Major Industry Trends
The construction sector is in an interesting phase of its evolution, not quite yet global in nature, but with some players active in more than one national market and the largest players becoming involved in multiple projects in Europe, North America, and Asia, particularly China. The sector includes companies from the smallest to the largest. At the bottom of the scale are small house-builders, followed at the mid-range by regional and national companies capable of handling multiple projects within one country, to larger players with specialist interests, for example, in shopping mall construction, or office blocks, operating in multiple countries. The industry has a clear overlap with civil engineering on infrastructure projects, particularly where groundworks and ground preparation for site construction are concerned.
The sector, of necessity, works in partnership with a range of other professions, such as architects, quantity surveyors, and structural engineering consultants, who may be external to the construction company, or part of the company. Legal and financial advice on contracts, joint ventures, and project financing, as well as on litigation—the construction sector is associated with more than its fair share of litigation—are also essential services for the sector.
After a number of boom years, the global downturn started to have a real impact around August 2008, and is now having a severe effect on the sector across the developed world, in all areas except public works and infrastructure. The stimulus packages that are being implemented by governments globally all have as a common theme the idea of bringing forward or initiating major infrastructure projects to pump public money into the economy.
However, infrastructure is not a market that the smaller players can get involved in. Now that the housing bubble has crashed in many developed economies, smaller house-builders are going into administrative insolvency in increasing numbers, and larger construction firms are implementing layoffs, which, in many instances, will damage their ability to go forward rapidly when the upturn finally arrives.
The industry also has a clear and very close relationship with related industries specializing in building materials, including cement, plastics, wood, steel, and glass, as well as innovative new product types, with particular strength, thermal, or low-maintenance properties.
There are huge difficulties in the way of construction companies moving outside their own national “turf.” Every country has its own planning laws, building materials laws, and building regulations for residential, office, leisure, retail, and industrial building. Moreover, construction is very materials and skills-intensive, and bringing materials to the site and organizing the necessary skills, labor, and project management is a real challenge for one location, never mind for multiple locations in multiple jurisdictions.
For this reason, many cross-border construction projects are done as joint ventures until the incoming company has acquired a sufficient base of experience in the new jurisdiction’s regulations and requirements, and has the necessary network of relationships to make building feasible, and tendering for local projects a practical proposition. For this reason, many international infrastructure projects tend to be project-managed by large civil engineering companies, who may use their own construction arms, or a range of large and smaller local construction companies, or some combination of all of these to get the job done.
While both the residential house-building and commercial office markets in the UK and Europe are in deep recession at present, 2009 may well turn out to be a vintage year for the launching of grand infrastructure projects in Europe and the US. Italy, for example, has revived one of Prime Minister Silvio Berlusconi’s top projects, the Messina Bridge, which will have a central span of 3.3 kilometers. Once completed at a projected cost of €6.1 billion, the Messina Bridge will be the longest in the world, and will link the island of Sicily to the Italian mainland’s Calabria region. It is to be part of a €17.8 billion public works program announced by the Italian government in March 2009, designed to counteract the effects of the global slowdown on Italian jobs and the Italian economy.
The new spending is a supplement to the €16.6 billion on new infrastructure spending announced by the Italian government in November 2008, to include new schools, prisons, and a flood barrier for the ancient city of Venice. Before the original Messina Bridge project was cancelled by the short-lived Socialist government, it involved a truly international consortium of construction and civil engineering companies, including Italy’s Impregilo, Condotte, Aci Consorzio Stabile, Cooperativa Muratori & Cementisti (CMC), and Impresa Grassetto, alongside Spain’s Sacyr Vallehermoso, and Ishikawajima-Harima Heavy Industries (IHI) from Japan.
One of the biggest construction projects in Latin America at present is the US$5.25 billion expansion of the Panama Canal to accommodate modern vessels that are longer and wider than was the case when the canal was originally built. The expansion program includes the construction of new locks on the Atlantic side, on the east side of the Gatun Locks, and on the Pacific side, to the southwest of the existing Miraflores Locks. It also involves the excavation of new access channels and the widening of existing channels, plus a modest raising of the level of Lake Gatun to accommodate the additional flows of water into the new locks at each locking. Already, three consortia of international companies have put in bids to construct the lock basins, which will take around half of the projected budget.
In the US, President Barack Obama has proposed the creation of a US$25 billion National Infrastructure Bank, as part of the US fiscal budget for 2010. A further US$60 billion to support projects funded by the bank will be raised through the issue of bonds.
One of the major expansion goals for the larger European and US construction companies is to expand their share of the burgeoning Chinese construction market. China is committed to building some 200 new cities over the next few decades. According to a study by the World Bank, cited by a report on China by the American Forest & Paper Association (AFPA), over half the house building that will take place in the world by 2015 will be in China.
Whereas 10 years ago Chinese urban living was dominated by state-provided housing, with urban residents employed in state-owned factories, from 1998 onwards the privatization of China’s existing and new housing stock has moved at a pace. Today, some 40% of the Chinese population is urbanized, but by 2020, the percentage of the population living in existing and new cities is expected to reach 60%. That adds up to a building program on a truly gigantic scale.
Foreign direct investment was flowing into China, just before the current downturn, at the rate of US$1 billion a week, according to the World Bank, much of that into construction projects. The AFPA estimates that by 2020 China’s housing floor area will be some 69 billion square meters. In 2004, the annual construction value of building in China amounted to between US$200 and US$300 billion, and it was growing at around 8% per annum until 2008.
In addition, the country aims to build a massive 85,000 kilometers of additional highways, plus a vast amount of infrastructure, from sewerage plants to power stations (a four-lane motorway costs around US$4 million per kilometer, double if there are bridges or tunnels involved). It is likely that Western construction companies that succeed in carving a major place for themselves in China, with the help of local Chinese construction companies, will start to achieve a real, global status.
Market Analysis
Building Materials—Industry Trends
The building materials sector is extremely diverse and constitutes a sizeable chunk of the industrial base of developed countries. It includes a highly diverse range of suppliers, from cement manufacturers (an area that is under tremendous pressure to both innovate and to “green up”), to specialty glass and steel manufacturers, as well as providing a large market to white goods manufacturers, furniture manufacturers, paint and wiring manufacturers, and a host of other related industries.
One of the biggest boosts for the building materials sector is the seemingly endless raising of the bar by various national planning departments on “green” building. The green building materials market was worth some US$57 billion in 2008 in the US alone, with the residential market being a major driver. One of the biggest segments of this market is the green floor-coverings sector, with renewable products such as woven floor coverings, bamboo, or cork being in huge demand.
Another growth area is concrete production from recycled materials, such as ash from power furnaces (source: the Freedonia Group). Wood from proven, sustainable forests is another area that is set to boom, as are water-efficient plumbing fixtures and energy-efficient lighting fixtures, both of which should see double-digit growth every year to 2013, according to a Green Building Materials report by market analysts, the Freedonia Group.
In the residential homes sector, construction companies are often pulled and pushed in two opposing directions simultaneously by regulations, when it comes to innovations in building materials. On the one hand, anything that helps to “green” a home, by improving its thermal efficiency, or lowering its energy consumption, is regarded as good. On the other hand, local planning offices tend to be very prescriptive on the kinds of materials that are regarded as suitable, and it can be an uphill struggle for new materials to get acceptance.
There are ways around this. Australia, for example, has a Building Products Innovation Council, whose job it is to promote the most efficient and innovative use of building products across the sector, while still seeing that construction companies adhere to a consistent regulatory framework for building. The council includes senior representation from across the spectrum of the building materials and products side of the building industry, which ensures that the council stays abreast of new product innovations.
The construction sector is, in many ways, both an ideal test bed for scientific innovation, and a powerful economic driver of innovation, as successful products can be taken up in enormous quantities on a worldwide scale. The range of innovation opportunities is as broad as the designer’s imagination. One company that specializes in building product innovation, DuPont, has products on offer that range from new materials to construct “storm rooms” to keep families safe in high-risk tornado and hurricane areas, to kitchen counter tops, such as its Zodiaq range which incorporates quartz crystal to create an exceptionally durable and scratch-resistant surface. Many innovations address thermal loss from homes to make them more energy-efficient. Phase change materials, for example, release or absorb large quantities of heat when changing state from one phase to the other. Companies such as BASF and Ciba, which specialize in surface coatings, have come up with micro-encapsulation waxes that enable glass manufacturers to incorporate phase change materials into window construction (see, for example, www.esbits.com, from PCM Innovations).
Innovation need not be a matter of new building materials; it can also be innovation in the way standard materials are used. The German Passivhaus standard (source: www.building.co.uk) is a low-energy house, built around a set of principles applied to building design. There are some 15,000 Passivhaus builds in the world, and the design principle is promoted by the Passivhaus Institute in Germany. The core is a super-insulated, airtight envelope boosted by the use of glass to promote solar gain, and the result cuts heating requirements by up to 85%.
Home and buildings designers and planners have to think about both materials and the building regulations that are likely to appear in a world dominated by calls for action to cut carbon emissions. Current building requirements are likely to be further amended, almost year on year, to minimize the impact of the built environment on the planet, which means cutting emissions and energy usage. We are at the dawn of “smart” buildings, which react both to energy usage and to the needs of occupants, but many leading architects and designers are already thinking about zero-emissions buildings, or massively taller buildings, or buildings that are themselves virtual “cities”—all concepts that will provide a fertile ground for innovation in building materials.
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