For 150 years, Ishikawajima-Harima Heavy Industries (IHI) has concentrated its operations and resources on providing technology-oriented products and services to Japan’s industrial private and public sectors. But the strategy that served IHI so well during the seemingly inexorable rise of the nation’s manufacturing base has in recent years been drawing the industrial giant into stormy waters.
Japan’s economic downturn is hitting IHI where it hurts. Sales declined in every business segment in 2002, leading to a 32 per cent drop in operating income to Y27,200 million. ‘The sluggish economy has had a serious impact on our sales figures,’ says Katsuhiro Seto, general manager of IHI’s international strategic planning. ‘With an export ratio of only 20 per cent, we are heavily dependent on domestic public spending and private capital investment. In these hard times, however, neither the government nor the private sector is in a mood to invest in major project work.’
IHI’s strategy has required a major rethink and last year the company’s management began implementing a three-year structural reform programme. This included hiving off shipbuilding and offshore operations, IHI’s core business, into a separate company. The remaining land-based operations – industrial machinery and steel structures; energy, environment and plant; aero-engine and space, and standard machinery – have also been reorganised in an effort to improve efficiency, speed up decision making and bolster technological and marketing capabilities. The company is also broadening its horizons, placing more emphasis on overseas trade in a bid to increase sales through exports to markets that are not suffering the traumas of the domestic economy.
The move will act as a major boost to IHI’s activities in the Middle East, and the region is likely to dominate the company’s overseas order books in the coming years. ‘Taken as a proportion of our overseas activities, the Middle East has always been an important market for us,’ says Seto. ‘Middle East contracts normally comprise around one-third of our overseas orders and the region surpassed itself last year, accounting for almost 40 per cent of IHI’s total international contract value.’
Despite the Gulf-oriented nature of its current Middle East operations, IHI’s first experience of the region was in Lebanon in the 1960s, with the construction of a new power plant for Electricite du Liban. Soon, however, the orders started to roll in from the Gulf, and IHI’s focus and regional office moved too. ‘By the 1970s, the bulk of our work in the Middle East was coming out of Kuwait and the UAE,’ says Seto. ‘We were carrying out the engineering, procurement and construction (EPC) for a huge range of projects, from power and desalination plants to cement factories and gas treatment facilities.’ With Kuwait and the UAE as the hub, IHI expanded its business into the rest of the region and projects were soon springing up as far afield as Tehran, Baghdad, Al-Khobar and Jeddah.
‘When the Asian economies started to pick up, we shifted our focus to the markets closer to home,’ says Seto. ‘Now, the spotlight is moving in the opposite direction.’
Recently, IHI has notched up several new contracts in the region, particularly in the cement sector. ‘There are not that many international players in Middle East cement,’ says Seto. ‘So we know the competition well and there’s a kind of friendly rivalry, particularly between the three major Japanese companies.’ Last year the company was selected by Yemen Cement Manufacturing & Marketing Company to carry out the $150 million expansion of the Amran plant – a contract involving construction of a new 1 million-tonne-a-year (t/y) clinker line. At the same time, IHI was also awarded the $20 million cement mill modernisation at the Eastern Province Cement Company in Saudi Arabia.
‘Ideally we like to bid for projects by ourselves,’ says Seto. ‘But it is not always possible, especially with large cement projects when limited resources dictate that we cannot carry out more than two or three without outside assistance.’ In such cases, IHI will either temporarily employ engineers from Europe or ask a specialised company to come in for subcontracting.
In a price-sensitive market, where Japanese engineering is often expensive, subcontracting provides IHI with a means of cutting costs. ‘Last year, we lost a very attractive project to build a liquefied petroleum gas (LPG) tank facility in Qatar,’ says Seto. ‘We were bidding against a Korean group, and the contract went to them because of the price differential.’ With high Japanese salaries reducing the competitiveness of IHI, the company is increasingly turning towards its subsidiaries elsewhere in Asia to provide high-quality, lower-cost services. ‘We have been expanding our activities in the Philippines,’ says Seto. ‘We have a design office there and are developing the detailed engineering skills in Manila too. The office is now one of our major designing partners for power plants.’
The use of Chinese contractors is also becoming more widespread – one such firm is assisting IHI on the Amran plant. ‘Language differences mean that we are not always able to take on the contractors directly,’ says Seto. ‘So we get our Singapore subsidiary to act as the subcontractor, and they are then able to hire and manage Chinese labour.’
Seto expects the structure will be redrawn in the years to come. ‘Chinese companies are becoming very developed in terms of their engineering capabilities, quality control, production capacity and delivery and many Chinese now speak excellent English,’ he says. ‘It is only a matter of time before we start using Chinese firms as major engineering subcontractors. Soon after that, we will have to start thinking about going hand in hand with them to bid for Middle East projects.’ As the Chinese skills improve, so Middle East clients’ traditional reluctance to take on Chinese participation diminishes. ‘Clients recognise that the quality of Chinese work is getting better and better,’ says Seto. ‘The only real barrier to Chinese companies now is if they bid for projects entirely by themselves.’
IHI is planning to expand its presence on the ground in the Gulf by opening a regional office in Dubai to oversee the Middle East push, which will focus in particular on Kuwait, Saudi Arabia and Qatar. ‘We have already had one recent success in the Saudi cement market, and we’re hoping to follow this with other similar projects there,’ says Seto. ‘We’ll be bidding for the Qassim cement plant and there are several more plant modification and renovation projects we believe we can win.’ IHI already has two cement engineers stationed in Abu Dhabi who have been providing consultancy services for such projects.
Undeterred by last year’s knock-back in Qatar, the company hopes to secure new projects in the oil and gas sector there. ‘We are in the final stage of negotiations for the EPC contract to build new liquefied natural gas (LNG) storage capacity at the RasGas [Ras Laffan LNG Company] complex. The clients for that project [the Japanese/Italian venture of Chiyoda Corporation, Mitsui & Company and Snamprogetti] are also looking at the option of building a fifth train there which would also be of interest to us.’
Harking back to its original Middle East activities, the company has high hopes for its power capabilities. Last year it bid successfully with Itochu Corporation for the Y40,000 million turnkey EPC contract to build the desalination and power generation units of Algeria’s first independent water and power project at Arzew.
‘Last year was an exceptionally good year for IHI in the Middle East,’ says Seto. ‘We may not quite be able to replicate the contract volume for the region this year, but we will certainly be watching the Middle East closely for any further opportunities. We are beginning to think and act as a global player. We no longer see the world in the traditional terms of exports and domestic production. IHI is an international actor, and Japan is just one of our many consumer markets.’