Roundtable

Hong Kong 2022: Surviving the inflation and productivity crisis in Hong Kong’s construction industry

  • April 28, 2022
A robust project pipeline, compounded by supply constraints and labor shortages, has fueled inflation in construction costs to an unsustainable level.

Additionally, construction capacity is constrained by low productivity and the slow adoption of digital technologies. While there are solutions to these challenges, Hong Kong’s complex environment and traditional construction culture has limited the industry’s ability to transform.

On April 28, 2022, McKinsey’s Global Infrastructure Initiative hosted a roundtable with senior leaders from across the value chain, including owners, engineering and construction players, material suppliers, investors and public sector leaders to navigate the path forward.

  1. Systemic change is needed: Hong Kong’s construction productivity and costs are expected to worsen in the next 8 years. Accelerating inflation coupled with declining productivity will drive up construction costs by up to US $22 billion by 2031, when Hong Kong is already among the most expensive cities to build in the world. There was strong consensus that systemic transformation is needed across commercial constructs, talent, government incentives, and tech-enabled ways of working. Incremental shifts will not deliver the type of step change needed.
  2. Reinvent the workforce: With 41 percent of active labor retiring in the next decade, increasing attrition, and decreasing new entrants, Hong Kong’s construction industry will face a labor shortage of >300,000 FTEs by 2031.  Even if it increases labor productivity by 50%, it would still be unable to meet the construction pipeline demand. Alleviating measures would include consolidating roles enabled by more integrated and streamlined processes; as well as creating new digitally-enabled roles that could replace multiple traditional roles and allow talent beyond Hong Kong to contribute remotely. Partnering with the education sector would help develop, attract, and recruit much-needed talent.
  3. Redefine policies, standards and requirements: Although lean construction and digitalization can help alleviate the challenge, Hong Kong’s construction players can only do so much without some fundamental innovations. Examples would be for digital certifications, inspections, audits and approval solutions to become accepted alternatives by the government and private developers; or for digital construction capabilities to be formalized and recognized by the education sector and professional bodies. Participants discussed a potential government-led alliance to connect the modular construction ecosystem, standardize requirements, and integrate upstream suppliers to support scale.
  4. Reconfigure incentives to encourage innovation, not stifle it: Shift away from awarding contracts based on minimum cost, which sets a norm of transactional behavior and discourages longer-term investments in quality. “The industry [habitually focuses] on ticking the box instead of delivering a good job,” said one participant. One alternative was the increasing use of a two-envelope approach, where technical capabilities are evaluated independent of price point. Across the board, participants stressed the need for new mindsets, greater transparency, and increased risk sharing to navigate the crisis.
  5. Take a long-term view when investing in digital: It will take time for digital solutions to produce a positive return on investment. Many organizations give up after a few pilots fail to gain momentum. The challenge is usually not the solution itself, but the commitment and resilience to sustain coordinated behavioral change. “Make it really easy to be digital and really hard not to be,” said one participant. Realizing the benefits of technology will require adoption by the full industry, including small/medium enterprises and older workers. While senior members of the workforce have the most practical expertise, they are also generally the slowest to adopt new technologies. Solution providers, educational institutions, and the public sector can take steps to make digital tools accessible for those above 50-60 years old—for example, through more intuitive user interfaces or targeted training programs.

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