Design Firms Eke Out Profit Even as Global Markets Gyrate
Austerity in public markets in the U.S. and Europe as well as mining-sector falloffs in the Southern Hemisphere are dampening international design firms’ revenue and profits, but CEOs are looking to new markets and altered strategies to stay on a growth track, said 270 global engineering and design-build chiefs who convened in New York City in October at an annual management conference.
For Arcadis, the Dutch-based global giant, working globally has been "great, OK and still ugly," company CEO Neil McArthur told peers at the event on Oct. 16-17, sponsored by industry financial and management services firm EFCG.
He said work in emerging economies now comprises 25% of the firm's portfolio. The U.S. initially posed uncertainty to the firm, he added, but "turned out OK," and Europe "remains ugly" with negative growth and lower margins.
“Western governments are all broke. It’s pretty tough and will stay that way,” Jacobs Engineering Group Chairman Noel Watson said. “It’s the new norm for this decade, and we need to plan for what we see today.”
EFCG President Paul Zofnass noted that growth fell for 40 respondents, compared to 33 firms last year, according to its survey of 220 companies. But ever optimistic, respondents predict a median growth rate of 7% in 2014, with median margins of 11.8%, he said.
“We are so focused on profit because the model breaks down if returns are not there with the risks you take,” said Paul Hardy, CEO of Australian firm Aurecon.
On the day the U.S. government shutdown ended, CEOs of several industry giants said there would still be business and project impacts from a changing federal marketplace. They were hopeful that work from municipal and private clients could fill some of the gap, noting the potential for more design-build and public-private ventures. HNTB group chief Ed McSpedon said engineers can expedite payment through design-build.
But Parsons Brinckerhoff’s George Pierson and other CEOs voiced concerns about uncertainties related to health coverage under the Affordable Care Act and higher costs for employees and firms. EFCG said 51% of firms expected a minimal impact, but 26% said it would be “noticeable,” with costs up as much as 25%.
Stantec CEO Bob Gomes said firms’ approaches to implementing the new rules and managing costs “will be a differentiator” in attracting new employees.
That was key for CEOs, with turnover averaging 15.5% among the largest surveyed firms, those with revenue above $1 billion. Pierson noted the challenge of keeping large firms “personal and less numbers-oriented.”
Of $38 billion reported by EGCG survey respondents in non-U.S. revenue, 28% was in Canada, the largest share, with 16% in Australia, 15% in Europe and 12% in the U.K. The 40% share of non-U.S. revenue that firms reported in 2013 compares to 7% in 1995, the survey said.
Europe is Slow Moving
The large contingent of European firm executives were dismayed but resigned to continued doldrums in that depressed region but some are making the best of it.
"We've grown 10% every year," said Jens-Peter Saul, CEO of Denmark-based Ramboll, noting that Nordic countries are spending "what they can afford."
Jim Stamatis, president of U.S.-based Berger Group's international arm, said the firm "was looking at maintaining a presence in Europe but not looking at strong growth," particularly in the public sector. He noted that "investment is limited unless money is coming in from other sectors such as banking."
Canadian designer Golder Associates' private-sector focus has made its European business "the best in 20 years," said CEO Brian Conlin, noting owners' increased business discipline and having "the right people focused on the right clients."
He and others still see potential in eastern Europe and Central Asia. "Kazakstan, Turkey and Poland are actually good opportunities on the private side," said Conlin. "I'm quite excited."
Peter Van Kerckhove, chairman of Belgium's VK Group, said that although the European Union aims to boost GDPs and infrastructure standards of its newly-admitted eastern European members, "the difficulty there is political rivalry." He said that such disputes are thwarting Romania's efforts to expand its current 450-kilometer highway network. "Politicians can't decide where new ones should be routed, it's a problem," he said. "Once these countries get more maturity, there will be big potential there."
Ups and Downs in Asia
Although some engineering firms have made inroads in the Chinese and Indian markets, profitability remains elusive because of strong cultural obstacles, CEOs said. The were no Chinese or Indian firms on the EFCG panel or even at the conference.
WorleyParsons has prospered by serving Chinese clients working outside of the People's Republic or serving multinational chemical firms, said Managing Director Iain Ross. The firm has 2,700 staffers in China "and we make money there," he said.
McArthur noted that China's GDP, just 25% of Germany's in the 1990s, has since grown 40 times as fast. He said that the number of Chinese companies in the Fortune 500 has grown to 70 from just 10 in a decade.
Simon Naylor, Americas president for AMEC Environment & Infrastructure, said the firm's "proposition offered" to the Chinese also involved overseas support to firms working in Australia, South America and Canada. It has 600 employees based in China.
The country's "Catch-22 licensing program" for overseas engineers is a problem, said SNC-Lavalin CEO Robert Card. "You have to be there already doing the work to get a license to do the work," he said. "The Chinese have lots of engineers and would rather do it themselves."
Gregs Thomopulos, chairman of U.S.-based Stanley Consultants and a former president of the International Federation of Design Firms (FIDIC), said "the Chinese have [their] own agenda," with only language and knowledge of FIDIC's international contracting documents "holding them back". He said FIDIC now is working with Chinese design officials "to prepare Chinese engineers to work abroad."
Added the CEO of an Australian engineering firm, "there are opportunities now, but it is a matter of time before they no longer need us," he said. Competing "will be tough for us as smaller-size firm, [and] China will no longer be the place for us."
Paul Hardy, CEO of Australian engineer Aurecon, told peers that Chinese firms are making strong inroads in Africa "and they bring everything—the money, the technology, the equipment, even the cement and plaster to build apartments in Angola."
But he emphasized that Chinese work quality abroad is mixed, noting that "we have a successful business in Angola rebuilding Chinese roads that only last a couple of years, so we’re enjoying that." He also pointed to corruption issues and growing tension with local vendors related to Chinese competition.
CEOs were more pessimistic about India. Omar Shahzad, CEO of Singapore-based Meinhardt Group, said that while the firm was profitable there in the past, the last few years have been tough. "It will take years to overcome macro-economic challenges there," he said, such as maintaining the value of the rupee.
"Doing business as an international company is much harder as the regulations keep changing," he said. Shahzad advised peers to "wait and see for the next 12 months," since much investment is on hold, pending upcoming elections next spring.
Mining Woes Hit Southern Hemisphere
Firms were more optimistic about South America as a long-term investment, despite current market travails in key countries such as Brazil.
SNC-Lavalin's Card said the country "was a tough place in which to start up and make money." While his firm has 2,000 employees there, "I don’t know if I’d go there if we weren't there already."
Card became CEO of the firm in 2012 following the ouster of its previous CEO, who now faces bribery-related legal charges. "If you buy a company there, you can end up inheriting huge liabilities without knowing it," he said. "That’s why lots of firms are for sale there and not many of us are buying. The structure of the market also is socially complex. There are a lot of unwritten rules."
He noted new potential in Colombia, where the firm employs 2,000 people. "It's small but an emerging resource market," Card said. WorleyParsons' Ross noted the mining slowdown affecting its work in Peru and Chile, "but overall I still see Latin America as very respectable. The potential exceeds the current growth rate."
McArthur of Arcadis said the firm's 15-year presence in Brazil has insulated it against market swings in mining or oil and gas. But he sees Chile a slower-growing market with less infrastructure spending "and more Spanish competitors who know the language."
Conlin of Golder, which has worked in South America for a decade, said the mining sector will return but likely not to the same strength as before. "We don’t see commodity prices as explosive again," he said.
The mining sector collapse also has roiled design firms in Australia, those domestically-based and more recent arrivals from abroad.
John Douglas, CEO of Sydney-based Coffey International Ltd., said the country's economy "had a charmed run since 2008 when the rest of the world went into a slowdown. Now it's converging with the others. He noted three key factors: rising commodity prices, "our cost structure got out of line with the rest of world," and six months of "political uncertainty" in the country.
Said Douglas: "A lot of American firms thought it was a great idea to come here. Now we're seeing a lot of people get burned."
Jose Granado, CEO of Wood & Grieve Engineers, said there could be as many as 7,000 unemployed engineers in western Australia.
Ian Hopkins, CEO of Australian designer Norman, Disney & Young, noted that the country is moving to substitute infrastructure work to fill the mining work gap, with state governments influential in the process. He said that despite past dysfunction, the government of New South Wales is embarking on new projects, as is Queensland, which had cut back spending in recent years.
New Zealand, while small, also shows potential, particularly in rebuilding the earthquake-ravaged capital of Christchurch, a government-funded effort. "It will be lucrative, but it's a 10-year journey," said Aurecon's Paul Hardy.
Political uncertainties in the Middle East still hamper market resurgence. "There is growth in the region, but can you make money?" asked Stanley's Thomopulos. Bisher Jardaneh, CEO of a small regional Jordanian firm, Arabtech Jardaneh, noted a "cowboy market" lacking in local rules covering contracts, procurement and engineering standards.
"Everybody comes in from all over the world, and local forces can’t establish parity with the client and set standards to manage the risks," he said. "Industry can benefit from setting those rules" such as in risk management and anti-corruption, Jardaneh said.
Despite Canada's appeal for firms in energy markets, Ontario-based Golder CEO Conlin said the "competitive environment here is higher than in the U.S." Card of Montreal-based SNC-Lavalin added that the strength of America's unconventional oil-and-gas market "will put a relative drag on the Canadian economy. We’ll see how the pipeline process goes to get oil out of Canada east and west. If it works, it will charge up the economy."
Firms pointed to the country's well-developed market for public-private partnerships as driving work, but noted the risks. "You need to pick projects carefuly, have the right partners and be on the winning team," said Scott Stewart, managing director of Canadian-based IBI Group. "You can't afford to do too many losing propositions."
CEOs generally noted difficulties in talent management, particularly high turnover still plaguing firms and younger employees from western countries less willing to travel.
Said Meinhardt Deputy CEO Shahzad: "After the Asian crisis, a lot of graduates went into banking. As the Asian economies grow, we can't find enough good people and that is constraining our growth. We can offshore part of the work but that doesn’t solve the problem entirely."
Aurecon's Hardy added: “Younger employees don’t have the money to buy in and—coupled with them not taking the longer career view—the [business] model is under pressure. We’re looking at that very hard.”
