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Globalization of the Engineering and Construction Industry

Uncharted by many American design and construction firms, the global business environment has grown significantly during the last 10 years. Along the way, it has pushed engineering and construction (E&C) companies of all sizes to begin thinking globally and performing business outside of their traditional domestic border.

The opportunity is real. A 2009 report published by Global Construction Perspectives and Oxford Economics estimates that construction in emerging markets—including Asia, Latin America, the Middle East and Africa—will double within the next decade and become a $6.7 trillion business by 2020, accounting for some 55 percent of global construction output. These projects represent significant opportunities for global-minded E&C firms.

In response to this seemingly endless demand for more infrastructure, large, multinational E&C companies are broadening their global footprints and strengthening their competitiveness by securing strategic positions in high-growth emerging markets. Competition is intensifying with new players from China, Brazil and India, proving them as a new class of powerful, emerging market multinationals. Just how adaptive these construction companies are, however, remains to be seen as they expand into an increasing number of highly regulated markets.

ADOPTING A GLOBAL MINDSET

Today’s global E&C industry is changing rapidly. Barriers to global trade have been reduced significantly, enabling capital, labor, goods and technology to flow freely across borders. This has increased business opportunities exponentially across the globe. However, globalization has also vastly increased the complexity of the E&C business environment. Changing customer demands and new funding mechanisms are driving industry players to diversify and seek mergers and acquisitions in new markets around the world to gain access to new expertise and project opportunities.

To compete in today’s uncertain, dynamic and interconnected business environment, design and construction firms, both home and abroad, will need to stay focused on key trends shaping their external environment. Understanding trends, and how they interplay and shape the contours of an industry’s operating environment, has become a vital skill in today’s business world. Insightful leaders anticipate and systematically observe, spot and act upon emerging trends to capture market opportunities, test risks and spur new ideas. In a world where the playing field of resources, competition and customer demands is constantly changing at an ever-increasing rate, company leaders must look beyond traditional performance measures and near-term thinking to define their corporate strategies.

Ron Magnus, managing director of FMI’s Center for Strategic Leadership, explains, “Today’s corporate leaders need to have a sense of what they think could impact their local markets. For example, if China’s economy continues to slow down, or if Israel attacks Iran tomorrow, what are the implications for the local market in Denver, Colo.? These types of events would have an overnight effect on specific market segments; therefore leaders need to evaluate their portfolios, understand their risk and be ready to respond quickly if necessary.”

Following are six recommendations on how firms can prepare for and deal with a global design and construction environment, regardless of company size or type.

View Competitors as Potential Collaborators
Despite the overall trend for large multinational E&C firms to shift focus onto high-growth emerging markets, FMI expects to see increasing competition from international organizations working in the United States in the coming years. Hugh Rice, senior chairman of FMI, states, “Although the U.S. design and construction market has slowed significantly, we still see many foreign companies with a lot of interest in expanding their presence in the United States. That’s particularly true of the European and Asian firms, including Japanese, Chinese and Korean companies.” Though larger firms might muscle in on smaller-size contracts, smaller firms can prove complementary on a larger contract, where they bring niche capabilities or knowledgeable staff to the table. Likewise, smaller companies may offer specialized staff or capabilities to a larger project that a firm is looking to shepherd.

Understand the Cost and Risk Barriers to Entry
Companies considering doing business on a global scale need to have strong balance sheets and solid bonding capacity, as well as a deep understanding of the risks involved. The cost of entry is typically much higher than anticipated. Risk management becomes a prime factor in strategic planning. The intricacies of risk allocation often present new ground for contractors to cover when doing business in a new country. Public-private partnerships (P3) in particular can be very challenging and often bring with them greater risk in terms of a longer life cycle, larger scale of liability and heightened vulnerability to changes in external dynamics as the project progresses. Magnus Eriksson, senior vice president, Skanska Infrastructure Development Americas, emphasizes the novelty of new arrangements. “First of all, you have to understand the difference in risk allocation — the additional risk in a P3 project you are required to absorb as a contractor (especially if you’re an American contractor) — it’s probably something you’ve never seen before.”

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