Engineering and construction: Shaken and stirred

24 May 2002

A year is a long time in construction. Twelve months ago, Korean contractors were scratching their heads and wondering what could be done to reverse the trend of lost contracts and an inability to appear on selected bid lists. But, today, with confidence restored, contractors are preparing for a new assault on Middle East projects.

The major players in Korea's construction sector have undergone a period of painful restructuring. The lumbering chaebols have been split up and vast swathes of affiliates hived off into separate entities. The crushing debt:equity ratios that threatened to drag companies into liquidation have been addressed. Shaken, Korea's contractors have emerged blinking into the light of a new economic dawn. The most pressing task ahead of them now is to persuade potential clients that they are once again a force to be reckoned with.

The Korean recovery has come at a price. The country's badly bruised financial institutions have adopted stringent conservative lending policies. As a result, contractors seeking to rebuild their reputations and international portfolios have been deprived of the means to resource themselves adequately. Their weak financing capacity effectively bars many Korean companies from competing with European and Japanese rivals for those projects requiring the contractor to provide a financial package. Instead, the Korean companies seek out projects financed by the client and for many, the road to rehabilitation is through the Middle East.

'The Middle East is very, very, very important to Korean contractors,' says Jae-Oh Soh, executive managing director of the International Contractors Association of Korea. 'The total value of contracts won there may have shrunk in recent years, but at $2,200 million in 2001, it accounted for half of all overseas projects awarded last year.'

'We have a strong emotional attachment to the Gulf,' says one senior executive based in Seoul. 'It was our playground in the 1970s, when we dominated the construction sector there. When the financial crisis struck we had to scale back our activities, but now we are ready to go again.' With higher-than-expected oil prices boosting government budgets, Korean contractors hope a welter of publicly financed projects will herald their return in force to the region.

The return journey may not be that easy, however. 'Many Middle East clients are still wary of hiring Korean companies,' says Paul Yoon, regional general manager at SK Engineering & Construction. 'They have seen what has happened to the conglomerates and need to be reassured that their troubles are over.'

Kook-Jin Yoon, overseas business director of Daewoo Engineering & Construction Company, agrees: 'When making a presentation to a prospective new client, it's not enough just to discuss the financial health of our company,' he says. 'We have to present the wider Korean economic situation, providing evidence of the recovery before we can go on to the specifics of Daewoo.'

Companies wanting to work in Gulf markets consider the support of the Korean government vital. Trade delegations and high-level correspondence have helped reassure clients to some extent, but more still needs to be done. 'The ball's in our court,' says Jong-Do Kim, director of business development at the offshore and engineering division of Hyundai Heavy Industries Company (HHI). 'We assume that everybody knows about HHI now, but that's not necessarily true. The re-education process will take a long time and there are many reputations that still need to be rebuilt.'

Korean firms hoping to reclaim their title as the region's most competitive contractors are facing a fresh threat in the form of a new generation of construction companies with the power to beat them at their own game. 'We are beginning to see the rise of Indian and Chinese contractors who are able to beat us on price for simple construction projects,' says Seung-Chil Kim, senior vice-president of Daelim Industrial Company's plant business development division. 'The local contractors have grown up too and are increasingly winning projects in countries such as Saudi Arabia, which are keen to encourage a home-grown construction industry.'

In light of the increasing threat these companies pose, Korean firms are placing more emphasis on the engineering, procurement and construction (EPC) market. The move is well timed, coinciding with the rise of major industrial projects in the region. 'The role of traditional construction companies is limited in the region nowadays,' says Ho-Yung Kim, executive vice-president of overseas sales at Hyundai Engineering & Construction Company. 'The growth of large-scale projects requires companies that are also capable of [carrying out] design, equipment supply, development, and can provide performance guarantees in a demanding market.'

The problem Korean contractors face now is convincing regional clients that they are up to the job. 'Middle East clients, particularly those in the public sector, tend to be very conservative,' says Sukkyu Lee, director of plant business development at HHI. 'They prefer dealing with companies they already know and are unwilling to select those they consider inexperienced.'

It is a dilemma faced by Korean contractors across the region. 'We do have the necessary experience to carry out the projects; the problem is we have not gained it in the Gulf, but in Korea and other overseas markets in Asia,' says Lee.

Executives in Seoul concede there is some justification in the clients' reluctance to hire them. Korean contractors' traditional strength lies in their construction capabilities and many have yet to develop their engineering skills to a level to match that of the core construction business. 'For a long time we have been dedicated to providing the best and most competitive construction. We even have an institute for construction technology so that we can constantly expand and improve our construction techniques,' says Yoon of Daewoo. 'We do not have the same breadth of experience on the engineering, procurement and project management side of things.'

Korean firms' limitations are particularly apparent in the light of another development in the Gulf market - the growing preponderance of gas projects. In the heyday of the chaebols, Korean contractors were well versed in oil technology, having participated as EPC contractors in the establishment of the conglomerates' oil infrastructure. 'Gas is different,' says Daewoo's Yoon. 'Korean firms do not have the necessary experience in building gas or LNG [liquefied natural gas] plants. It's still something we have to work on.'

The relative simplicity of projects in Kuwait goes some way towards explaining why Korean contractors have been successful in retaining the major share of project awards. 'A number of the projects there do not require enormously high technical expertise,' says Daelim's Kim. 'It's well within the ability of Korean contractors. Their price competitiveness in turn has the effect of preventing European and Japanese contractors from entering the market.' Rivals are also deterred by the method of project execution. 'Kuwait is prepared to manage and control the contractor itself,' says Lee. 'It has been a pioneer in developing local engineering expertise and so can design and manage projects according to its specific requirements.'

Elsewhere, Korean contractors' attempts to establish themselves as EPC contractors in the Gulf risk being thwarted by the growing size and scale of the projects. On the one hand, clients are reluctant to entrust billion dollar projects to the care of untested contractors who have only recently emerged from a financial pummelling. But there is hesitancy on the part of the Koreans too. 'Since the foreign currency turmoil, all Korean contractors have placed a high priority on risk management,' says SK's Yoon. 'One way of limiting this risk is to place a cap on the size of projects you undertake. The larger the project, the greater the possibility for unexpected and potentially costly loopholes.'

With the difficulties they face in entering many markets as prime contractors, Korean companies are seeking instead to participate in major regional projects in partnership with their international rivals. 'Forming joint ventures with established companies offers a solution to many of the problems we face,' says Daelim's Kim. 'Our weakest point is our engineering ability. Therefore, linking forces with a company which has the necessary technical skills in that area means we are able to focus on what we do best.'

The method is a win-win scenario for all involved. 'Korean companies are able to offer competitive rates for the construction side of the project, enabling their partner to lower the bid price,' says SK's Yoon. 'It also means that Korean companies are able to share the financial risk, and so work on and gain experience in projects that would otherwise be outside their financial means.'

In Qatar, one market where there is still a reluctance to take on Korean firms as prime contractors, the partnership between LG Engineering & Construction (E&C) and Germany's Lurgi on the expansion of the National Oil Distribution Company (Nodco) project has shown that such an alliance can work. 'Knowing that we were undertaking the execution in conjunction with a Western firm gave the client confidence in every respect,' says Mike Choi, senior business development manager at LG E&C. 'There were no questions about our technical performance, and the quality, schedule and price were all assured.'

One market where Korean firms do not suffer from a credibility problem is Iran, where the raft of major new industrial projects has provided welcome business for some of the Asian contractors. The massive South Pars gas project is now almost entirely the preserve of Korean companies, with Daelim taking package 1, Hyundai Engineering & Construction stitching up packages 2, 3, 4 and 5, and LG widely expected to win phases 9 and 10. 'Korean firms have stayed in Iran in the good times and the bad, and our efforts, sincerity and credibility have been recognised and rewarded by Tehran,' says Daelim's Kim. Tehran's insistence on local content and competition is, however, proving an obstacle to further participation. 'The obligation to source locally for services and equipment can have an impact on the quality of the end product,' says one senior executive. 'It may also put pressure on deadlines and increase completion risk.'

The Korean companies' other new weapon in the region is selectivity. Having learned from bitter experience, they are no longer prepared to over-stretch their resources, preferring instead to build up their portfolio in specific areas and sectors. 'We've come to recognise that it's a question of quality not quantity,' says Tae-Hun Jung, executive vice-president of desalination plant marketing at Doosan Heavy Industries & Construction Company. 'The important figure is profit rather than sales volumes; therefore we've taken the strategic decision to strengthen our essential core business and abandon unprofitable lines of work.'

But finding and sticking to a niche market is not enough in itself. 'If you want to lead a market, you have to know what to do, and the best way to do it,' says Jung. 'We are always seeking to improve our technology and we are able to share the benefits of this with our clients and so strengthen our relationship with them.'

Korean contractors are hoping this new-found maturity will make a positive impression on regional clients. They know their future in the Middle East will be bleak and short lived if they are unable to rid themselves of the old image of Korean firms as cheap, quick-fix contractors who had mastered the basics, but were best not left alone with the complicated details. Having confronted past mistakes, and rectified their previous excesses, the contractors are now looking to extract their rewards.

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