Moving from low cost to high quality

16 August 1996

The Middle East is no mystery to Korea's contracting companies. For many, the Middle East was the foreign region of choice when they ventured abroad for the first time in the 1970s. Drawn to the booming oil economies of the Gulf, the leading engineering and construction companies used their low costs to snap up some of the most prestigious civil works schemes. Many are monuments to the region's modernisation over the past 30 years.

With the scale of civil works activity now much reduced, and well within the capabilities of local companies, the Koreans have been more active elsewhere in recent years, most notably in southeast Asia But the Middle East continues to compel, albeit for different reasons. Like the country itself, the companies of Korea have upgraded themselves. Commercially, thet can no longer compete for civil works, as their cost base has risen. Technically, they have improved their skills and acquired the experience to tackle the most sophisticated work at the top end of the market. It is the quality projects more usually managed by European, Japanese and US engineering contractors that they are targeting.

As they campaign to gain recognition and prequalify for some of the region's most complex engineering projects, Korean contractors are preparing a second coming.

When Korean companies first appeared in the Middle East in the early 1970s they made an instant impression, winning some of the largest civil orders ever seen in the region.

Hyundai took the $931 million contract for the industrial harbour project in Jubail, which is the core facility for Saudi Arabia's largest single concentration of industries. It also built the Arab Shipbuilding & Repair Yard in Bahrain. Even today Hyundai Engineering & Construction has contracts in hand in the kingdom with a book value of nearly $1,200 million. The Middle East and North Africa accounted for 35 per cent of its overseas turnover in 1995, The total value of its contracts in the region since 1975 is an impressive $19,119 million.

Recession in the Middle East and a downturn in business turned Hyundai's attention, along with that of the entire Korean construction industry, to the potential of southeast Asia. For Hyundai the result has been about $10,000 million in business so far. The busiest market at the moment is Singapore where Hyundai has ongoing projects worth $2,055 million covering land reclamation, port construction, container terminals, hospitals and sewage treatment.

In the Middle East, Saudi Arabia, Kuwait and Libya account for the bulk of its current activity. In June, Hyundai won a groundbreaking project with Qatar General Petroleum Company the $75.6 million Dukhan Arab D gas recycling project. It is keen to do more. 'We have been active for 25 years and we know how to co-operate with these countries,' says H H Yang, senior vice-president in the overseas business and marketing division

Dong Ah dominates

The region has assumed an extraordinary significance for Dong Ah Construction Industrial Company since it won the first phase of Libya's Great Manmade River (GMR) project in 1984. That initial $3,575 million order led on to a second $6,700 million contract in 1990. In April of this year, the company agreed to take on two further phases that could raise the ultimate value of its work on GMR to more than $20,000 million. Although Dong Ah's Libyan work has at times accounted for 100 per cent of its overseas business it has some huge civil works projects elsewhere in the region to its credit. The three-phase expansion of Saudi Arabia's telephone network from 1977-86, for example, involved nearly 18,000 kilometres of trenching and was worth $1,188 million.

The engineering and construction arm of Daewoo Corporation arrived relatively late in the region and took an exotic approach to the possibilities. 'When we decided to go abroad most major Korean contractors already had Middle East contracts, so we decided to go into new markets,' says K I Chung, executive director for overseas marketing at Daewoo Engineering & Construction.

In 1978, this strategy led to Libya, which has since generated $7,000 million of construction business. In his memoirs, the charismatic founder and chairman of Daewoo, Kim Woo-Choong, recalls that he targeted Libya because it was Africa's richest country; Nigeria because it was the most populous; and Sudan because it is the largest.

Business theorists might question the science behind the strategy, but there is no doubt about Daewoo's success as a business.

Daewoo has a broader focus today and its biggest current project is a $1,100 million highway project in Pakistan. Part-financed by the Asian Development Bank, it is due for completion next year. 'We don't have a policy to eliminate countries for this reason or that one. If there's a feasible project, we'll go in there,' says Chung.

The company is changing its focus too.

'Normal civil construction work is not so attractive the margins are too slim. And we are not as competitive as we were.

Inevitably, we aim at technically oriented projects.' The complaint above competitiveness is a common one as most Korean firms try to cope with wage inflation and a rapidly rising cost base.

The interest in more sophisticated projects leaves Daewoo at a temporary disadvantage as it attempts to move upscale to more demanding, higher margin business. The company has set up a joint venture in Saudi Arabia to target lump sum turnkey business with Saudi Aramco and petrochemicals projects with Saudi Basic Industries Corporation (Sabic).

But Daewoo lacks petrochemicals experience in the Middle East and remains something of an outsider. 'For the time being we are not very competitive in petrochemicals,' says Chung. 'So we are aiming to get work as subcontractors to big companies.' In both Oman and Qatar, Daewoo has offered itself as a subcontractor on both the liquefied natural gas (LNG) projects that will be supplying Korea Gas Corporation (KGC) from the end of the century.

On the back of extensive experience in Korea and southeast Asia to develop its engineering capabilities, Sunkyong is making a similar bid for sophisticated work in the Middle East. Historically, Sunkyong's regional activity was in civil construction work. Six years ago it decided to relaunch its overseas activity with the stress on engineering procurement and construction (EPC) contracts rather than construction alone. Its initial strategy was to team up with US or European companies, offering Sunkyong's services as part of a consortium.

'Unfortunately, we have not been successful in winning Middle East contracts in consortium with US or European companies,' says K H Kim, deputy general manager for overseas marketing at Sunkyong Engineering & Construction. 'Middle East clients prefer US or European companies while Korean companies have a track record doing construction only.'

Sunkyong is keen to revise that reputation, however. It has built a range of petrochemicals plants for its sister company Yukong in Korea and is building an aromatics plant in Thailand. Now it is targeting such work in the Middle East. The best current prospect is in Kuwait, where Sunkyong was low bidder at $161 million for the retendered contract to design and construct the acid gas removal plant at the Mina al-Ahmadi refinery. It is also very keen on plans for an aromatics plant to be built in Kuwait. 'We are very interested in aromatics projects. We have done five major aromatics projects in Korea and abroad,' says Kim.

New opportunities are emerging outside the core Gulf area, notably in Egypt where the Egyptian Petrochemicals Company is expanding its Alexandria plant and two private companies are planning similar ventures.

Efforts to be prequalified for EPC work have not been successful, so far. 'We have not read their minds for EPC procedure. Now we lobby with the licensor to make our capabilities known,' says Kim.

It may still be some time before the company can gain the recognition it seeks, however. 'I think we are technically some way behind at this moment, but in a few years time we should have enough experience to win EPC works.'

Daelim Engineers & Constructors is confident that it too can climb up the ladder from civil contracting in the Middle East to fully fledged EPC work. Its regional track record goes back to boiler erection at the Ras Tanura refinery in 1974 and has involved work in Kuwait, Abu Dhabi, Iran, Egypt and elsewhere. Daelim is qualified as an EPC contractor with Egyptian General Petroleum Corporation, but has not yet made it to the shortlist for EPC work with Saudi Aramco, which would be the bigger prize.

Daelim Industrial owns the largest petrochemical plant in Korea and the company offers a full range of services, from EPC to operations and maintenance. 'The problem so far is the reluctance to prequalify us due to the lack of experience in the region,' says S H Whang, director for overseas business at Daelim Industrial. 'Recently, we have worked as EPC contractors in southeast Asia so we are hoping they will recognise our experience and competence.'

EPC attempts

Daelim has a resident team of about 40 personnel in Egypt and recently submitted proposals for an ethylene project, a hydrocracker and a polypropylene scheme. 'We are following any oil, gas, refinery or power plant,' says Whang. The company is currently negotiating a substantial subcontract for the Midor refinery.

In Saudi Arabia, it has submitted EPC proposals for several private sector projects the Nama epoxy scheme, the Amam soda ash plant and the Xenel Industries propane dehydrogenation and polypropylene schemes all to no avail. The best short-term prospect is for civil works on the expansion of the Hadeed steel complex in Jubail, where Daelim worked on the original project.

By far the biggest regional involvement at present is Daelim's $463 million contract for civil works at the Godar-e Landar dam project in Iran. External finance for the huge scheme is by Japan's Overseas Economic Co-operation Fund, which has frozen the second tranche of funds in deference to US demands for an economic boycott of Iran. 'Our scope of work is not affected by this and we have no difficulties with client support or co-ordination,' says Whang. The difficulty comes from the remote location and finding skilled personnel to handle the equipment.'

Abu Dhabi targets

For the region's LNG schemes Daelim has teamed up with a variety of partners to bid for EPC contracts. In Oman, it is bidding for the upstream gas gathering and processing contract with The Parsons Corporation of the US; it has submitted a quote for construction of the downstream facilities to Chiyoda Corporation and Foster Wheeler. which are the preferred bidders for the E PC award. In Qatar, Daelim bid unsuccessfully for the Ras Laffan LNG scheme in partnership with Chiyoda and McDermott. The award eventually went to JGC Corporation of Japan.

Upcoming targets in the Gulf include the Ruwais refinery and the Asal gas development scheme, both in Abu Dhabi, even though prospects may be mixed by the client's preference for working with a single contractor rather than a consortium of companies. Daelim's ambitions are finnly focused on a time in the future when it will no longer have to accept a subcontractor's role. 'We think that the Middle East has big potential in the future, especially as we are chasing oil, gas and petrochemicals as a specialised contractor,' says Whang.

Few companies can claim to be constructing the biggest of anything, but Hanjung, formerly Korea Heavy Industries & Construction, is building the world's largest desalination plant at Shuaiba in Saudi Arabia.

The 100 million-gallon-a-day plant, which will also generate 530 MW of power, is due for first commissioning next year and the whole project should be completed by 1998.

The company is no stranger to the kingdom having completed the 1.5 million-tonne-ayear Gizan cement plant in 1981. Hanjung's other current major commitment in the area is in Egypt where it is working on the Kureimat and Ayun Musa power station projects for the Egyptian Electricity Authority.

The company is preparing to take a much more aggressive approach to new business as its 15-year mandate as an exclusive supplier to the Korea Electric Power Corporation is to end in 1997. 'Anticipating the opening of the domestic market, we realise we have to compete at home and abroad,' says Hanjung's vice-president for overseas power plant marketing, B K Choi.

Hanjung already has fabricating capacity in Vietnam and China and is evaluating prospects in the Middle East, although any decision on regional capacity would be determined by the demands of the markets to be served. The company is convinced that its future in the region will depend on getting closer to its customers and says it is in the final stages of deciding on a new manufacturing base in the area.

Korea's engineering contractors expect no favours, but are convinced that their proven capabilities are not yet appreciated by Middle East clients. Despite suggestions that the advent of KGC as a gas buyer from Oman and Qatar might put them at an advantage, there is no evidence that Korean contractors have been favoured so far for work stemming from the two schemes. But, as more contracts in the region are accompanied by requests for finance, the financial muscle that Korean companies can muster could start to make a significant difference. Korea's Export-Import Bank is keen to support contractors, especially in energy related business.

In the meantime, the engineering companies will continue their lobbying effort to command more attention and win more high quality contracts. 'just a few years ago Korean companies launched an effort to break into the EPC business,' says Sunkyong's Kim. 'In a sense we have launched a struggle.' Rival companies will doubtless take note.

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