Build on foreign construction losses

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Build on foreign construction losses

Samsung Engineering reported an operating loss of 219.8 billion won ($195.6 million) in the first quarter - its first loss in a decade. The construction company is said to have lost 300 billion won in the United States and Saudi Arabia. GS Engineering and Construction stock last week plunged the daily limit and rattled other builders in Seoul after reporting a first quarter operating loss of 535.5 billion won.

Large Korean construction companies have been perceived as doing well overseas - despite the slumping local market. But that perception has been shaken as the sector suffers setbacks in large orders for plants, shipbuilding and solar farms. Samsung and GS Engineering both cited losses from higher costs in 2009 overseas projects. Other builders may face similar losses because they secured lofty construction orders from the Middle East during the same period.

Rumors have been rampant that Korean builders were fighting among themselves with dumping and low prices in international bidding. Even without winning low-ball bids, builders have been running money-losing operations in large-scale construction projects that usually take three to four years to complete because of frequent changes in designs from contractors and the insolvency of subcontractors. Local builders rushed overseas after the Korean construction market stalled following the global financial crisis. There was intense competition for construction projects in the oil-rich Middle East. Those reckless ventures have backfired.

But overseas construction projects remain a strong strategic revenue base for our economy. Local companies earned a combined $65.9 billion last year from overseas construction projects. Semiconductor exports were $50.4 billion and autos $47.2 billion. The industry should focus more on profit margin than on the number of orders in their bidding for overseas projects. Companies should refrain from self-destructive rivalries among themselves. And they should focus on package contracts that cover the entire process, from design to financing to construction.

The overseas market is changing fast. Demand for construction and plants is brewing in emerging markets in Southeast Asia and Africa. The shale gas boom in North America is also revolutionizing the global market. Korea’s engineering companies have 40 years of invaluable overseas experience. When combined with solid local capital, such as the National Pension Fund, they can strike a new bonanza overseas. The local industry is the world’s seventhlargest in global construction. The government and industry aspire to attain revenue of $100 billion in overseas construction by 2017 and move up to No. 5 in the global market. The local industry must shake off past losses and start anew.

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