Wednesday, August 31, 2011

Traditional Markets in Decline, Firms Look to Break in New Regions

McGraw-Hill Construction Research & Analytics Number of Top 225 Firms Reporting Backlog Changes

McGraw-Hill Construction Research & Analytics Percent of Change for Top 225 Firms Reporting Backlog Related Links: Full Report: ENR's 2011 Top 225 International Contractors Top International Contractors Basic Rankings Top Global Contractors Basic Rankings Related story: Massive Gigaprograms Come with Layers of New Risk

The global shift in the international construction market can be seen in the results of ENR's Top 225 International Contractors list. The Top 225 as a group generated $383.66 billion in 2010 contracting revenue from projects outside their home countries, down only marginally from 2009's figure of $383.78 billion. On the domestic front, 2010 revenue for the Top 225 rose by 10.8% to $688.71 billion, led by China's major growth among contractors working on that nation's massive infrastructure program.

Contractors are shifting their focus to new and emerging markets, which can be seen in the Top 225's regional revenue breakdowns. International revenue fell 6.6% to $94.18 billion in Europe. It also fell 6.6% in the Middle East to $72.43 billion and 6.5% to $32.61 billion in the U.S.

By contrast, international contracting revenue rose 25.6% to $34.05 billion in Latin America and the Caribbean, 6.7% to $60.59 billion in Africa and 4.7% to $76.64 billion in Asia and Australia. This shift in focus is leading to upheaval for major international contractors.

International construction firms have not escaped the recent turmoil in international markets. "The main impact has been in the U.S. and the European Union," says Pierre Duhaime, CEO of SNC-Lavalin Group. However, SNC has been traditionally strong in developing countries such as those in Africa, softening the impact of the downturn on the firm. "Latin America, the BRIC [Brazil, Russia, India and China] countries and Southeast Asia are certainly all regions where we see great opportunities for the future, and we are actively targeting these regions for business growth."

The sovereign debt crises hitting some European countries have hurt many construction programs. "Construction-related spending from the economic stimulus programs was stopped earlier than expected or not passed at all, instead being replaced by austerity packages to help slow the national debt," says Hans Peter Haselsteiner, CEO of Austria's Strabag SE. However, he says there has been an uptick in investment from private clients and German developers.

Philippe Quoilin, COO of Besix warns that the budget woes in the U.S. and the European Union may have an indirect impact on other countries' spending. The sovereign debt crisis has limited many countries' ability to invest in costly projects, and countries in good financial shape have "received the warning and will not make the same mistake. They will be prudent in investing in construction development," he says.

Europe's construction community underwent major change this summer as Germany's largest contractor, Hochtief AG, fell under the control of Spain's ACS Group. Hochtief's CEO, Herbert Lütkestratkötter quit and was replaced in May by Frank Stieler, an executive board member since 2009. Hochtief will continue functioning as a separate company, helping ACS enter new markets like Asia Pacific, according to one bank analyst in Frankfurt.

Hochtief will increasingly focus on energy, transportation infrastructure and urban construction sectors, says Stieler. It will increase "asset turnover," particularly by selling public-private-partnership investments. Hochtief is on course to sell its airport business by this year's end, he adds. The firm has interests in airports in Athens, Budapest, Düsseldorf, Hamburg, Sydney and Tirana.

Alain Bonnot, chairman and CEO of Vinci Construction Grands Projets (VCGP), is uncertain how its relationship with Hochtief will change. Until now, Hochtief teams have been "good competitors and good partners," he says. "ACS/Dragados has been very aggressive ... because they have an internal market which is completely destroyed."

Competitive Pressures

The downturns in many major regions have caused an increase in competition as more firms enter unfamiliar markets. "We see crowding of markets as some local players aspire to be global players," says Ravinda Kansal, regional CEO of India's Punj Lloyd operations in Africa, the Middle East and the Commonwealth of Independent States. He says that many major contractors are holding back in the face of new competitors making unrealistic bids in unfamiliar markets.

One such situation arose in June. China Overseas Engineering Group was dismissed as contractor on the A2 project in Poland. The action had less to do with its bid price than experience, says Johan Karlström, CEO, Skanska Group. "They underestimated how difficult it is to go to a new market," he says. But as China's internal economic growth moderates, Karlström believes more Chinese contractors will look for entry into new geographic markets.

Chinese contractors "are becoming bigger competitors," agrees Yves Gabriel, CEO of Bouygues Construction. "We are mainly competing [with Chinese contractors] in Africa for the moment, but these companies might probably come in Europe in the future." Balfour Beatty already is competing with Chinese firms in Hong Kong and the Middle East, says CEO Ian Tyler. "They do have some specific skills which are very good," he adds.

Chinese contractors have proposed joint venturing with VCGP internationally, says Bonnot. "I don't know if we will. We don't want to have partners just to get a lower price. If they have good technology and are well [placed], then why not?" he says.

While Chinese contractors have been pushing into the international market with some success, international contractors trying the penetrate the Chinese market have been less successful. Bonnot sees little prospect of work for VCGP inside China itself. Gabriel agrees, saying, "The Chinese market is particularly closed," although Hong Kong "is booming."

Mainland China is "very, very closed," adds Tyler, but he sees niche opportunities in the energy sector. He agrees that Hong Kong is "very buoyant," particularly in infrastructure. "In general, we avoid countries where we have no strategic advantage, like China," says SNC's Duhaime. "The Chinese model, which favors Chinese companies, puts companies like ours at a disadvantage," he says.

India, on the other hand, is positively courting their involvement. Bouygues is interested in large, complex highway projects, "particularly those including tunnels," says Gabriel. And the company is tracking metro opportunities in big cities.

Besix is using its past work in India as a springboard for expansion because "this country has a huge construction potential," says Quoilin. "We have a small presence in India," adds Tyler. "We are trying to see how we might participate in that market." Bureaucracy and corruption are among his concerns.

But India is not in Skanska's sights. "We can't be everywhere," says Karlström. While sticking to its policy of developing "home markets," Skanska is nevertheless inching into new countries, such as Russia and Colombia, he adds.

Arab markets remain attractive, though the political turmoil in some countries has disrupted businesses. "The effect of the Arab Spring on our business in Libya [is] ... we have had to scale back our near-term business objectives," says Duhaime. VCGP evacuated about 130 people from the Cairo metro project, but they are back now, says Bonnot. "We got back from Libya one full plane," he says. "We had very good relationships in Libya ... now the subsidiary is closed."