Managing risk on the world stage
Updated: 2012-10-05 08:34
By Woolf W. Huang (China Daily)
Chinese construction companies have a lot of work to do if they are to be competitive
An analysis of the global construction sector reveals that many leading companies have weathered the global economic downturn by maintaining their revenues - none more so successfully than the key players from China.
Chinese companies have taken some dominant positions in the industry, but this is only a recent phenomenon. What is clear from an examination of company performance is that they should adopt industry best practices if they are to maintain these positions.
When ranked by revenue, not one Chinese company was among the top 10 construction companies in 2002. But, by 2010, the combined revenues of the four top Chinese companies, totalling $238.5 billion (185.2 billion euros), overshadowed the $198.5 billion combined revenues of the six other companies in the top 10.
Chinese companies' primary source of growth has been domestic demand, which they used to build significant scale rather than bidding for large international projects.
With the next big growth area for the industry set to be construction in emerging markets, there is an expectation that these companies will be among the leading challengers for this work. Construction demand in emerging markets is expected to double within a decade and become a $6.7 trillion business, accounting for some 55 percent of global construction output by 2020. Any companies hoping to challenge for that growth need to do it profitably, and their efforts will be aided by increasing the efficiency of their operations.
Accenture's construction research of high-performing companies has shown that improving risk management and financial-performance modeling, along with increasing the efficiency of their operations and streamlining logistics and supply chains, can help strengthen the position of the Chinese players. Our research suggests that strengthening these areas of operation can greatly aid the drive for higher profits.
Risk management and financial-performance modeling capabilities that enable the most efficient allocation of capital are assuming a more important role as global expansion and diversification take hold throughout the industry. Construction companies need to become highly efficient financial managers using dedicated central teams and streamlined internal processes to confirm group-wide access to cash, improve their debt/EBITDA (earnings before interest, taxes, depreciation and amortization) ratios, and accelerate the rotation of assets as construction cycles change. Adopting this approach also limits the exposure of companies to client defaults and project risks by leveraging sophisticated risk-monitoring capabilities.
Employing new technologies as enablers of efficiency will be important to leading companies, as it allows them to implement process innovation programs to optimize maintenance services and field-engineering activities. Companies will also need to explore using building information modeling systems in their engineering and construction processes to further improve efficiency. Infrastructure owners anxious to minimize the risk and the cost of large, complex and high-value projects are finding well-integrated suppliers increasingly attractive.
Fine-tuning logistics and the supply chain are also essential. This may include reinventing supplier relationships to reduce administrative costs, improve quality, and reduce the time required to complete increasingly complex products.
Some leading companies have extensive global sourcing operations and use e-procurement, while others may have internal programs to verify subcontractor compliance.
Installation times can be reduced by developing turnkey solutions and prefabricated products, embracing a more customer-oriented approach similar to that of other consumer industries. Using analytics capabilities will help Chinese companies measure and monitor the volatility of raw material prices, as well as price variations among suppliers.
This will become more important as Chinese players expand. The largest Chinese construction companies are increasingly active in fast-growing markets in the Asia-Pacific, Africa and the Middle East, forming consortia to bid aggressively on large infrastructure projects. Chinese construction companies are now looking to expand in North America, where they have linked up with Chinese rolling stock companies to compete for high-speed rail projects. As Chinese construction companies expand into more highly regulated developed markets, the challenge will be how successfully they adapt to local competitive and commercial conditions.
These commercial conditions are set to bring very specific challenges. One of the key factors that will affect Chinese companies' success is their need to increasingly draw project funding from a wide range of sources. In economically ailing developed countries, there has been increased scrutiny of public-infrastructure investments. Although emerging economies are not facing the same difficulties with budget deficits, they too are pushing for more public-private partnerships. Access to capital, for public as well as private sponsors, is becoming more challenging.
In this context, construction players have the opportunity to diversify the upstream infrastructure value chain mainly by promoting and financing infrastructure and/or building alliances with investment banks and infrastructure funds. Competition is also expected to intensify as the growing appetite for specialist construction services attracts new, more nimble entrants and forces all players to diversify along the infrastructure value chain.
The Chinese companies face a new wave of potential competitors as construction companies based in Brazil and India look to follow suit and join the new class of powerful emerging-market multinationals. Just like the recent emergence of Chinese dominance, these organizations in Brazil and India have been building capacity based on strong local demand and could begin to join the push for the next wave of construction growth in emerging markets.
However, as these players vie for this work, they will do so as a new set of macro-economic trends affects the sector. Any organization that focuses solely on its peers ignores these new trends at its peril. One of the most important will be urbanization and the emergence of megacities. More than half the world's population, which is expected to reach 9 billion by 2030, now lives in cities. Buildings and infrastructure need to be developed as fast as the population expands. Chinese construction companies need to confirm they are well positioned to play a key role in strategic planning for redefining the urban landscape.
At the same time they will face an intensified war for talent. Accenture's construction research found that the need for qualified engineering talent has increased globally, creating strong competition between construction players in emerging and developed markets. Chinese players need to be planning for the impact of this today if they are to cushion the effect of this constraint.
Accenture also predicts that the construction industry will be called upon to build and maintain broader, more efficient infrastructure for energy distribution in the face of a potential energy crisis. By 2030, global energy consumption will have risen by up to 30 percent and construction will play a key role. Also, as companies and citizens become more interested in energy efficiency, so there will be new opportunities for construction companies to revamp existing homes and buildings to reduce energy consumption.
To take advantage of the opportunities these trends and market growth generate, construction companies will need to strengthen their position and become more profitable to satisfy shareholder expectations. By ramping up their risk management and financial performance, enhancing operational efficiency and optimizing logistics and supply chains, companies will move closer to realizing this goal. In the changing global marketplace, strong positioning will become ever more critical, as companies will need to be exceptionally agile, efficient and customer-focused to effectively compete against developed-market firms, as well as rising emerging-market entrants.
The author is managing director of Accenture's Construction Industry Group in China. The views do not necessarily reflect those of China Daily.
(China Daily 10/05/2012 page9)