Builders cash in overseas experience

Which Korean industry has the following export performance?

Overseas contracts rose 33 percent annually from 2000 through 2011, when it reached $44.3 billion, all told a 23-fold increase. It has five companies and they’re among the global top 20.

The answer: Plant engineering, which includes designing facilities, procurement of equipment and material and construction.

The rapid growth of this industry is traced to leveraging early experience in large-scale projects, target marketing and gaining the trust of customers. Still, the nature of plant engineering makes mid- to long-term revenue streams a constant challenge. To maintain their edge, Korean companies need to diversify their business model according to anticipated megatrends and strengthen their technological competence.

Much is at stake and much can be learned from the builders’ experience. Their success has made overseas plant projects a key export. In 2010, overseas plant orders accounted for 12 percent of Korea’s total exports compared to 1.1 percent in 2000. Particularly notable were the builders of chemical and power plants, who accounted for Korea’s presence in the global top 20. The plant engineering industry also has become a major source of new jobs; for every 1 billion won in sales, plant engineering companies hire 19 people, more than double automakers’ rate of 10.8 new hires.

Naturally every project requires a unique approach because of the client’s needs and the unique problems and risks attached. As such, plant engineering is a knowledge-intensive industry in which knowledge, skills and experience must be collected and aggregated for efficient planning, construction and cost controls.

Experience and know-how was gained by working with global companies on foreign-led projects during the 1960s and 1970s. The third five-year economic development plan (1972-76), in particular, ensured surging domestic demand to be accommodated by Korean companies. In the 1970s, Korean engineering and construction companies began to establish an increasing presence in the Middle East and elsewhere with the construction of roads and port infrastructure. Entering the 2000s, sustained demand for plants emerged from the country-clients and the Korean companies were positioned to tap local networking, work experience and build their reputations.

Target marketing appeared in the early 2000s, when Korean builders deviated from foreign rivals and decided to focus on the Middle East and emerging market economies. The companies predicted rising oil prices would boost plant construction demands in the Middle East and rapid growth in emerging economies would trigger more construction projects.

Between 2001 and 2008, oil producing countries’ revenue increased by an annual average of 25 percent to top $1.9 trillion. In the 2000s, the GDP growth of emerging economies was two to three times that of advanced countries. The growth in target markets led to increases in investments of industrial facilities, including plants. Korean companies fostered skilled workers in the targeted markets and aggressively sought new orders. In contrast, rival Japanese companies adopted a defense posture, curbing investments.

Korean builders strive to deliver customer satisfaction, which lays the groundwork for additional orders. Constant innovation and flexibility by Korean companies allows them to avoid costly construction delays and consequently gain customer confidence. For example, when rust in a chemical distillation tower was found in a Saudi Arabia project, the client suggested a cleaning method that required two months. Instead, Samsung Engineering employees went into the tower and did the work in 15 days.

To maintain their top-tier overseas status, Korean plant engineering companies must remain prescient. They have to closely observe changes in future macroeconomic and social trends and incorporate them into their strategies.

The emerging shale gas industry, expanded development of deep water resources, increased urbanization and greater attention to environmental-friendliness will inevitably require that Korean plant engineering companies reexamine their business model.

by Kim Won-so