The international construction market over the past couple years has brought widespread prosperity and opportunities. But it also has led many international contractors to be more careful about the kind of work they do and the conditions under which they are willing to work. For some, it is an opportunity to expand. But for many international contractors, now is the time to be careful and seize only the best opportunities, not everything that comes along.
For ENR’s Top 225 International Contractors, 2005 was a banner year. Combined revenue from projects outside of the groups’ home countries was $189.41 billion in 2005, up 13.1% over $167.49 billion in 2004. But this prosperity wasn’t a sign of weakness at home, as these same companies saw their domestic revenue rise 11.5% in 2005, to $373.42 billion, up from $334.79 billion in 2004.
This high level of global activity is causing material price and personnel pressures, leading to subtle shifts in doing business. “The availability of materials and the high market activity fully loading contractors are extending project completion schedules,” says John Grill, CEO of Australia’s WorleyParsons. He says customers are showing signs of accepting shared risk to minimize premiums from contractors. “We are also seeing a shift away from lump-sum turnkey contracting to reimbursable [engineering-procurement-construction management].”
The hot market is attracting new players into the marketplace. “As the established contractors have become busy, a number of competitors are entering the [lump-sum turnkey engineering-procurement-construction] market with limited experience and track record with a tendency to take higher levels of risk and price aggressively,” says Peter Warner, executive vice president of sales and marketing for U.K.-based Petrofac. “This is a competitive concern for contractors and a major concern for clients, not least from a [health, safety, environment and] project delivery perspective.”
“The negative aspects [in the global market] are the increase in competition from the Asian countries, particularly China and India, and emerging countries with very aggressive prices as a result of very low labor costs,” says Alfonso González Dominguez, chairman of Spain’s Abeinsa. “Chinese companies are running all around the world with low quality and consequently impossibly low prices,” charges Bulent Erdogan, general manager for Turkish-based NUROL Construction and Trading Co. But he says owners are becoming wary of the low-bid mentality. “We see that employers are taking some precautions which we expect to improve the conditions.”
However, Chinese contractors are growing in size, experience, and sophistication. Some of China’s old hands in the international market are now passing the $10-billion mark in revenue. One new name on this year’s list, China Communications Construction Group, actually is the parent of two familiar names on the international scene: China Road & Bridge Corp. and China Harbour Engineering Co. China Communications’ revenue for 2005 was $9.3 billion.
Safe at Home
The hot market has led some large players to settle in traditional “home” markets and refrain from expanding into new regions though risky international bidding. “I don’t foresee any geographical expansion,” says Stuart Graham, president and CEO of Sweden’s Skanska. Among reasons he cites for quitting some markets was corruption. “In many places, customers of international companies do not subscribe to our code of conduct,” says Graham. But he also concedes, “as an industry we have a long way to go.”
Spain’s Sacyr Vallehermoso is another contractor that is finding more than enough work in its traditional markets. “We are focusing in Europe and in the Americas,” says Pedro Alonso, head of corporate communications. He provides a laundry list of reasons: political and economic stability, clear procurement rules and a transparent legal framework.
Regionally, China’s vast construction market holds little attraction for many international players. “It’s difficult and I’m not sure they need us,” says Richard Francioli, chairman of Vinci Construction SA, France. Hochtief’s current work in China is “insignificant compared to the rest of the world,” says Hans-Peter Keitel, chairman and CEO.
For many international contractors, an uncertain legal framework in the Far East and especially China have been discouraging. “We are somewhat disappointed with the Far East construction market,” says Juan Pedro Alonso, international director of Spain’s Acciona Infraestructuras. “Construction remains very challenging due to the regulations that apply to the construction companies and increasing competition.”
Japan’s Kinden Corp. also has found China daunting. “The law and regulations are not clear for us [and] China’s first class contractor’s license is a barrier for us,” says Shinichi Kotoku, manager in Kinden’s international division. Instead, Kinden has successfully followed Japanese manufacturers into such countries as Thailand, Vietnam and Indonesia, he says. Kinden also is working in Malaysia, including the Kuala Lumpur sewerage pipe jacking project and the Jimah 500-kV substation project, he says.
For France’s Bouygues Construction, Hong Kong’s building sector still offers opportunities, but infrastructure is “flat,” says Deputy CEO Michel Cote. He forecasts an upturn next year or 2008. “We are more optimistic about the market of Singapore,” he says. Expansion of Singapore’s gambling sector is creating work. “We are trying to follow our clients [and] in the field of casinos there are only three or four clients worldwide,” he adds.
One region that is a study in contrasts is the Middle East. The rapid increase in oil prices have fueled a major rise in oil and gas projects. “The Middle East is the area where we expect the largest opportunities, as a result of the huge expansion plans in the oil and gas and petrochemical sector,” says Samer Khoury, executive vice president of Consolidated Contractors International, Greece. He expects the boom to last. “Oil companies have huge planned investments in the next five years all over the world,” he says.
War continues to cloud over the Middle East, with security concerns throughout the region. London, U.K.-based construction staffing firm EPCglobal on Aug. 10 released the results of a survey of 2,128 international engineers, over half of whom are working or have worked in the Middle East, on their attitudes on working in the Middle East and North Africa. Of the group, 17% said they would not work there, while 56% said they would only if the financial rewards were sufficient. And 60% said that they would not work in Iraq.
“We can’t ignore that experienced engineers...perceive risks associated with working in the area to have increased since 2003 and as a result of the present conflict in Lebanon,” says Tobias Reed, CEO of EPCglobal. But he notes that experienced engineers are no more likely to refuse to work in the region that they were three years ago.
Despite its huge rebuilding program. many contractors remain wary of working in Iraq. For example, NUROL had been negotiating contracts with the Iraqi government for a number of projects. But, “as we could not get guarantees for the...