Dominance continues in region’s projects market
MEED’s annual survey of the most successful engineering, procurement and construction (EPC) contractors working in the Middle East had five companies from South Korea in the top 10, confirming the dominance the country is enjoying in the highly competitive sector.
The survey covered the period from June 2012 to May 2013, and the work won by contractors such as Samsung Engineering and Daelim Industrial amounted to $13.2bn in total. This figure was $400m more than the contracts won by European firms.
Since 2009, South Korean contractors have won more than $123bn-worth of work in the Middle East and North Africa (Mena) region, according to regional projects tracker MEED Projects.
Almost $42bn of that was awarded in Saudi Arabia, the most active process plant project market in the region. Five South Korean contractors have won contracts in the kingdom totalling almost $42bn between them since 2009, and the vast majority of this work has been won in the process plant market.
Daelim Industrial has enjoyed the most success, winning more than $10bn in contracts. The firm has an excellent track record in petrochemicals and refining, which is reflected in the fact that $9.43bn of its total orderbook came in those two sectors.
The power and water sector was the most lucrative segment in terms of the value of contracts won by South Korean firms at $13.8bn.
Despite being a small market compared with Saudi Arabia, the UAE has been the source of more than $36bn of awards since 2009 for South Korean contractors. The country’s nuclear power programme was won by a Korean consortium. In total, the power and water contracts won by South Koreans in the UAE add up to more than $12bn.
Abu Dhabi’s oil and gas sector has also provided a huge amount of business for South Korean firms, with more than $19bn-worth of contracts awarded since 2009.
The initial swathe of contract awards that year took many industry executives by surprise. Previously, Japanese and European contractors had been the dominant forces in the sector. However, it was not the overnight success many took it to be; it came after years of winning and executing smaller projects in the region, and building up trust among the Middle East’s major client base.
I remember being at conferences and all of the Europeans were saying that the prices were unsustainable
Senior executive at European contractor
It was also the year when the region’s largest oil producers found themselves flush with petrodollars from the oil price spike of 2008 and wanted to spend the money across a wide range of projects. Another positive factor was that in 2009, a crash in the price of commodities made megaprojects such as petrochemicals plants and oil refineries more attractive and cheaper to build.
This made the Middle East one of the most active projects markets in the world in 2009-10. The South Koreans saw an opportunity and seized it. They bid aggressively and won the work against more established competitors.
A senior executive from an European EPC contractor now admits most non-Koreans were caught by surprise, and many thought the success would be short-lived.
“I remember being at conferences and all the Europeans were saying that the prices were unsustainable and that it would only be a matter of time before the wheels came off,” he says. “By 2011, it became clear that unless we offered the clients the same kind of service and prices we were not going to win anything.”
The challenge for South Korean EPC contractors now is maintaining the success they have enjoyed in the region.
Most of the major players budget for about 50 per cent of their backlog to be Middle East projects. This has been easily achievable since 2009, as the region has invested tens of billions of dollars on its oil and gas infrastructure.
The region also invested in industrial diversification strategies aimed at steering economies away from a reliance on hydrocarbons.
As one of Korea’s leading EPC contractors, Samsung Engineering has built a solid reputation in the region’s process plant industry and has been the sector’s most consistent performer over the past three years.
However, in a recent MEED interview, Samsung Engineering’s chief executive officer, Ki-Seok Park, said his company was in the process of evolving into a global engineering powerhouse. It is actively searching for new markets in Latin America, Europe and the Commonwealth of Independent States (CIS), as well as opening up regional engineering hubs across several continents.
South Korean EPC contractors will be keen to remain the dominant force and build on the successes of the past
This will be a major change in strategy for a South Korean contractor that traditionally uses Koreans based in Seoul for the engineering of large-scale projects. Operating engineering hubs around the world is more in line with the strategy of European contractors than domestic competitors and is an unusual step to take.
Most other South Korean firms are not as actively looking for new markets; nor are they looking to open engineering centres.
Despite the massive success of the past four years, the South Korean contracting model is still not without its risks.
In the first quarter of 2013, eight South Korean contractors posted losses, and all cited problems with overseas projects as the reason.
The majority remain confident that the losses were a blip and that profit forecasts for 2013 remain intact, but the dip was proof that taking on so much work on a lump-sum turnkey (LSTK) basis is not without danger.
Not all of the losses were due to projects in the Middle East, but maintaining performance in core markets, as well as expanding into new ones, is always going to be a risk-laden enterprise.
Another issue is that, due to the continued slowdown in key markets elsewhere in the world, all EPC contractors are now bidding aggressively in the Middle East.
European contractors have enjoyed a resurgence over the past 18 months in the Middle East. The UK’s Petrofac has won more than $7bn-worth of projects in the region in the last year alone.
The positive contribution South Korean contractors have made to the Middle East’s process plant sector has been welcomed by most major clients. South Korean contractors are also making inroads outside the two key markets of the UAE and Saudi Arabia, and this is due to the strong reputation of the nation’s brand.
The long-term outlook for projects in the Middle East remains extremely positive. There is still a long way to go for many countries in terms of industrial diversification, as well as major power and water schemes to execute.
The oil and gas industry is likely to offer the most opportunities in the future. The gas sector has been identified by South Korean contractors as a key growth area and the region’s maturing oil fields will soon require major investments in enhanced oil recovery.
South Korean EPC contractors will be keen to remain the dominant force and build on the massive successes of the past four years. However, it is clear that the competition is starting to catch up, so it will take even more creative thinking from Seoul to separate itself from the chasing pack.
Contracting model aggressive pricing key to winning work
The success of engineering, procurement and construction contractors from the Korean peninsula meant a new term was coined for their success: the South Korean model.
At the core of the philosophy is the lump-sum turnkey (LSTK) contract. Contractors bid a set price for a piece of work and then deliver the finished facility at the end of an agreed construction period, usually between 24 and 36 months.
South Koreans use LSTK to submit aggressive prices before employing stringent project management processes and highly effective procurement strategies to ensure that they bring the project in on time and on budget.
The South Korean model became popular in the Middle East after the global financial crisis of 2008-09. Its success has meant contractors from any country are now adhering to its basic principles in order to win work.
“The South Koreans have come in and been successful, and everyone accepts now that to compete you have to be able to offer clients the same kind of deals,” says an executive from a European EPC contractor.
“We have long held reservations about how sustainable this model is, but it is coming up to five years now [since it was introduced] and it remains the popular choice with clients.”
There is no doubt that Middle Eastern process plant clients favour the South Korean model because it takes almost all the risk away from them and places it on the contractor.
Effective procurement is imperative and, despite speculation to the contrary, most South Korean contractors source at least 50 per cent of materials from outside their home country. This global strategy is essential for sourcing materials for process plant projects, as many manufacturers are based in either the US or Europe.
Prior to LSTK, the majority of the projects executed in the region were priced using a cost-plus model. This means the contract is executed with an open-book policy for procurement and then a percentage of the cost is paid by the client as profit to the contractor.
This model is preferred by contractors because payment is guaranteed and it presents them with very little risk.