Mapping the Paradigm Shift Towards the Digital Era in Southeast Asia’s Building & Construction Markets
- Volume XXI, Issue 78
- Executive Insights
Is there an appetite for digital intervention amid the seemingly traditional brick-and-mortar construction materials industry of Southeast Asia (SEA)? Yes, according to L.E.K. Consulting’s recent building contractors’ survey. Given the inevitable generational shift in both distributors and the user base, and the propensity of younger generations to rely on digital tools, it is vital that building & construction companies consider the digital route as a means of growth in the SEA market.
L.E.K. recently conducted a survey of 300 builders and contractors across Malaysia, Indonesia and the Philippines to understand their purchasing habits and their receptivity towards online channels, as well as the extent to which construction players can leverage the potential digital appetite of their customers. Our survey uncovered a persistent theme: As with many other traditional industries in SEA, construction has been considered a straggler in terms of willingness to embrace disruptive ideas — in particular, digitisation. In part, this could be because builders in SEA do not perceive a tangible connection between digital innovation and improved customer experiences, much less new customer wins. In the face of such scepticism, it is natural to question whether the pursuit of digitisation can be a productive endeavour for the SEA building & construction industry.
In light of a generational shift, however, it is imperative that participants in the building & construction value chain in SEA consider developing an online strategy for the future. One trend indicates that change may be more forthcoming among this new wave of users: the increasing propensity of online purchasing. With mobile/smartphone penetration surging, we anticipate an overall paradigm shift towards digital intervention in SEA’s construction value chain.
Robust growth in the region is expected to benefit the entire construction value chain in SEA-5 (Indonesia, the Philippines, Malaysia, Vietnam and Thailand, as shown in Figure 1), driven by a shared set of key factors that include robust economic growth; a rapidly expanding middle class, which is driving private expenditure; and increases in foreign investments. China’s Belt and Road Initiative, for example, has been making significant investments in this region.
Infrastructure remains the main focus for most of these countries, part of several nation-building priorities to improve connectivity and modernise. However, both residential and non-residential (commercial or industrial) development efforts have also benefitted, especially in the Philippines, Indonesia and Malaysia.
Construction materials in SEA can be sold directly or indirectly in various store types and settings. The region also supports a spectrum of builders, ranging from small homebuilders to small and medium-sized contractors to large construction players. Yet the market remains largely fragmented, and construction players are traditionally known to be quite reluctant to embrace new ideas. These factors are key to understanding the procurement habits and distribution channel dynamics that exist in SEA.
Our survey indicates a continued reliance on and preference for traditional purchasing channels and platforms, with 50% or more of purchases made in independent or chain hardware stores (Figure 2).
Online purchases of building materials are almost non-existent in the region at present. Reliance on conventional channels is partly due to the entrenchment of traditional modes of doing business but is also driven by lack of credible online options.
Contractors in this region prefer channels that showcase products (e.g. showrooms), are conveniently located and offer products across multiple categories (Figure 3). Each country displays certain preferences. For instance, Indonesian builders favour showroom facilities with product displays that permit them to touch the product or gauge its overall quality, when compared with other channel selection criteria. On the other hand, the Filipino market particularly values physical channels because they permit builders to receive verbal product recommendations and direct advice from contractors.
Although current consumption patterns signal a propensity towards traditional channels, we believe that in the context of anticipated growth in these markets and the digital appetite of the next-generation workforce, opportunity for digital channels exists in these three countries.
Survey respondents who indicated they have made a purchase via online channels are mostly 40 years old and younger — 75% to 90% in the three countries discussed earlier (Figure 4). This exposes a potential generational shift and a resulting paradigm shift towards the digital era as the industry observes the continuous participation of, and eventual takeover by, members of Gen X and younger generations while their predecessors phase into retirement.
The generational shift is reflected in our survey — respondents indicated they are likely to increase their usage of online stores as compared to other channels in the future (Figure 5).
The continued increase in smartphone penetration rates in these countries is expected to drive both the presence and the awareness of online channels, and is likely to influence industry participants’ buying behaviour.
However, online commerce is only a small part of the digital story. Builders and contractors show a high degree of digital engagement. For example, aside from basic email communication, respondents across all three countries in the survey acknowledged their reliance on devices for technical product information, product reviews and price comparison (Figure 6).
In light of the likely generational shift and the rising importance of digital for users — i.e. contractors and builders — participants in the building & construction products value chain must adopt a digital mindset. L.E.K. has developed a framework to help these value chain participants (from manufacturers to construction firms) undertake their digital journey, recommending that firms focus on four areas:
Future opportunities are abundant within the SEA construction market’s digital landscape, where a transition in the workforce towards a younger demographic represents not just an underlying need, but also a significant untapped commercial opportunity. The market is poised for growth, but there is also a role for operators to play in increasing awareness and availability of digital solutions. Key considerations for companies building a digital strategy in this space will include developing strategic product portfolios to align with unmet needs, collaborating with capable local partners on R&D or commercial issues, and building internal expertise.