Korean contractors face increased competition

13 May 2010

South Korean contractors dominate the Middle East contracting market. But they face growing competition from Chinese and Indian firms, who are forming alliances with European companies

It is hard to believe that as recently as the late 1990s South Korean engineering, procurement and construction (EPC) contractors were struggling to even prequalify for multibillion-dollar contracts in the Middle East. Instead, they had to be content with say the occasional tank farm or utilities package and look on enviously as the more technical process plant contracts were designed and built by their Japanese rivals across the East Sea.

Korean success in the GCC is the result of more than 30 years of effort. [China] will take less time to do the same

Richard Lee, Korean law firm Bae, Kim and Lee

Following a slew of contract awards in recent years, South Korean EPC contractors are today a dominant presence in the Middle East, but now competition from another neighbour in East Asia is intensifying.

“There are amazing similarities between Japan and Korea then, versus Korea and China now,” says Hwan-Joon Yang, director of the plant finance department, at the Export-Import Bank of Korea (Korea Eximbank).

“Japanese contractors used to dominate the [Middle East] EPC market in the 1990s – and when you see the process of their respective development, the current situation is almost exactly the same.”

Korean EPC contractors have been working for decades to achieve their current status. Earning the right to bid for contracts to build oil refineries, petrochemicals plants and nuclear power stations has taken years of gradual progression as well as the application of the now legendary South Korean work ethic.

Hidden dragon

“The current Korean success in the GCC is the result of more than 30 years of effort,” says Richard Lee, a lawyer specialising in the Middle East for the Korean law firm Bae, Kim & Lee (BKL). “Korean contractors have been working towards this moment since the 1970s, when they first started to win major civil engineering projects in the region.

“But believe me,” he adds. “The Chinese will take a lot less time to do the same thing.”

Contractors from developing nations such as China and India are starting to make inroads into the Middle East market, but are currently only winning the contracts the Koreans were being awarded 10-15 years ago. While some contracts are still large in value, such as the $1.2bn Abu Dhabi Crude Oil Pipeline (Adcop) project being executed by China Petroleum Engineering & Construction Corporation, the Koreans are seen as more experienced when it comes to technical process plant contracts.   

“The problem [with Chinese and Indian EPC contractors] at the moment is with quality and project management capabilities,” says Sang-Ryong Woo, president of local GS Engineering & Construction (GS E&C). “You need to understand that with Middle Eastern clients it is not just about money, it is about value for money.

Ironically, many of the criticisms made against Korean companies in the region over the past 30 years are being echoed in comments about their emerging rivals.

“I am sure, though, that while it may take some time for the Chinese and Indians to catch up, they will catch up eventually,” he adds.

Climbing the ladder

Casey Choi, president of local SK Engineering & Construction (SK E&C) agrees: “Price is one thing, but Chinese contractors are not getting the pre-qualification for the technical process plant contracts – for offsite, utilities and civil works, maybe – but not the really technical stuff.

“But, if you look at the history of Korean contractors, we moved in with the more simple work and then learned over time to prove our capabilities. It took 20 to 30 years to get these jobs. The Chinese [EPC contractors] don’t have a track record and it will take them a little time to prove themselves, but they will get an opportunity eventually. And while that is difficult at the moment, in five years they will get there,” Choi adds.

While Chinese EPC contractors are still trying to catch up with the rest of the world, the Chinese government is making sure it is doing all it can to give them support to win contracts in the Middle East and Africa region.

The Japanese, US and European contractors have the core technology … and win [high-value] projects

Hwan-Joon Yang, Export-Import Bank of Korea

It is now common practice for countries with a surplus of commodities and natural resources to exchange them for free, or heavily subsidised construction and contracting services with China. Sudan, for example has exchanged crude oil for major infrastructure construction work.

“Sudan is a good example,” says Lee from BKL. “China can go to countries such as Sudan or Yemen, whereas Korean contractors would struggle to get financing and the necessary bonds to work in such places. It is time the Korean government acted.”

With EPC contracting expertise becoming one of Korea’s main exportable assets, calls have been made for the government to adopt a similar model to the Chinese offering
government-backed guarantee for the financing of projects. 

Strategy change

In March 2009, the Korean government did agree a Chinese-style $3.55bn deal with Iraq for the exchange of construction and contracting services to help repair the war-torn country’s infrastructure in return for crude oil. But it has no plans to issue guarantees in the form of bonds as yet.  

Indian EPC contractors are more conventional than their Chinese counterparts and resemble more strongly the Korea of 15 years ago. Companies such as the Dodsal Group and Punj Lloyd are extremely active with process plant contracts in their domestic market, but are still struggling to make an impact in the Middle East. As a result both companies are trying a new strategy to win market share in the region, teaming up with their European peers.

Established European contractors such as Spain’s Tecnicas Reunidas and Italy’s Saipem have teamed up with Punj Lloyd and Dodsal, respectively, to bid for packages at the $10bn-plus Shah gas development in
Abu Dhabi. Such a strategy is mutually beneficial as it allows Indian contractors to gain essential experience working on large process plant projects, as well as allowing Western contractors to be as competitively priced as the Koreans. 

“This is the first step,” an official from a Korean EPC contractor says. “Indian contractors are teaming up with European contractors, but soon they will be bidding on their own.”

While the Koreans are nervously looking over their shoulder at Chinese and Indian
competitors, contractors from Japan and the western hemisphere are also trying to ensure that they do not start to lose out on the more technical (and profitable) front-end engineering and design (Feed) and project management contracts to the Koreans. 

So far, South Korean contractors have been prequalified for Feed and project management contracts on only a few major projects across the region.

The US’s Bechtel and Australia’s Worley Parsons are handling the Feed and project management respectively on the $10bn Shah gas development in Abu Dhabi, while Japan’s JGC Corporation is handling the Feed for the Pearl gas-to-liquids project in Qatar. Each of the megaprojects across the Middle East tell the same story. 

“We are looking to be more like [the US’s] Fluor, [Japan’s] JGC [Corporation] or [Canada’s] SNC Lavalin,” a Korean contracting source says. “But we need to train our people in areas such as gas liquefaction if we are to compete in this area.”

Yang from Korea Eximbank adds: “The Japanese, US and European contractors have the core technology and still win the projects in the high-value market. We lack the core technology. And while this only accounts for 5-10 per cent of the current market, the profit margin is unmatchable.”

Korean EPC contractors see moving into the more value-added services such as Feed, feasibility studies and project management is the way to fend of competition from China and India, but it remains to be seen as to how long it will take them to break into the Middle East market.

Renewed reputation

Korean EPC contractors have enjoyed huge success in the past couple of years, but they need to keep developing their  capabilities in order to protect their market share. Otherwise, sandwiched between low-cost contractors from China and India and hi-tech contractors from Japan and other Western nations, South Korean could find themselves being squeezed out of the equation in the future.

However, the standing of South Korean contractors, especially in light of the recent $20bn contract award for four nuclear power plants in the UAE, has never been higher in the Middle East. Furthermore, they are now acquiring a reputation for being able to execute projects well, rather than just being a low-cost option.  

The early incarnation of the EPC Korean contractor that lived in the shadow of their Japanese rivals with a low-cost, no-brand model has now evolved and contractors such as Samsung, Hyundai Heavy Industries, GS and SK are being given opportunities in the Middle East that they could only dream of a decade ago. But Chinese and Indian firms are hot on their heels.

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