Successful Global Firms Learn To Nurture Their Supply Chains
The construction industry is becoming more global, allowing firms to find a steadier stream of work internationally when domestic markets dry up. However, the widening geographic footprint is forcing firms to come to grips with the added cultural, labor and logistical challenges, including unpaid bills.
"Globalization has happened—the game has changed," said Lee A. McIntire, chairman and CEO of CH2M Hill Cos., who spoke at the Global Construction Summit, which ENR hosted on June 6-7 in New York City for several hundred attendees.
The global engineer-constructor now is working in 119 countries, noted McIntire, who compared the industry's global expansion to buccaneers and pirates searching for treasure.
In reality, such quests are rarely easy. Firms working globally face currency issues, high expatriate costs, difficulties in repatriating profits, corruption risks, cultural miscues, and wear and tear on executives. Because getting paid is the leading challenge in working beyond borders, McIntire urged firms to have an end game in their global strategy.
Managing Growth Across Borders
While McIntire sees Latin America as the next decade's hot market, he noted new security issues and rising costs in CH2M Hill's design center in Argentina. The company intends to cut in half its global footprint. "The world will grow 4% to 6%, but there's only 50 countries we really want to be in," McIntire said.
At the start of 2013, the global economic upturn is less robust than expected, but construction should grow ahead of gross domestic product as Asian economies continue to modernize and the U.S. recovers, said Graham D. Robinson, a London-based industry consultant. Sub-Saharan Africa and Eastern Europe look strong, while North America construction activity is expected to grow at an average of 4.1% annually through 2025.
Keeping up with more complex procurement and supply-chain demands has been a challenge for firms. "We used to buy everything within five miles, but not anymore. This has required a new level of diligence," said Kathy Canaan, Fluor's logistics chief. Work by Turkish power project developer Calik Energy and its construction affiliate Gap Insaat in Turkmenistan for G.E. and other global clients "mastered us on logistics," added Ridvan Akturk, energy director. "It was tough."
Philip Ovanessians, Samsung Construction & Trading Corp. general manager of global procurement, noted "a changing dynamic" in sourcing materials, supplies and labor in emerging markets in Africa and Asia. Early on, as the firm considered a long-term commitment to work in Myanmar, the Korea-based contractor did resource surveys of local construction conditions and capabilities.
While United Rentals Vice President Frank Roth noted major cost savings through use of modular construction, Canaan cautioned that it can create added supply-chain demands for building and transporting modules. Global firms are using software tools to plan and manage procurement flow, said Ovanessians, "but the key is getting effective information inputted."
Roth noted that United Rentals is working to standardize online fleet-management dashboards for equipment sourced internationally. However, Terex Corp. CEO Ron DeFeo pointed out that changing regional regulations, such as diesel emission restrictions, make exporting equipment more of a challenge.
"It will impact the value of your equipment, and it will impact your supply chain," he said.
Owners Weigh In
Supply chain challenges are a “struggle” that a panel of owners said they seek contractor expertise to manage.
“Can you get the materials in place to let the workers work?” asked Brett Henderson, Chevron’s upstream director in Europe, Eurasia and the Middle East.
In selecting firms, owners also measure contractors' ability to bring both competency and “chemistry” to global projects, particularly in emerging markets, panelists said.
“Do they respect and understand the other side?” said Grant R. Stevens, senior managing director of developer Hines India.
Irv Kieback, Procter & Gamble corporate engineering director, said he wants firms to “bring us something unique,” while James Ellis, DuPont global engineering director, pointed to investment in a “localization strategy” and a commitment not to tolerate “arrogance” by expats toward local firms and entities.
Watch the Balance Sheet
While construction sector expansion strategy will still include cross-border acquisitions, AECOM CEO John Dionisio and KBR chief William Utt hinted that their global growth going forward would be more “organic.”
After 70 M&A transactions, Dionisio noted that in some cases, the firm missed “little things” that became stumbling blocks in cultural integration with acquired firms.
Utt said KBR will seek out project partners for risk sharing to avoid “straining the balance sheet.”
But CEOs cautioned that firms seeking new links in global markets need to know what they’re getting into. For buyers, “the typical mistake is to buy something small so you think it’s less work. That’s not the case,” said Uwe Kruger, CEO of U.K.-based Atkins.
Nassef Sawiris, CEO of Egyptian contractor Orascom Construction Industries, which recently acquired Iowa-based Weitz Construction advised potential acquirees: “Use due diligence as a trial and don’t oversell.”
Meanwhile project participants said global worksharing, particularly in design, will grow. The approach, now used on 5% of Parsons Brinckerhoff projects, will grow to 30% in three to five years, said David A. McAllister, its corporate development director.
“Global workshare is recognized no longer as an option, but as the way we work,” added Andy Ewens, group engineering director for AMEC.
Market Changes Through 2025
Robinson, executive director of London-based Global Construction Perspectives presented a preview of a detailed global market study to be released in July.
He said the developed countries in the Asia Pacific market, such as Japan and Australia, are expected to remain weak in the long term as populations age. But emerging Asian countries like India and China are set to grow relatively strongly at 6.9% average per year.
Even though the pace of building in China has slowed recently, it is still the largest construction market in the world. Urbanization and a rapidly growing middle class will propel construction in these countries through 2025, Robinson added.
Sub-Saharan Africa's expected 5% annual growth in that time frame is linked to investment in the exploitation of natural resources, along with spending to overcome deficits in power and infrastructure, Robinson said.
Faced with declining populations, most of Western Europe will experience extremely low growth through 2025, with growth at just 1.1% annually. But Eastern Europe will grow at 6.9% per year, driven mostly by strength in Russia and Turkey, he added.
While North America's construction markets shrank by 3.5% annually on average between 2005 and 2012, the housing recovery in the U.S. and natural resources development in Canada are major drivers for a more optimistic forecast, Robinson contended.
With a population that is already largely urbanized, Latin America’s construction market will grow a little more slowly than in past years, but still at a healthy 3.7% annually, his report forecasts. Potential future bright spots will be Mexico and Colombia.
Global Construction Perspectives's full 250-page report will include 50 separate databases that provide data over a 20-year period for all global markets.
