we’ve always done it.
Tried it before; didn’t work.
This is not a construction problem.
It’s a human nature problem.
In the global economy, new ideas are presented and adopted by humans faster than ever before. Beyond innovation, one must integrate marketing, sales, and good ol' back-of-the-napkin math in order to change buying behavior.
As an area purchasing manager for nearly five years, I was introduced to dozens of plausible innovations that could save time and money. The most common obstacle was that it was left up to me—the buyer—to do the hard work of marketing, selling, and developing the good ol' back-of-the-napkin math.
But I already had a full-time job.
Sales rep
This innovation will save you $1,000 per home in reduced carpentry labor costs.
Me
OK great. So you’ve spoken to the carpenter and he’s agreed? And the two of you already worked out the reduction in his labor hours, showing how all three of us win while reducing house cost by $1,000 per unit?
Sales rep
Well, no.
Me
Oh. OK. Who’s going to do that?
Changing hearts and minds is hard work.
As Andrew Carnegie said, "You cannot push any one up a ladder unless he's willing to climb a little himself.”
5. Off-site and the EV Analogy
Thirty-five years ago, I read about the future of electric vehicles (EVs) in my social studies book. (Yes, I’m so old I was issued real books in grade school. Ah, the good old days.)
This was the future of auto manufacturing.
Incredible progress has been made—despite Elon Musk’s lack of focus at Tesla. The former Big Three are now building EVs. Rivian and Lucid have attracted millions in funding and are capturing market share.
Such progress!
And yet, EVs account for less than one percent of all new vehicle sales in the US. There’s an inevitability to EVs at scale, but it’s a long road.
“Being early,” the venture capital cliche goes, “is the same as being wrong.”
There is an inevitability to off-site construction at scale. But it will be a long build cycle.
In a May TikTok post from McCaughey, a grainy video depicts a 1950s-era pit crew slowly changing tires on a race car. Above the video, it read “Stick framing in the 21st Century.” The video transitions to a modern F1 pit crew installing four new tires in a few seconds. Above this pit crew were the words, “Framing using FIOSS™ by Entekra.”
Entekra trademarked and registered the acronym, FIOSS. It stands for “fully integrated off-site solution.”
I believe a FIOSS will play a critical role in the future of construction, but sadly not the trademarked and registered FIOSS by Entekra.
For all the innovation and forward momentum generated by Entekra, McCaughey, and LP, the humble blocking and tackling of business remain critical.
Warren Buffett (whose Berkshire Hathaway owns MiTek, an off-site software developer) once joked about the fundamentals of business—even, and especially, within the innovative ones.
“The sign above the players’ entrance to the field at Notre Dame reads, ‘Play like a champion today.' I sometimes joke that the sign at Nebraska reads, ‘Remember your helmet.’ Charlie [Munger, Buffett’s long-time #2] and I are ‘Remember your helmet’ kind of guys. We like to keep it simple.”
The demise of Entekra was probably precipitated by numerous factors, but the simple truth may be that it failed to generate sufficient free cash flow to fuel its own growth.
