Asia in Construction Boom, Bucks Global Trend

Large infrastructure projects are boosting companies in Asia Pacific, bucking the downtrend elsewhere, according to a recent KPMG survey of 140 global engineering and construction companies.

 

China for example, has enjoyed massive state investment in the past year, which has filtered down to infrastructure projects typically carried out by the mainly government-owned construction companies, some of whom participated in this survey.

 

Across Asia Pacific, over one third of respondents reported that various government stimulus initiatives have had a "significant" impact. However in Europe, the Americas, the Middle East and Africa, a majority said it has had little or no effect.

 

"Construction companies in Asia Pacific are benefiting from infrastructure and resources related activity and the medium term outlook is positive. The challenge today for Hong Kong construction executives is how to benefit from the China construction boom in a profitable way, and how to diversify away from pure contracting to enhance margins and build a sustainable, longer term business," says Jonathan Downer, Partner, KPMG China.

 

Despite an overall slow global economic recovery, the outlook for the industry remains strong. Almost half of the worldwide respondents expect an increase in their backlog in the next year, driven by pent-up demand, expansion into new services, such as power; or moving into additional geographies, such as the Middle East, Asia, Australia, Africa and India. Asia Pacific respondents were especially bullish about the future, with 21% of respondents confident of a significant increase in backlogs in 2011.

 

Another trend noted by the survey is that many contractors are considering moving into new sectors, regions or geographies to improve profitability.

 

While average margins for companies across Asia Pacific have tended to be higher than elsewhere, only a small proportion overall have managed to avoid price reductions. Close to half of respondents in Asia Pacific said they have had to price at or below break-even levels. Some have chosen to scale back activity rather than be drawn into a price war.

 

Mid-sized companies in particular, remain optimistic for the coming year, despite government spending being tightened across the board. However, there is a more measured prediction on profits over the next 12 months. The environment remains highly competitive in all markets, and almost a third (31%) of engineering and construction companies report they are bidding for new business with lower margins - even in the more robust Asia Pacific markets. Pricing in Hong Kong was described by one respondent as "extreme."

 

Asia-Pacific's positive market was also reflected in the headcount numbers, with only one in seven companies in this region making any type of job cuts at all. Conversely, 35% of respondents said their organisation had increased its direct labour force.

 

In terms of the future outlook, the survey notes there has been a global shift away from heavy infrastructure projects such as railways, roads and bridges, towards power, energy, mining and water, particularly among larger companies. The exception to this trend is Asia Pacific, where there is a significant push for railway construction, an example of which is the high-speed rail projects underway in Mainland China and rail development in Hong Kong.

 

For their expansion plans, respondents indicate strong interest in the Middle East, Asia, Australia, Africa and India. The larger players in particular appear to be avoiding the European market, in favour of Australia and Africa. "It's a bullish picture for Asia and you don't have to be an industry specialist to see and feel the infrastructure related construction activity taking place in Hong Kong and China. But there are challenges – the market is competitive: pricing is tough and costs rising, and in Hong Kong in particular there are concerns about skills shortages - tunnel blasters for example," concludes Downer.

 

 

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