Squeeze Is On As Firms Fight For What Little Work Is Available

The industrial and manufacturing sector, already care-worn with decades of ‘hollowing out’ as plants moved overseas, continued its slow spiral downward in the last year. The economic crisis that hit in fall 2008 further sapped capital expenditures across the board, and the bankruptcy of two of America’s Big Three automakers this spring contributed to the decline.

Photo: DPR Construction

Solar-cell manufacturing facilities, like this 45,000-sq-ft design-build plant for Suniva, are a rare bright spot in manufacturing.

Photo: Kia

Kia is finishing its first auto-assembly plant in the U.S.

There are some bright spots, however. New starts have ramped up for polysilicon manufacturing plants as demand for photovoltaics increases and the demand for new battery technology to power hybrid vehicles has created a mini-boom in battery plants in the U. S. A recent injection of accelerated tax credits for plant and equipment for alternative-energy manufacturing, announced by the Obama administration in August, should provide even more stimulus for that sector.

Still, the short-term outlook is one of reduced capacity, more emphasis on retrofits instead of new plant construction, and a sector hamstrung by a lack of credit and slack consumer demand, sources say. “There is a pall of uncertainty hanging over everything,” says Richard Haller, CEO of Detroit-based Walbridge. “The arc of the manufacturing sector, if you want to call it an arc, is more a hyperbolic curve downward.”

Key manufacturing sectors like auto and steel production were doing well enough last year, Haller says, with work on the boards, particularly plans for retrofits to adapt to new types of demand. “Then August hit,” he says, referring to the global economic meltdown. “Then everything just stopped. It just really decimated manufacturing,” he says.

The resulting lack of credit has stalled projects and led to what Haller says is a major reduction in capital construction spending in those sectors. Other major contractors agree. “Certainly, we have seen a marked decline in the last 12 months in demand for construction in the manufacturing sector,” says Gavin Keith, project executive for DPR Construction, San Jose, Calif. “The collapse of access to capital/financing, the low demand for products and the uncertainty of the timing for recovery, have all stifled manufacturing production and ensuing capital construction programs.”

DPR says its best growth potential is in computer-chip fabrication plants, battery plants and solar-panel manufacturing. One example is a new solar-cell plant manufacturing facility in Norcross, Ga, built for Suniva Inc. The 45,000-sq-ft design-build facility—one of the first of its kind in the U.S.—was completed in 16 weeks earlier this year and includes advanced elements such as high-purity water systems, onsite waste-treatment systems, chemical-delivery systems, chemical bunker and high-purity piping.

Solar-panel manufacturing is quite hot, say industry sources. The Houston-based research firm Industrial Info Resources Inc., estimates there are at least 12 such facilities under development but not yet under construction in the U.S., totaling $780 million. The largest currently under way is a $210-million facility near Austin, Texas, by Austin-based Solar Array Ventures. The project broke ground in June. DPR Construction is lead contractor on the plant.

Not Gloomy

“It is not all gloom and doom out there,” says Michael Bergen, vice president of marketing with Industrial Info Resources. There are roughly $10 billion of semiconductor chip plants planned or under construction in the U.S. Intel, for example, is spending $3 billion to expand a chip plant in Chandler Ariz. Another similarly sized expansion is under way at Intel’s existing plant in New Mexico.

Global Foundries Inc., Sunnyvale, Calif., began site preparation earlier this year for a new $4.2-billion greenfield semiconductor manufacturing plant in Saratoga Springs, N.Y. Delaney Construction Corp., Mayfield, N.Y., is providing civil/site prep for the project.

The downturn is changing how semiconductor plant owners engage contractors, says Bart Eberwein, CEO of Hoffman Co., Portland Ore. With less work and more hungry contractors, owners are squeezing every penny from their supply chain. “We’re seeing a shift in purchasing strategy,” says Eberwein. “It is becoming super-cost driven.”

Some manufacturers are even moving away from preferred providers, Eberwein says. “They are saying, ‘This is going to be all about costs, this is all about fees.’” Hoffman has seen a 30% drop in manufacturing...

...volume since last year. “We see no indication there is going to be a quick turnaround,” says Eberwein. “You are looking at years and not months of a slower market.”

In the pharmaceutical and biotechnology manufacturing sector, opportunities also have diminished but contractors see it as a steady, growing market. More than $20 billion of capital projects are planned through December 2010, according to Industrial Info.

One example of a recently completed project is a 203,000-sq-ft manufacturing, research and office facility for United Therapeutics Corp. in Raleigh, N.C. DPR’s Keith says his firm worked closely with UTC as the project’s design-build contractor to integrate the manufacturing facility with the office and R&D components of the facility.

Major projects continue in the steel sector. The sector has been hampered by the economic downturn, but still has more than $26 billion of projects slated to start by December 2010, says Industrial Info’s Bergen. One of the largest is a $1 billion-plus, 1.6-million-sq-ft greenfield complex and mini-mill for manufacturing pipe for oil-and-gas pipelines in Gregory, Texas, near Corpus Christi. The owner is TPCO Enterprises, Houston, a subsidiary of China’s Tianjin Pipe Group Corp. The facility will be the largest single investment to date by a Chinese company in the U.S., says a TPCO spokesman.

Auto-Sector Blues

The auto sector has been roiled by the economic recession. The impact for contractors is less greenfield work, a lot more re-tooling of existing facilities and intense competition for available work. Events unfolded earlier this year that are leading to a fundamental change in the auto sector. In June, General Motors filed for bankruptcy protection, citing $82.3 billion of assets and $172.8 billion of debt. It emerged from bankruptcy 60 days later, but as a shell of its former self. In the process, GM has shut down plants in Michigan, Indiana, Ohio and Delaware, and plants in Tennessee and elsewhere in Michigan have been put on standby.

Chrysler filed for bankruptcy on April 30 and emerged as a new entity 31 days later with Italy’s Fiat as the new controlling owner. Fiat will have a 20% ownership stake in the new entity, called Chrysler Group, but will have effective management control going forward.

Meanwhile, in West Point, Ga., work is nearing completion on Kia Motor Corp.’s $1-billion-plus greenfield auto-assembly plant. The plant is located 80 miles southwest of Atlanta and is Kia’s first in the U.S. Construction began in 2007 and it will produce its Sorento sport utility vehicle when completed. So far, Kia has received over 43,000 applications from people seeking work in the new plant.

The world’s largest automaker, Toyota Motor Corp., has had its own set of difficulties as consumer demand shifts. It is reconfiguring its portfolio of plants in the U.S. to reflect new consumer buying habits. At this time last year, Toyota was moving forward on construction of a major facility in Blue Springs, Miss., to produce a new version of its Highlander SUV. The $1.3-billion plant was scheduled for completion in 2010. Last December, Toyota said it would retool the plant to make Prius hybrid vehicles, but demand for that vehicle has slackened. Since then, completion of the plant is on indefinite hold, awaiting an upturn in the economy.

Conversely, Toyota in July said it would spend $470 million to retool and upgrade its Princeton, Ind., plant to build its Sequoia and Highlander SUV lines. And in August, Toyota announced a $147 million expansion of its four-cylinder engine production facility in Huntsville, Ala.

Changing Times

The reconfiguring of plants will be the dominant trend going forward, says Walbridge’s Haller. “The auto sector is undergoing a fundamental shift in production,” he says. “There will be fewer large projects, more re-tooling and a strong sense of uncertainty. We recognize that there is still meaningful opportunity, particularly for firms that can react quickly to the automakers’ changing plans and we are actively pursuing these opportunities.”

Haller sees a 50% drop in the pipeline of auto-related projects since last year. As a result, automakers are making contractors jump through even more hoops to secure work, he says. In a recent competition for a relatively small project, Haller says one major automaker took nine firms through the entire selection process before making a decision.

The impact on top contractors working in the auto sector, as in most other manufacturing sectors, is for even more blistering competition for available work.

“It is a buyer’s market but there just are not a lot of buyers out there,” says Haller.