chapter 4 international competition engineering and

Chapter 4

International Competition inEngineering and Construction

CONTENTS

PageSummary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ...........119Industry Structure and Trade . . . . . . . . . . . . . . . . . . . . ....................121

The Industry . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .....................124Downstream Linkages . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .............127The International E&C Market . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. ...128

Competitive Strategies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ...............136Financing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ..........136Technology . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ...........138The Future . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ...................144

Policy Issues: Technology Development and Diffusion, . . . . . . . ...........148Concluding Remarks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ...151

BoxesBox PageI. Examples of International Design and Construction Projects of

American Firms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ..................122J. Piping Design and Construction Management Technologies . ..........125K. Technical Knowledge in the E&C Industry: Three Examples . . . . . . .. ...140L. Federal Government R&D Support for Construction-Related

Technologies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ..............149

FiguresFigure No. Page26. New U.S. Construction, 1985 . . . . . . . . . . . . . . . . . . . . . . ...............12627, Total Billings, Domestic and Foreign, for 500 Largest U.S. Design

Firms by Type of Project, 1984 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ......12628. New Contract Awards of the 250 Largest International Contractors ....12929. Economic Growth in the Developing World. . . . . . . . . . . . . . . . . . . . . . . ..13030. Foreign Construction Awards of the 400 Largest U.S. Contractors .. ...13131. New Contract Awards of the 200 Largest International Design Firms ..13332. Foreign Awards of the 500 Largest U.S. Design Firms. . ..............134

TablesTable No. Page14. Leading International Contractors, 1980 and 1985 . ..................12615. Typical Examples of U.S. Goods Exports Resulting From an Overseas

Energy Project. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ...........12816. New Contract Awards for the 250 Largest International Contractors,

1985 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ....13117. Revenues of the 500 Largest U.S. Design Firms . ....................13218. Billings of the 200 Largest International Design Firms, 1985 . .........13419. Foreign E&C Firms in the United States . . . . . . . . . . . .................135

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Chapter 4

International Competition inEngineering and Construction

Through the mid-l970s, American engineer-ing and construction (E&C) firms won far moreinternational contracts than competitors fromother countries. For many of the larger U, S.-based contractors-Bechtel, Brown & Root,Fluor-international projects came to accountfor half Or more of revenues and profits. Butas international (construction boomed and U.S.firms did well, others did better. [J. S. marketshare gradually slipped.

The 1980s brought a new era to the worldconstruct ion industry. Like so many of theircounterparts in U.S. manufacturing industries,American E&C firms found themselves in aworld w i t h many more quite able competitors,A second factor accelerated the slide in U.S.market share: declining economic growth ratesin the Third World, plus the collapse of oilprices, meant fewer international projects.

Over the past two decades, the E&C firms ofthe less developed and newly industrializingcountries (LDCs and NICs) have matured.Meanwhile, the Europeans and Japanese pur-sued strategies based largely on the developmentof technological advantages, first in construc-tion methods needed to deal with conditionsin their home markets, So long as Third Worldgrowth was strong, and Middle East oil reve-nues high, there were enough international con-tracts to keep many companies busy. U.S. mar-ket share gradually fell, but for practicalpurposes American companies had all the busi-ness they could handle,

Today, deteriorating economic conditionsmean fewer of the big construction jobs—damsand water projects, airports and electric gen-erating plants—that have been a staple of U.S.(and European) E&C firms. Third World debtburdens mean that developing countries cannotafford new projects. Falling oil prices have cutsharply into new construction in the Middle

East and other oil-exporting regions. The oil-exporting nations already face overcapacitiesin petrochemical production; they have neitherthe money nor the need of earlier years. At thesame time, these countries can now handlemany projects on their own that a decade agowould have been contracted to a foreign E&Ccompany.

Moreover, contractors from NICs includingSouth Korea, Brazil, and Turkey have begunto compete against firms from the developednations in the international market, With theNICs pushing from below, E&C firms from theother developed countries have invaded mar-kets once the province of American contrac-tors, often with the aid of subsidized financingpackages put together with government help,Companies based in Britain, France, and WestGermany—major players in the internationalconstruction game for many years—have beenjoined by aggressive competitors from Japan,Italy, and elsewhere.

Three primary factors affect internationalcompetitiveness in the E&C industry: costs,financing, and technical capability—the latterincluding managerial expertise as well as engi-neering skill. Generally uncompetitive in labor-intensive construction, American companieshave concentrated on the professional servicesportion of the industry-architecture, engineer-ing, construction management, and operationsand maintenance. But with rising competenceelsewhere, U.S.-based firms have had troublecompeting on a cost basis even for the moresophisticated jobs; despite hiring growing num-bers of foreign nationals for work on interna-tional projects—engineers and supervisors, aswell as people in lower skilled positions—American companies continue to lose contractsto foreign competitors with lower costs overall.

119

120 • International Competition in Services—. —

With more competition for fewer projects,U.S.-based firms will increasingly find them-selves members of international consortia. Tosurvive internationally, they must rely morethan ever on strengths in putting togetherfinancing packages, and on their managerialand technological expertise. The alternatives?Withdraw from the market, or operate inter-nationally only in protected segments createdby U.S. Government set-asides (e.g., militaryprojects). With other governments participat-ing in financing—to support exports of mate-rials and equipment as much as E&C services—American companies have been actively seek-ing joint ventures with foreign partners, in partto tap the financial resources of the latter. Thispattern will probably continue even if U.S. ef-forts to wean other countries away from subsi-dized financing succeed.

The picture is not all grim. American com-panies still have excellent and deserved repu-tations in engineering and project management.If not, as they once were, broadly superior, U.S.firms lead the world in technologies such ascomputer-aided design and drafting (CADD),and in know-how for designing petroleum re-fineries and some kinds of power stations andchemical plants. They also retain a lead inmanagerial expertise—which remains a signif-icant though diminishing source of advantage,given the shift in the market away from mas-sive projects demanding skills in logistics andcoordination on jobs involving hundreds of sub-contractors and suppliers. Even so, manage-ment tools such as computerized inventory con-trol systems and scheduling methods can helpcut costs and increase productivity on projectsof all sizes, as can advances in constructiontechnologies such as automated earthmovingequipment and pipe bending machines. Thesetechnologies can help to reduce the labor costdisadvantages of U.S. construction firms, as cantechniques for offsite fabrication of major com-ponents and designs that are easier and cheaperto construct.

Taken together, advances in constructiontechnology will, over the next two or three dec-ades, lead to huge increases in productivity.

Currently, however, it is foreign companies, notAmerican, that have the lead in fields like tun-neling, reinforced concrete construction, andsome applications of new materials. Overseasfirms—especially the Japanese—do much moreresearch on basic construction processes. MostU.S. R&D has been directed at managerial anddesign technologies, and at industrial processengineering. While American E&C firms havebeen seeking to position themselves to takeadvantage of growth in emerging industries likebiotechnology, the common strategy—servingas a broker who can put together a turn-keypackage of process technology for the customer—today can compensate only partially for lackof a proprietary technological position in thesense of firm-specific know-how.

American companies have begun to adapt tonew competitive realities, somewhat hesitantly.The years ahead promise further painful ad-justments, Broadly speaking, loss of competi-tiveness in engineering and construction hasimplications for the entire economy. Eventhough only a small portion of U.S. E&C firmsseek international business, and even thoughthe linkages between exports of E&C servicesand exports of goods have been weaker in theUnited States than in other nations, loss of com-petitiveness in the E&C industry translates intoreductions in the export potential of industriesthat sell capital goods internationally. Theserange from computer systems for air traffic orindustrial process control, to steam generatingunits and turbo-alternators, to mining, earth-moving, and construction equipment itself.

Furthermore, as E&C markets have dried upelsewhere, foreign firms have turned their at-tention to the United States. Using skills honedabroad, some of these companies have begunto make substantial inroads into the huge do-mestic U.S. construction market; AmericanE&C firms could begin to find themselves un-competitive at home as well as overseas.

The most immediate government policy im-pacts in this industry come through financing.Progress in matching or eliminating foreigngovernment subsidies—e.g., mixed credits—would be a real help to U.S. firms internation-

Ch. 4—international Competition in Engineering and Construction ● 121

ally, not only in winning contracts they mightotherwise lose, but in permitting them to avoidsome of the joint ventures with foreign part-ners they have been forced into. Beyond this,Federal support for R&D that underlies the E&Cindustry—including new applications of exist-ing technologies, and diffusion of results—could help American companies rebuild theirtechnical prowess. Even in the absence of for-eign government subsidies, American firmswill need better technology over the medium

and longer term to compete. The evolutionarytransformation of construction into a high-technology industry, already underway, meansnew opportunities for American firms that caninnovate and establish strong technological po-sitions. While Federal procurements could helpthe industry, an aggressive strategy based onstrengthening the infrastructure for technologydevelopment offers the best hope for maintain-ing competitiveness over the longer run,

INDUSTRY STRUCTURE AND TRADE

Some firms do business in both the designand construction portions of the industry,others specialize in one or the other. Box I in-cludes examples of typical projects of bothtypes, drawn from recent or current interna-tional projects won by American firms. Designactivities, encompassing both architecture andengineering, include:

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project feasibility studies, ranging fromeconomic analyses to environmental im-pact assessments;conceptual design, for appearance as wellas function;cost estimating;engineering, including site planning, struc-tural analysis and design (foundations, cal-culations of loads and strength), and—forbuildings—heating, ventilating, and air-conditioning, as well as other building sys-tems (e. g., electrical power); andpreparation of detailed drawings and speci-fications to guide construction.

The construction phase involves procure-ment and tracking of materials and supplies,mobilization of labor and equipment, site prep-aration, earthmoving, onsite materials handing,and fabrication and erection. Contractor andpurchaser may each have their own inspectionand quality control personnel. Development ofoperations and maintenance (O&M) proce-dures, and training of the client’s work force–while not normally considered part of the E&Cindustry-fits logically as a part of the engineer-

ing process; moreover, a number of E&C firmsnow undertake ongoing O&M work on a con-tract basis.

Many E&C firms specialize in certain typesof projects—Fluor in energy-related work andpetrochemicals, Ebasco in power generation.Other firms specialize by technical function-T.Y. Lin in structural engineering, Louis BergerInternational in planning, design, and construc-tion management. Some companies choose todiversify, and compete for many types of jobs.Even so, a company that builds, say, commu-nications networks would seldom be found put-ting up residential buildings.

Contract opportunities typically emerge atfour stages during large international projects:feasibility studies; design and engineering; con-struction; and startup, including O&M train-ing. The earlier an E&C firm becomes involved,the better the chances of further contracts. Asa rule-of-thumb, feasibility studies account forabout 1 percent of the eventual project cost,with design and engineering about 10 percent.Construction management can run between 2and 6 percent of total costs, while lifetime ex-penses for operations and maintenance mayamount to several times the design and con-struction cost, depending on the type of facil-ity. E&C firms may make little if any profit onfeasibility studies—indeed, because they pro-vide an opening wedge for future design andengineering contracts, may treat them as lossleaders.

122 ● International Competition in Services

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Box I—Examples of International Design and Construction Projects of American Firms

The Guy F. Atkinson Construction Co. leads an international consortium that is building the GuriDam in Venezuela, the second largest hydroelectric development in the world. With the firm Eulo-gio Grodo y Cia, Atkinson is also responsible for the Colburn Dam in Chile, which will be thatcountry’s largest.

A group of U.S. firms helped build the 1.8 million square foot Taipei World Trade Center in Tai-wan. Bechtel International served as consultant for construction supervision and project manage-ment, Hellmuth, Obata & Kassabaum as lead architect, T.Y. Lin International as structural engi-neer, and William Tao & Associates as the mechanical engineering contractor.

Saudia Arabian Bechtel Co., Ltd,—the local subsidiary of the Bechtel Group-serves as planner,designer, and project manager for the King Fahd International Airport. Minoru Yamasaki & Asso-ciates, of Troy, Michigan, won the contract for architectural design of the terminal complex.

A joint venture of three American firms—Paul N. Howard Co., Harbert International, and Sadelmi,Inc.—has begun the first stage in what will be a $2.6 billion rehabilitation of the Cairo sewer system.Local subcontractors will do most of the physical work.

AEGIS Construction has won a contract to design and build 125 units of family housing at theU.S. naval base at Guantanamo, Cuba.

M.W. Kellogg’s British subsidiary recently won a contract for engineering, procurement, and con-struction supervision for an ammonia plant in Hull, England.

Scientific-Atlanta has a contract to procure equipment for and build 12 satellite Earth stations inGabon.

Morrison-Knudsen International designed and is constructing a $2 billion coal mine and port onthe Guarjira Peninsula in Colombia—the Cerrejon Mine/Puerto Bolivar project. This is Columbia’slargest development and the world’s biggest award to a single contractor. Most of the labor forcewas hired locally, with 380 Americans in a work force that reached a peak of 11,000.

Contracts take two common forms: design-bid-build, and design-construct. Under thedesign-bid-build sequence, design and con-struction take place under separate contracts.Specifications developed in the design phaseform the core of a request for bids on the con-struction work. (Typically, the client selects thedesign firm based on an evaluation of qualifi-cations.)

Design-construct procedures eliminate the in-termediate bidding stage, so long as the clientis satisfied with the earlier work. One contractcovers the entire project—design and engineer-ing, construction, and perhaps even installa-tion of equipment (for a turn-key project). Thelead contractor might later provide O&M serv-ices. Turn-key or total package approaches have

the benefit of simplicity for the client, who needdeal with only one firm,

The design-construct process aims for bet-ter cooperation between the design and con-struction teams; the design-bid-build systemfosters separation, even antagonism, betweendesigner and builder–a tradition that persistsin the American E&C industry, even within in-tegrated firms. Current policies at both theWorld Bank and the Inter-American Develop-ment Bank permit clients funded through bankprograms to award design contracts as follow-ups to earlier feasibility studies without reopen-ing the bidding process. If the client has beensatisfied with the feasibility study, the presump-tion of this “continuity of work” principle isthat sticking with the same firm will be more

Ch. 4–International Competition in Engineering and Construction • 123

efficient and less disruptive during the design rounds of bidding. Other nations have negoti -phase, given that the E&C firm has developed ated selectively with or invited bids from indi-an understanding of the client’s needs. Like- vidual companies.1

wise during construction, continuity of work For large and complex projects, which mayimplies that staying with the same firm will be broken down into thousands of individualeliminate the cost of learning and mobilizationthat a new firm would incur and charge to the

work packages, site management becomes acritical factor in controlling costs and meeting

client.

Many bidding variations exist. For example, IA. Demacopoulos and F. Moavenzadeh,United Arab Emirates picks the lowest five bids

“ I nterniit l[]na] (;(]n-struction Financing, ” l’DP Report 85-3, hlassa{:husctts Institute

for a rebidding process, or negotiates down to of Technology, Tec hnologj’ and De\wlo p men t l)rogra m, ] one

the lowest price offered. Indonesia awarded the 1985, pp. 73-74.Information in this chapter not otherwise cittxl ~(’nerall~ (:onl(;~

contract for the Jakarta Airport after three from interviews,

Photo credit: Bechtel Power Corp.

Const ruct ion pro jec t under U.S management in Southeast As ia .


schedules, and hence in the ability to put to-gether a winning bid. Tasks such as trackingincoming supplies, onsite warehousing, releas-ing drawings (and preparing as-built drawingswhen changes must be made in the field) ona large project can be overwhelming. For ex-ample, Morrison-Knudsen’s Cerrejon Mineproject involved 200 subcontractors and 2,100suppliers. In order to control costs, construc-tion companies have begun using onsite com-puter systems (box J). American firms have beenleaders in software for onsite management, andin the use of personal computers in the field,

The Industry

Domestically, construction is one of thelargest sectors of the U.S. economy. Well overa million firms, most of them small, employmore than 5 million Americans. New construc-tion in the United States during 1985 accountedfor nearly 9 percent of the gross national prod-uct. But only a few thousand American E&Cfirms do business internationally.

Residential building comprises more than 40percent of domestic construction (figure 26),with industrial plants and civil works of alltypes (roads, bridges, dams, irrigation systems,water and sewer systems, pipelines, ports) mak-ing up another 30 percent. Commercial andother nonresidential buildings account for mostof the rest. z Residential housing remains thedomain of local firms, both in the United Statesand overseas. The international E&C marketconsists mostly of design and construction forindustrial facilities, civil works, and, to a lesserextent, nonresidential buildings.

Of the 400 largest contractors in the UnitedStates, only 60 gained new contracts for for-eign work during 1985.3 A few big companies,in turn, dominate this small export-oriented

2See Traffe in St?rlrices: E~ports and Foreign Relrenues (Wash-ington, DC: Office of Technology Assessment, September 1985),pp. 58-61 and 65-67. Also 1986 Lr.S. Industrial Outlook [Wash-ington, DC: Department of Commerce, February 1986), cbs. 1and tj7.

“’U.S. Reco~er} Fuels Work Again, ” Engineering Neiis-Kecord, Apr. 17, 1986, p, 98. The figure was 6[j in 1984. Thisgroup got 21 per(:vnt of its total contract ii~~rar(ts oi’erwas (lur-in~ 1985,

group, with eight construction firms account-ing for more than 80 percent of new foreignawards by value. Similar patterns hold in othercountries, with international contracts makingup a substantial part of the total revenues ofthe largest firms and/or those that specializein this part of the business (table 14). For the[J. S. industry as a whole, foreign revenues—although totaling $7.7 billion to $8.1 billion in1983—account for only a few percent of totalreceipts (3 percent in 1983).4

Relatively more design firms do businessinternationally than construction companies(many of the large E&C firms offer both designand construction services), Of the 500 largestU.S. design firms, 258 reported foreign billingsin 1985. 5 Figure 27 gives the breakdown by typeof project, including both domestic and foreignawards, for 1984 (the latest year for which suchdata are available), Small design firms, particu-larly, are more likely to be active in the inter-national market than small construction com-panies. Nevertheless, of more than 45,000establishments providing engineering, architec-tural, and surveying services in the UnitedStates, only about 4 percent report foreignreceipts. However, those that do have foreignsales get, on the average, more than 20 percentof their revenues overseas.6 For the design por-tion of the E&C industry, OTA estimates thatforeign revenues came to about 14 percent ofdomestic revenues during 1983 ($5.1 billion to$5.6 billion, compared with $37.3 billion do-mestically), with affiliate sales considerablymore important than in construction.7

4These figures are (ITA estimates—Trade in 5’ert’ices, op. c it,,p 60. Of the $7.7 billion to $8.1 billion, $4,8 billion consistedof direct export s—e. g., construction services produced in theUnited States for Lustorners ot’erseas; OTA estimates place thesales of foreign affiliates of U.S. construction firms at $2,9 bil-lion to $3.3 billion in 1983.

5“Designer Billings Reachecl Record of$11 Billion, ” Engine(;r-

ing Ne}t’s-Recortf, Nlay 15, 1986, pp. 32-50,‘1982 C e n s u s o f Ser\7ice Industrit?s: A!isce]]aneous Subjects

(Washington, DC: Department of Commerce, 1985), p. 5-142,‘Trade in Sert’ices, op, cit., pp. 65 and 67. OTA places direct

exports of design ser~’ices at $1,1 billion to $1.6 billion in 1983,m ~](:h less than the estimate(l $-I billion in sales by. o~’erseas a f-filiates of U.S. design firms.

Ch. 4—International Competition in Engineering and Construction • 125

Box J.—Piping Design and Construction Management Technologies

For refineries, petrochemical plants, and power stations, fabrication and installation of piping maybe the single most expensive part of the construction process. With miles of pipe of many differentsizes, thousands of sensors, valves, and pipe hangers, and tens of thousands of welds, the designprocess itself is laborious and expensive. In earlier years, three-dimensional models were needed tocheck for clearances; today, much of the spatial design can be done with CADD systems. Particularlyin nuclear powerplants, piping systems must be designed so that neither expected nor unusual loads(e.g., earthquakes) will cause ruptures; both piping runs and hangers will affect vibratory modes andthe loads at each point. Calculations are very complex; today, they are carried out on large computers.

The pipe itself is expensive, particularly when specialty metals (e.g., nickel-base alloys) must beused to resist corrosion or high temperatures. Welds must be checked, often with X-rays. Pipes mayneed to be insulated after fabrication. For a large power station, conventional or nuclear, the materi-als and labor for the piping can run to half a billion dollars or more. Piping may account for 40 percentof total labor hours on the job site. Mistakes leading to scrappage or extensive rework can cost millions.

Piping fabrication—e.g., cutting and bending —normally takes place in an onsite shop. As an alterna-tive to using elbows, induction heating following by bending under computer control can greatly reducethe number of welds and hence cut both fabrication and inspection costs; savings maybe 20 to 40 per-cent. * While U.S. construction companies have begun to use induction bending, the technology hasbeen developed in Europe and Japan, and continues to be controlled by firms outside the United States.

Offsite fabrication can also lead to savings, particularly for projects in countries with limited poolsof skilled labor. For the A1-Jubail refinery, in Saudi Arabia, a Japanese firm built modules weighingup to 2,500 tons at its home facilities. After shipment from Japan by sea, the modules were moved6 miles on a specially constructed roadway to the refinery site.

Other sources of future savings in piping-intensive construction will include direct control of pipebending equipment from CADD databases, greater use of automated welding equipment and roboticsduring installation, and automated real-time inspection of welds (ultimately, closed-loop control ofthe welding process may obviate inspection except on the most critical welds).

Electrical wiring—also involving many components and labor-intensive installation—presents an anal-ogous set of opportunities for automation and costs savings. Bechtel, for example, has scaled downa mainframe computer program for cable and raceway scheduling to run on PCs at the constructionsite, Designers enter data on each electrical component into the system at the home office. Whenparts, components, and subassemblies are delivered, warehousemen log them in using optical scannersto read bar codes and computer-generated control cards. As the job progresses, workers enter dis-crepancies and field changes into databases maintained both at the home office and the construction site.

Far more can still be done to improve productivity in construction through improved managementsystems. On some large projects, workers maybe idle as much as two-thirds of the time while waitingfor the materials or tools for the next task.** Such examples suggest the potential of computer-basedconstruction management systems, now in their infancy, for smoothing the flow of work and cuttingcosts. They will be extensively developed and applied over the next 10 to 15 years, not only for pipingand electrical wiring, but for many of the other tasks commonly found in complex construction projects.In principle, components can already be coded and tracked from the design phase (engineering speci-fications), through fabrication (material lots, delivery and warehousing, construction and inspection),and a database maintained over the life of the plant or facility. In practice, however, most companiesstill work with a number of independent databases, handing control from one to the next at successivestages in design and fabrication. The companies that develop and apply computer-based constructionmanagement systems most effectively will have substantial advantages on large international projectsin the future.

*“Final Report, Tasks 1/2, Technology in Architecture, Engineering, and Construe. tion. ” prepared for OTA h} Il.\\’ Ha]pin under contractiNO, 633-1970, p. 42.

The A1-Jubail example below comes from p. 32, the information on Bechtel’s computer management of elwtri(a} wiring from pp 26-27.* *“Final Report, Task 3, Technology in Architecture, Engineering, and Construct ion,” preparwl for (3TA h} 1). VI’ Halpin under contract

633-1970, p. 2.

126 • International Competition in Services

Figure 26.— New U.S. Construction, 1985

Other privatenonresidential -

$56.1 billion (16.50/.) ~

\

$75.8 billion (22.1%

Total: $342,4 billionSOURCE “Annual Value of New ConstructIon Put In Place In the Un!led States

In Current Dol Iars and 1977 Dollars, ” U S Department of CommerceNews, Apr 1, 1966

Figure 27.—Total Billings, Domestic and Foreign,for 500 Largest U.S. Design Firms by Type of

Project, 1984

Water supply70/0

Sewer and waste12 ”/0

Total: $9.6 billionSOURCE “Design Billings Gain 12 Percent In 1964, ” Ertg/neerirrg NewsRecord,

May 16, 1985, pp 36-66

Table 14.–Leading International Contractors, 1980 and 1985

1980 1985New contracts New contracts

(billions of dollars) (billions of dollars)

Foreign Domestic Foreign Domestic—American firms:Bechtel Group . . . . . . . . . . . . . . . . . . . . . . . $8.5Parsons. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.3Fluor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.0Foster Wheeler . . . . . . . . . . . . . . . . . . . . 2.8C-E Lummus . . . . . . . . . . . . . . . . . . . . . . . . 2.7

Japanese firms:Chiyoda . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1.3JGC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.7Toyo Engineering . . . . . . . . . . . . . . . . . . . . 0.5

European firms:Philipp Holzmann (West Germany) ., . . . $2.5Bilfinger & Berger (West Germany) . . . . . 2.4Davy (Britian) . . . . . . . . . . . . . . . . . . . . . . . . 2.4

Korean firms:Hyundai . . . . . . . . ... . . . . . . . . . . . . . . $1.4Daelim. . . . . . . . . . . . . . . . . . . . . . . . 0.8Daewoo. . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.8

Other:Mendes Junior (Brazil) . . . . . . . . . . . . . $1.5Solei Boneh (Israel) ... , . . . . . . . . . . . . . . 1.3SOURCE E~g/neer/r?g News-Record, various tssues

$2.1 M.W. Kellogg . . . . . . . . . . . . . . . . . . . . . . . $6.21.1 Parsons . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.04.1 Bechtel Group . . . . . . . . . . . . . . . . . . . . . . 3.61.8 Brown & Root . . . . . . . . . . . . . . . . . . . . . . . 2.91.6 Lummus Crest . . . . . . . . . . . . . . . . . 2.4

0.3 Kumagai Gumi . . . . . . . . . . . . . . . . ... . $2.20.4 Mitsubishi . . . . . . . . . . . . . . . . . . . . . . . . . . 1,40.1 JGC . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.0

1.2 Philipp Holzmann (West Germany) . . . . . $1.90.6 SADE/SADELMl (Italy) . . . . . . . . . . . . . . 1.80.1 John Brown (Britain) . . . . . . . . . . . . . . . . 1.7

$0.2 Hyundai ., . . . . . . . . . . . . . . . . . . . . . . . . $2.00.3 Daewoo . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.90.1 Daelim . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.5

$1.4 Enka (Turkey) . . . . . . . . . . . . . . . . . . . . . . . $1.1. Joannou & Paraskevades (Cyprus) . . . . . 0.5

$0.63.63.82.71.1

$2.53,00,4

1,3—

0.4

$0.50.40.4

$0.5—

Ch. 4—International Competition in Engineering and Construction • 127

Relatively few Americans work overseas onprojects carried out by U.S.-based E&C firms;generally, they fill only the higher levelmanagerial and technical positions. In the past,it was more common for skilled jobs—survey-ors, heavy equipment operators—to go toAmericans, but most of these are now filled inthe host country, or by people from third coun-tries who get lower wages. Laborers and semi-skilled workers come almost entirely from hostand third countries; U.S. firms with contractsin the Middle East, for example, have hiredlarge numbers of South Koreans. In 1983, U. S.-based E&C firms employed 45,000 Americanson international projects and 99,000 foreignworkers, exclusive of subcontracting.8 Of theAmericans, about 19,000 worked outside of theUnited States and 26,000 at home. In recentyears, U.S.-based firms have also tended to letlarger numbers of subcontracts to foreign com-panies, taking advantage of their lower laborcosts.

Downstream Linkages

While E&C firms may underprice their fea-sibility studies in hopes of landing a follow-ondesign contract, and may hope that a designcontract will carry over to the constructionphase, this happens only some of the time. And,while a design contract by one U.S. firm mayraise the probability that it or another U.S. firm

~“’1’he Conlr]bution of Architectural, Engineering and Con-

~tro(:tion Exports to the U.S. Economlr, ” prwpare(l h} f]rice \l’ater-h{}use for the International Engineering an(] Construe. ti[]n ln-dust ries Council, V/ash ington, 11(;, April 1985, [). 17. (;oinpa ri ngtotal payroll costs, including fringe benefits, tor U.S. and [or-eign worker-s demonstrates the mutl~’es for hiring foreigners: p,i}.-roll costs for the 45,000 America ns totaled $2.2 hi] I ion (an a\er -,ige o f $49,000], costs for the 99,000 foreign ~~.orkers o n 1 y’ $1.4hil]ion ($14,000, on the average).

Direct exports prokide about 1 percent of total (J. S. E&C In-

dust r}’ employment. Assuming a 11 45,000 Americans mrcre Ill-~.ol ~’ed i n industrial or civil w() rks, the}’ made up perhaps 3 i)e r-cent of U.S. employment in this sector of the E&C illdustr}’. ,4higher fraction of emplo}’rnent can bet raced to exports in manyof the capital goods sectors that depenci in part on constructionpropx.ts for sales, For example, according to the [1 .S. lnt[’rna-t lorral ‘trade (:nrn mission. 4.3 per(, ent of [” .S, lohs I n the heat -I ng, plu rnh ingl and structural metal produ(:ts i n(lust r~ (I f:[]t}n(ltxl

() n cxpurts i n 1982, 31 I)e r(; e n t i n (;on st ru (. t io n a n ( 1 m i n i n g m d-

c h i nery, and 34 per(: e nt 1 n e n~ i nes and t LI rh i n e- [ ‘..$. TrcI~lt?-

~e]ate{l ~mp/oJ ment, USITG ~)ublication 1445 (tt’ashington, 11(;:1“,S. International ‘I1rade (;olnn~ i~~ion. ()(,tohcr 1983], I)p. 49-50.

will get the construction contract-perhaps be-cause the design calls for construction technol-ogies in which American firms specialize—onestudy of large projects during the 1970s foundonly 43 percent of projects with U.S. designers/consultants subsequently going to U.S. con-struction firms.9 Thus, exports of design do notautomatically lead to exports of construction.

A second set of downstream linkages also be-gins at the design stage. Merchandise sales—e.g., capital equipment—often follow quitedirectly from exports of E&C services. Part ofthe reason is simply that design firms tend tospecify equipment they are familiar with, sothat American E&C firms turn naturally toAmerican-made goods (table 15). Furthermore,American-made equipment commonly demandsAmerican-made spare and replacement parts.Contracts for O&M training and managementservices also follow logic all}’ from the exportof design services and equipment.

Today, with comparable equipment availablein a greater number of countries, this set of link-ages is not so strong as a decade ago, and willprobably continue to weaken. Under continu-ing pressure to cut costs, American firms havebeen purchasing or specifying foreign materi-als and supplies more frequently than in earlieryears. Still, in a survey by the U.S. InternationalTrade Commission, 33 of 38 American E&Cfirms said that they specified or recommendedU.S. equipment.10 Sometimes, of course, thepurchaser (rather than the E&C firm) specifiesAmerican (or other foreign) equipment for rea-sons of price or reputation. Nonetheless, most

‘K. J. Mu rph~’, hfacroproject De}relopmen t iII the Third [ lr(~rl(i(Boulder, CO: West\riew, 1983), p 138. Other’ (Downstream IIn A-age percentages: !Vest German y., 80 percent; J a pa n, (j 3 per( c n t:France and Italy, 50 percent; Britain. 13 per[:ent.

IO The Rela tionshlp of ~’,~ports Irr h’cle(,’tf?ti [ ‘.,5’, i~’( ‘rt ”l[, f‘ ]1) (/ll.$-

t r i e s t o U.S. hfercharrdi.w E x p o r t s , LISIT(; Puhli(at lon 1290(Washington, DC: U.S. International ‘1’radf’ [;omm ittion, I !]82),

p. 62..4 survey of projects with financing from the L’S F;\l)(Jrt-lllll)ort

13ank found that, when the design firm mas Amerlcdn, t)o ~x;z

cent of imported equipment ~t’a~ purchased from American (onl-~)anies. \}’ith des]gn engineerirl~ firms from other foreign ( ()\ln-t ri(:s (not the host (:OU nt r~’), the percentage (Iropped to 43 p~’r(. ent.See (~, Becker an(l F’. L1’ilsorl, “’ Addendum to Architectural an(lEngineering Serx ices Sector StudJ-]une 1 984, ” Export-l nlportBank of the ( 1nited States, Jt’ashington, 1)(;, July 27, 1:184.


Table 15.—Typical Examples of U.S. Goods ExportsResulting From an Overseas Energy Project

Likelihood of U S goods purchases relative to foreign goods

Above average Average Below averageFired heaters, includ-

ing furnaces,ovens, boilers,flues, and relatedproducts

Pumps and drives, alltypes

Vacuum equipment(vacuum pumps,ejectors)

Sawmill and planingmill equipment

Equipment for refiningpetroleum, and mis-cellaneous productsof petroleum andcoal

Miscellaneous plasticproducts

Heating and refrigera-tion equipment

Switchgear andswitchboard ap-paratus

Wiring devices

Pressure vessels andcolumns, Includingtowers, andreactors.

Heat exchangers, in-cluding condensersand evaporators

Instruments, includ-ing safety valves,Indicators, andpanels,

Electtric motors, motorcontrols, and trans-formers

Compressors anddrives, includingblowers and fans.

Crushers, pulverizers,and blenders,

Water and wastetreatment equip-ment, includingclarifiers, chemicalfeeders, mixers,and agitators.

Paints and alliedproducts

Nonferrous wiredrawing and in-sulating equipment

Lighting fixtures andequipment

Fabricated platework

Fabricated pipingof all types

Tanks, bins, andhoppers,

Materials-handlingequipment–e.g., bucketelevators, con-veyors, cranes,hoists, weighingdevices.hoppers

Plywoods andveneers.

Plumbing fixtures,fittings, andtrim,

Fabricated struc-tural metalproducts

Pipes, valves, andfittings.

SOURCE E C Stokes Vice President Procurement Bechtel Power Corp

of the total project budget on a large interna-tional project normally goes for non-U.S. goodsand services, even when the contractor is basedhere. A 1983 survey of American firms by Price-Waterhouse found that only about a quarter oftheir spending on international projects wentto cover expenses incurred in the United States,On the average, about 11 percent went for sal-aries and fringe benefits of U.S. employees (ex-cluding employees of U.S. subcontractors), 10percent for the purchase of equipment and ma-terials from other American firms, and 5 per-cent for subcontracts to U.S. firms .11 Most of

1 I Sllc h figures (;a n va r}~ a good deal from year to ~fea r, witha fe~l’ major pro je(:ts producing large swings in the proportionsspent her-e and abroad. Those quoted are from ‘‘The Contribu-

the remaining 74 percent paid for goods andservices purchased overseas,

When comparable goods (or subcontract serv-ices) are available from many sources, price willusually be the determining factor. Basic build-ing products—lumber, cement, and fabricatedsteel—tend to be purchased in the host nationor from low-cost third-country suppliers,Today, American firms will also normally spec-ify standardized or commodity-like products—e.g., many kinds of piping and materials-handl-ing equipment—based largely on price. In addi-tion, protected markets for host country con-struction and supplier industries may limit anE&C firm’s ability to specify foreign goods andservices, with local procurement requirementsoften written into contracts. As table 15 sug-gests, American suppliers begin to have advan-tages where proprietary technology makes adifference, as for refinery equipment, In othercountries, E&C firms may work more closelywith suppliers, particularly where one or bothare publicly owned, or when governments par-ticipate by providing export credits; the presi-dent of Italy’s state-owned industrial group, IRI,has said, “The first priority . . . is to promotethe work of Italian suppliers. ”12

The International E&C Market

Figure 28 summarizes conditions facing Amer-ican construction firms: a shrinking world mar-ket, caused in large part by economic problemsin the LDCs, coupled with intense competitionas firms from many countries strive to main-tain hard-won positions. Economic growthrates have been declining in the developingworld—figure 29. At the same time, the exter-

tion of Ar[; hitectura], Engineering and Construction Exports tothe [J .S. Economy, op, cit,, M’ it h corrections supplied by Price-W’aterhouse to OI”A, This sur~.ey found that, in 1983, foreigncontracts to U.S. E&C firms totaling $19.6 billion resulted in $2.2billion in U.S. salaries and fringe benefits (excluding subcon-tractors), $1.9 billion in pur(:hases of U.S. goods, and $1,4 bil-lion in U.S. subcontracting. A total of$13,4 billion went for goodsand ser~’i(;es purchased in the host nation or in third countries(foreign expenses), with the remainder for miscellaneous itemssuch as tax pa~’rnents. For 1982, $21,7 bil 1 ion i n con tra(; ts re-sulted in purchases of $2.8 billion in U.S. materials, $2.2 billionfor U.S. salaries and fringe henefits, and onlj $800 million forL’. S. subcontracting, with $15,3 billion for [orei~n expenses.

l’” Italian Engineering & Cnnst ru(; tion 1986, ” Engjne(,rjl],q,\T(?\\’s-R(;(; (][$(i, )UI1(; 12, 1986, p. 1-6.

Ch. 4—international Competition in Engineering and Construction ● 129— —

Figure 28.— New Contract Awards of the 250 Largest International Contractors

1980 1981 1982 1983 1984 1985

Year

Headquarters location of contractor:

❑ All other ❑ Japan ❑ Korea ❑ Europe ■ Uni tedStates

SOURCE Eng/neer/ng News-Record, various issues

nal debt of the LDCs has grown—from almost$400 billion in 1978 to an estimated $1 trillionin 1987.13 Many developing countries cannot— - — . IJ~~~Or/~ ~Co~omjc out100k (Washington, DC: InternationalNlonetary Fund, October 1986J, p. 100. For the current accountfigures for oil exporting countries, below, see p. 78.

in 1977, 15 percent of revenues that the indebted developingnations earned through exports went to debt payments: by 1982,debt sert’ ic, e pa~’rnents had peaked at 24,6 per(; ent of total e\-ports. For man} indi~’idual countries, the situation was muchworse; in the Llrestern Hemisphere, o~er half the exports of tht:indebted de~eloping nations In 1982 went to~i’ard debt payments,(An indebted nation has external debts greater than e~ternal as-sets; in practice, this i nc]udes all I,DCs ~t’ it h the exception o fAli(i(ile Eastern oil f;x~xjrters, )

service their existing debt, much less contem-plate expensive new construction projects.

Among the reasons for the deteriorating eco-nomic picture illustrated by figure 29, perhapsthe most significant has been the fall in pricesfor non-oil commodities–particularly food andprimary metals, For the Middle East, of course,the problem has been declining oil exports, and,more recently, falling prices, leading to eco-nomic slowdown; the current account of theoil exporting nations as a group shifted froma surplus of $95 billion in 1980, to an estimated

130 . /international Competition in Services—

Figure 29.— Economic Growth in the Developing World

\ 1

\I 1

ige 1978 1979\1988-77

t

s

\2 Middle East+

k“~’

–41

SOURCE” World EcorIormc Outlook (Washington, DC. International Monetary Fund, October 1986), p 37

$39 billion deficit in 1986. Given their debt serv-icing problems, and the fall in commodityprices (including oil), developing nations havegenerally been unwilling or unable to borrowcapital to finance major development projects.This is the context for viewing the decliningU.S. share of international E&C projects.

Construction

American construction firms (design andengineering are treated later) get much of theirinternational business in Asia and the MiddleEast. Figure 30 shows the extent to which theLatin American market, large in the early 1980s,has dried up—a casualty of the economic prob-lems summarized above; since 1982, U.S. firmshave done as much or more business in Can-ada as in all of Latin America.

The dropoff in the Middle East has also beensevere. Nonetheless, table 16—which gives newcontract awards by region during 1985 for con-struction firms from different countries—showsthat the Middle Eastern market continues tobe particularly important for American contrac-tors. European firms do especially well inAfrica, a result in many cases of continuing tieswith former colonies. In 1984, the 41 U.S. firmsamong the 250 largest international contrac-tors (in that year) had a share of the interna-tional market slightly greater than that of theEuropean firms (38.1 compared to 37.1 percent).In 1985, however, the U.S. market share fellbelow that for the Europeans, as the table indi-cates. Indeed, it has been dropping steadily for15 years. Over the period 1966-71, Americanfirms captured nearly 70 percent of the foreignconstruction orders won by companies from

Ch. 4—International Competition in Engineering and Construction ● 131

Figure 30.— Foreign Construction Awards of the 400 Largest U.S. Contractors

50

40

30

20

10

01980 1981 1982

t1983

Year

I

I1

1984 1985

Source of contract award:

❑ Canada and ❑ Europe ❑ Af r ica ❑ Lat inAmerica

A s i a ~ M i d d l e E a s t

SOURCE Errg/neerlrrg News.l?ecord, various Issues

Table 16.— New Contract Awards for the 250 Largest International Contractors, 1985

Total new awards by region (billions of dollars and percentage) ‘-

Number Country Total L a t i n – - ‘Northof firms of ownership awards Middle East Asia Africa Europe America America

43 United States $282 34.6% $ 78 36.0% $7.1 39.9% $ 4.5 29.1% $4.2 $4.2 42.3% $2.3 34.8% $ 23 23 0°10116 Europe 326 399 61 284 43 24.3 75 487 55 55.3 3.6 53.2 5.5 54239 Japan 11.6 143 19 88 54 306 1 6 108 02 23 05 7.1 20 19.217 South Korea 48 58 34 156 04 21 10 6.5 —a — — a

35 All other 44 5.4 2.4 11. 2 05 30 07 05 03 49 04 36

250 A l l $81 .6 100% $2.1 6 100% $178 100% $153 1 100% $100 100% ‘ $ 6 . 6 1 0 0 % $1 0-2700”/(0

‘{L e!~ Ihar $50 mllljon—

FJ() I [ Totals may n~l ~dc hfrdd<c O’ rourc ng

SOIJ RCE E ng(neerlnq ‘ie~ + 8e:orl ) J I ~ 11 198EJ P ~ 1

132 . International Competition in Services

six major industrialized nations.14 By 1980, theU.S. share of new contracts going to these sixnations had dropped to 60 percent, and 1984saw a still smaller share of 49 percent.

Why did the U.S. share drop? Largely becauseexports of E&C services from other countriesgrew faster, With the rapid increase in new con-struction projects in the Middle East during the1970s, U.S. E&C exports jumped, rising fromabout $3.6 billion in 1972 to some $22 billionin 1975. However, this growth did not neces-sarily translate into a larger share of the inter-national construction market for U.S. firms;construct ion exports from other nations roseas fast or even faster during the peak years of’the Middle East building boom. South Korea’srise was especially striking; Korean construc-tion exports rose from $83 million in 1972 to$8 billion by 1978, peaking at $13,9 billion in1981.15 Meanwhile, for American firms, 1975marked the beginning of a plateau, althoughexports from countries like Korea continuedto climb.

U.S. market share has been sliding ever since.As figure 28 indicated, the U.S. share of all in-ternational contracts was 35 percent in 1985;it had been 45 percent in 1980, While the UnitedStates continues to export far more construc-tion services than any other nation, the rela-tive slide has been rapid. Foreign firms have

14R. Bah Nw, lnternatj~n~j Construction [;OI]tractjI]g (Eppirlg,Essex: Gower Press, Bowker Publishing Co,, 1976), p. 38, “1’heshares o~’er the I ~66-~ I period were:

[ ‘rlltf’d ,Sfiit(’.$ l’r<tn(:t> Hrltdfn [t81J” 11’c’lt (;(~rmall) /(ipdrl

b8.9% I 1. I % 9 1‘% 6 3% .$,~C,/,, 1 ,:3’’/11Historical data on the international E&C market are hard to

(:ome bj’, and not necessaril~’ comparable from year to ~’ear. I ngeneral, the annual surveys conducted b~ Engineerjn,g Ne\\rs-

Recorcf (EN R), drawn upon where possible in this cbapter, pro-\ride the most useful data. Nonetheless, these surveys are of ques-t ionable accuracy: some firms in some years, for instance, mayunderstate their business, while others ha~’e reasons for o\’er-stating tbeir awards. EN R’s surveys of the top 250 internationalcontractors did not begin until 1980, while their co~erage of in-ternational design firms only became standard ized at 200 firmsin 1982.

15R (;ortirlc~,ls and M, Co]ombard-prout, L a Coree dU .$od etla Questjon des Eyportatjons de BTP ( Paris: Centre Experimentalde Recherches et d’ Etudes du Batiment et des Travaux Publics,1982), p. 150.

More recentl}’, tbe collapse of the hliddle East market has hadl~hurt the South Korea construction industr}, E:xports of SouthKorean firms ranked among the largest 250 international firmsdeclined from their 1981 peak to $4,8 billion in 1985.

been continually nibbling area} at the U.S. po-sition. With a growing number of competentfirms, and increasing} homogeneous technol-ogies, the pattern is one of convergence in Com-petitiveness; particularly since 1982, price com-petition in a shrinking overall market has beenvery intense. As in so many other industrieswhere the international standing of U.S. firmshas been threatened, many of the causes lie asmuch in improvements elsewhere as in prob-lems here.

Foreign government policies have contrib-uted to this convergence. Governments dictatethe conditions under which foreign-owned E&Ccompanies do business within their borders.In the 1950s and 1960s, an American firm couldbid on and win contracts calling for most ofthe engineering and design work to be under-taken in the United States. Today, many gov-ernments insist that the work take place locally.They also seek transfers of proprietary technol-ogies. In many cases, this means that U. S.-basedE&C firms station a small nucleus of highlyskilled specialists in the host country, wherethey supervise and train local residents.Through such policies, developing countrieshave nurtured their own E&C capability, andtoday depend less heavily on foreign expertise.

Design and Engineering

overseas work for American design firms hasremained relatively stable, in contrast with theslump in construction. Foreign billings of U.S.design firms fluctuated between $1.1 billion and$1.4 billion over the first half of the 1980s (ta-ble 17). Figure 31 shows the market shares ofthe top international design firms. U.S. designfirms have been, by and large, holding their owninternationally, The Middle East has been a ma-

Table 17.— Revenues of the 500 LargestU.S. Design Firms (billions of dollars)

Foreign revenues Domest ic revenues

1980 . . . . . . . . . . . $1.1 $6.11981 . . . . . . . . . . . . 1.2 7.11982 ... . . . . . . . . 1.4 7.11983 . . . . . . . . . . . . 1.3 7.31984 . . . . . . . . . . . . 1,1 8.51985 . . . . . . . . . . . 1.3 9.7SOURCE .Eng/neer/ng News-Record, various Issues

Ch. 4—international Competition in Engineering and Construction • 133

Figure 31 .— New Contract Awards of the 200Largest International Design Firms

1982 1983 1984

Year

Headquarters Iocatlon of firm:

❑ All other ❑ i Canada ~

~ Europe ■ United States

SOURCE Eng(neenng NewsRecord. var!ous issues

1985

Japan

jor international market for U.S. design firms(figure 32]. While the recent drop in opportu-nities in the Middle East has hurt, U.S. designfirms—unlike their counterparts on the con-struction side of the business—have been ableto find replacement markets in other parts ofthe world—e. g., Latin America.

As table 18 indicates, the industrializednations—basically the members of the Orga-nization for Economic Cooperation and Devel-opment (OECD)—continue to monopolize theinternational market for design and engineer-ing contracts. None of the NICs has carved outan international position comparable to that ofthe Koreans in construction. This does notmean that the NICs are not active. Engineer-ing News-Record’s listing of the 200 largest in-ternational design firms includes companiesfrom South Korea, Taiwan, Brazil, and Vene-zuela. But as table 18 shows, the international

billings of the four Korean firms making the1985 list totaled less than $50 million.

Outlook for the Future

Given the past importance of the Middle East-ern and Latin American markets, f’ailing oilprices and increasing LDC debt have drasticallyaffected the competitive fortunes of AmericanE&C companies. Is it possible that the deterio-rating U.S. position outlined above is tem-porary, subject to reversal with improving eco-nomic conditions in the developing world?Certainly an economic upturn would bring newdemand for construction and help Americanfirms. Nevertheless, the international E&C mar-ket has changed fundamental}’, and in waysthat make it unlikely that American companieswill return to the positions they held in the early1970s.

The primary reason has already been men-tioned: rising competence elsewhere, as dem-onstrated most spectaculary by the rise of theSouth Korean construction industry during the1970s. And it is not only the E&C firms in theNICs that have matured, but those in the LDCsas well, aided by participation alongside U.S.and other foreign firms on past projects. (Man}’South Korean firms learned their trade onprojects in the Middle East and Vietnam, oftenunder the supervision of American companies. )Developing countries can nowr handle manyconstruction projects on their own that oncewould have been opened to foreign bids. From1980 to 1985, World Bank disbursements withinhost nations nearly doubled (this covers bothgoods and services for civil works projects);only one-quarter of these expenditures now goto outside firms.

Improvement in local E&C capability, ofcourse, has been a major goal of the develop-ment process, and a cornerstone of industri-alization. 16 In countries with low per-capita in-

16’jT’he construction Industry: Issues and .~’tra tf>~~ie,s in ])f> L’Pl-

opin~ f,’ountrif~s (lVashington, DC: W’orld Bank, 1984]; P.G. Al]-hott, ‘rcchnolog~r Transfer in the Construction lndustr~, SpmialReport ,No. 223 (I,ondon: Economist lnte]]igence Unit, 1985). onthe examp]e~ later in the paragraph, sw “Third Saudi A ir[mrtFlt for Kings, ” Engineering Ne~t’s-Record, Dec. 19, 1985, II. 48:and ‘‘ Disne}’ Park To Smooth Weak F’r[’nrh \larket, ’ Enginecr-in,g Ne\%’s-Record, Jan, 2, 1986, p. 14.

134 • International Competition in Services

Figure 32.— Foreign Awards of the 500 Largest U.S. Design Firms

., ---

1,200

1,000

800

600

400

1984—

1981 1982 1983

‘ear

19851980

Source of contract award:

❑ Canada and ❑ Europethe Caribbean

❑ Asia/Pacific ❑ Middle East

LatinAmerica

SOURCE Ertg/neer/rrg News-Record, various Issues

Table 18.—Billings of the 200 Largest International Design Firms, 1985

Foreign billings by region (millions of dollars and percentage)

Numberof firms

59961312

416

Countryof ownership

United StatesEuropeCanadaJapanSouth KoreaAll other

Total Middle Latinforeign billings East Asia Africa Europe America

$1.1645 32.0% $3036 31.1% $267.6 29.1% $127.6 16 1% $1499 41 .9% $2944 64.6%1,7094 47.0 5 0 2 3 5 1 . 6 3 6 7 0 4 0 0 501 5 63,3 1 9 9 , 0 5 5 6 102,7 22,5

2 6 5 8 7 , 3 162 1,7 71,4 78 787 9.9 2.1 06 279 6.12 6 2 2 6 2 154 1.6 1 5 1 . 2 1 6 5 443 56 1.9 05 134 29

46.6 1,3 244 2.5 16.4 1 8 58 07 —a — — —2 2 7 2 6 2 1 1 2 3 1 1 , 5 455 50 34.2 4,3 4,9 1.4 172 3.8

NorthAmerica

$21.5 15 2%37.0 262695 493

—a —— —

13.1 93

200 All $3,675.7 100.0% $9741 100% $9190 100% $792.0 100% $3577 100% $455.5 100% $141 0 100%a[ ess than $100000NOTE Totals may not ~dd because of rounding

S O U R C E Engmeer/r?g News .f?eco(o August 7 ~986 p 28


comes, the World Bank gives bids from localcontractors a 7½ percent preference. Many1,1X governments have protected their supplierand E&C industries, following infant industrystrategies. Regulations may require subcon-tracting to local firms, as well as local purchasesof’ materials and supplies, In Indonesia, bypresidential decree, subcontracting to domes-tic companies must accompany all awards toforeign E&C firms. The aim is to speed tech-nology transfer. Saudi Arabia’s Governmenthopes to see three-quarters of the contracts forthe King Fahd International Airport go to Saudicompanies. In pursuing such approaches, de-veloping countries are simply following the leadof the First World, When it comes to militaryand other federally funded projects, the U.S.Government maintains its own set of prefer-ences for American firms, as discussed in chap-ter 10 (see box II). In France, over 90 percentof’ the work on the new Euro-Disneyland-tobe built outside Paris at a cost of more than $3billion-has been promised to French archi-tects, engineers, and construction firms.

Beyond the growing capabilities of indige-nous firms, three decades of Third World de-velopment also mean that many of the large in-frastructure and industrial projects are alreadyin place. A resumption of economic growth willcertainly bring new opportunities, but not onthe scale of the past, In the petrochemical in-dustry, for example, overcapacity in commodityproducts means movement toward high-value-added specialty chemicals. New plants will besmaller in scale, the contracts less lucrative.The success of the green revolution has like-wise reduced the immediate need for massiveirrigation and other agricultural projects. Asmany in the industry put it, the era of the mega-project is past, (China’s $20 billion Three Gorgeshydroelectric station, if it goes forward, mayprove the outstanding exception.)

Structural change in this industry meansmore than stronger competition in overseasmarkets, For American E&C firms, as for Amer-ican manufacturing firms, it means new com-petition at home. With the slowdown in theThird World, foreign contractors have begun

Table 19.— Foreign E&C Firms in the United States

Number of U.S. affiliates

1978 1980 1983

Design and engineering services(including architecture) . . . . . . . 40 53 58

Construction . . . . . . . . . . . . . . . . . . 45 70 82

U.S. receipts of foreign-owned E&C firms

(millions of dol lars)Design and engineering

affiliates . . . . . . . . . . . . . . . . . ..$ 669 $ 594 $ 892

Construction affiliates:European . . . . . . . . . . . . . . . . . . . . $1,142 $3,896 $5,394Canadian . . . . . . . . . . . . . . . . . . . 61 243 144Japanese . . . . . . . . . . . . . . . . . . . 24 50 81Other . . . . . . . . . . . . . . . . . . . . . . . 317 415 1,308

Construction total ... ... ... .$1,544 $4,604 $6,927SOURCES: Fore(gn Drect Investment In the Un/ted Stafes Operaf/ons of U S

Affi//ates 1977.80 (1985); 1980 Benchmark Survey (October 1983) andPre//rn/nary 1983 Est/mates (December 1985), tables 5 and E 5 AllDepartment of Commerce, Bureau of Economic Analysls

to view the United States as the next majorgrowth market. Companies with headquartersin Europe, Japan, and South Korea have an-nounced plans to expand into the U.S. E&Cmarket. Many already have operations here—table 19. The rapid rise in U.S. revenues offoreign-owned E&C firms indicates that theyhave been taking market share from American-owned competitors (also see figure 5 in ch. 1).

In some cases, foreign E&C firms have pur-chased American companies. One of Britain’slargest construction companies, the DavyCorp., bought Arthur G. McKee & Co. of Cleve-land in 1978 to form Davy-McKee. ” The Ger-man firm Philipp Holzmann acquired a largeAmerican company, J.A. Jones Construction,of Charlotte, NC, in 1979, and later added Lock-wood Green Engineers. The South Koreans andJapanese seem to prefer to establish their ownsubsidiaries and branch offices (SamwhanAmerican, Kajima International), rather thanpurchase American competitors or enter jointventures. As both table 19 and figure 5 show,European E&C firms had a greater presence

1“’()~erseas Firms Closing In on U.S.,” ,!311gineer”ir]g .\k;Ji.5-

Recor[i, I%llg, 2, 1984, pp, 10-11.Nlorc recent]}, a Norwegian compan}’ purchased a majority

share of E.W, Howell of Port Washington, N’}r, the 162nd lar~estLI, S ~~ntract~r—’’Nor\tegia ns BU}I N.}”. contra(;tor, ” ~x]gir]f>t>r-

in~ .\’ettrs-Record, Jan. 23, 1986, p. 158.


in the United States than the Koreans or Japa- for 1983 to $700 million in 1984, and $1.8 bil-nese in the past. But recently the Japanese have lion for 1985.18

invaded the U.S. market with startling success;their construction contracts in the United States

1%. H. Farnsworth, “Japanese Accused On Bidding, ” New YorkTimes, Jan. 6, 1987, p. D2; also R. Koenig, “Toyota Learns TO

jumped from the $81 million shown in table 19 I.ive With U.S. Unions, ” Wall Street Journal, Feb. 25, 1987, p, 21.

COMPETITIVE STRATEGIES

Competitive advantages in the internationalE&C industry hinge on three interrelated fac-tors: costs, financing, and technology (includ-ing management expertise). In part, technol-ogy determines costs, but a bidder that canassemble an attractive financial package mayget a contract despite direct costs for construc-tion higher than for the competition.

Labor is a big part of construction costs,regardless of the type of project. In the devel-oping world, labor costs for roadbuilding canrange up to 70 percent of total project costs,depending on construction method. Withwages in the LDCs far lower than in the indus-trial countries, extensive hiring in host coun-try labor markets is a fact of life. The averageconstruction wage in the United States in 1983was $12 per hour, while laborers in Ecuadorearned less than $2 per day.19 In the UnitedKingdom, the 1983 figure was $4.47 per hour;in Mexico, $0.65 per hour, Large wage differen-tials exist at technical and managerial levelsas well, helping contractors from the NICs un-dercut those based in industrial nations. A Ko-rean engineer or project manager working onan international project earns less than half thesalary of an American in a similar job.20

As a result, American E&C firms seekingoverseas business not only hire local workers,

l~The (j’onstructjon lndustr~r: Issues and strategies in Det’el-oping Countries, op. cit., p. 41; Year Book of Labour S’tatistics—2985 [Geneva: International Labour Office, 1985), table 1499.

ZOEy,en S0, i n the early 1980s, a Korean manager or engineercould expect a salary of more than $35, ooo per year on an over-seas project, Plumbers and welders could earn about $15,000per year, and bricklayers about $6,000—double what a workercould make in South Korea. Nonetheless, these costs are lowcompared to salaries for Americans stationed overseas; indeed,U.S. firms complain that the $70,000 tax exemption for Ameri-cans working abroad is too little, and raises their wage costseven higher. See R. Cort inc~’is and M. Colombard-Prout, op. cit.,p. 227.

but often establish subsidiaries in low-wagecountries. A great deal of scope remains for im-proving labor productivity through automationof construction processes, and high produc-tivity—hence management skills and technol-ogy—can offset high wage costs. But at present,E&C firms from the industrialized world cangenerally compete for Third World projects,even hiring local labor, only in special circum-stances: 1) when projects are too demandingtechnically for local firms; or 2) where they canoffer attractive financing packages. Such fi-nancing, often arranged with the help of theE&C firm’s home-country government, may in-clude loans with below-market interest ratesor unusually long payback periods.

Financing

Currently, few nations (or enterprises) inthose parts of the world where the majority ofinternational contracting takes place canassemble the necessary financial packages forlarge projects on their own. To be successful,bidders must offer not only competent engi-neering, but access to financing. This is not anew problem for the major U.S. E&C firms,which, since the 1960s, have accumulated muchexperience in working, not only with interna-tional lending agencies, but with aggressive pri-vate U.S. financial institutions. Nonetheless,with Third World governments strapped forcash, and with governments in other OECDcountries often willing to help their own firmswin contracts, the U.S. E&C industry has beenoperating under a considerable handicap.

Today, LDCs commonly ask foreign contrac-tors to submit financing proposals along withtheir bids; Bechtel Financial Services has beeninvolved in well over 50 major projects since

Ch. 4—International Competition in Engineering and Construction ● 1 3 7

1977. 21 In cash-poor countries, outside financ-ing may be necessary to create a market. Forthose American firms which, unlike Bechteland other very large companies, have quite lim-ited financial resources of their own—and nomore than peripheral experience in the me-chanics of international financing—the com-petitive difficulties will prove severe. Manycommercial banks already have unacceptableexposures in countries that otherwise wouldoffer attractive opportunities. Winning newjobs will mean assembling imaginative financ-ing packages on a project-specific basis. This,in turn, will call for much greater familiarityon the part of E&C companies with the intrica-cies of rapidly evolving international financialmarkets (ch. 3), At the same time, banks andother players in global capital markets will needto develop a better grasp of the financing prob-lems peculiar to international construction.

Managers of American E&C firms face a re-lated strategic problem, one partially outsidetheir control: the roles taken by other OECDgovernments in project financing. In countriesincluding France, Italy, and Japan, governmentagencies have stepped in, not only with devel-opment aid, but with export credits at below-market interest rates. The objectives have beennot only to support their own E&C firms, butto secure orders for materials, supplies, andcapital goods. A Japanese-led consortium, forexample, won a major contract from the Turk-ish Government to build a bridge over theBosporus with a package including a $205 mil-lion Japanese loan at 5 percent, at least $130million in Italian export credits at 2 ½ percentto 7 ¾ percent, and commercial loans totaling$230 million.22

‘–~ 1 ~~(jre than 4(I COU nt ries sought contractor part icipat ion i IIfinancing during 1984–’’Foreign Contracts Slump Further,”Engineering Nen’s-Record, July 18, 1985, p. 55. On Bechtel, see“Financial Engineering Wins Jobs, ” Engineering New’s-Record,~Ug, ~, 1984, p, 30,

ZZI.. Ingrassia, “HOW Japan Sealed Deal To Build Big i3ri(l~(’Spanning the Bosporus, ” tt’aff Street journal Ylaj 29, 1985, p. I.

Ch. I(I discusses po]ic~ issues raised b}’ subsidized financing,in{;] ud in,q mixed credits, a spe(; ia] case oft ied aid. Tied ai(l refersto de~’eloprnent grants or loans that require purchases of spe(:i-fied goods and ser~ices, generall~ from the donor nation; mix[~(j(:redits combine de~elopment aid with export (;rtxiits.

While the U.S. Government has sought inter-national agreements to limit the use of finan-cial subsidies, especially mixed credits, prog-ress has been slow—not surprising, given theindirect as well as direct benefits that govern-ments expect from their financial participation,Aside from appeals to the U.S. Government forassistance in combating foreign government in-terventions (or in matching foreign subsidies),American companies are not entirely power-less in pursuing offsetting strategies. They can,for instance, enter joint ventures with foreignfirms that have access to subsidized financing;while such a strategy may not be ideal, it helpspreserve some international business. Amer-ican E&C firms can also use existing forms ofassistance, including the services of the U.S.Export-Import Bank. Furthermore, the majorAmerican E&C firms are among the largest andfinancially strongest in the world; this has per-mitted them, in some cases, to take equity po-sitions in new projects. Bechtel Power Corp.,for instance, recently signed a protocol withthe Turkish Electric Authority to build a $1 bil-lion coal-fired powerplant. Bechtel and its part-ners will not only design, build, and financethe project, but will also enter a 15-year jointventure with the Turkish Government; someof their revenues will come from the sale ofpower. 23

In the last analysis, if a foreign governmentwants one of its firms to get a particular con-tract, and if financing is a critical part of thebid package, there will be little that other bid-ders can do without aid from their own gov-ernments. Realistically, U.S. E&C firms willcontinue to have trouble competing wherevergovernment-supported financing comes intoplay. Progress in the OECD toward moderatingthe use of mixed credits and other forms of sub-sidies will help, but subsidies will not disap-pear in the foreseeable future,

27’’ Buying Into Turkey, ” Engineering .Ve~i.s-Kec:ord, Nlar. 13 ,1986, p. 17; D. Barchard, “Ozal Mode] Sets l)attern for the Fu-ture. ” Financial ‘rimes, Dec. 18, 1985, p. 6.

h“ot man} E&C firms (;an vf:nture into s u c h a r r a n g e m e n t s ,tthich not onl~’ demand an unusual commitment of capital, butma} force the contractor into an uncomfortable entrepreneu-rial 1 role, Few’ firms h a~’e the ski] 1s, and even fewer would ~’ i (~ti’the role of owner/operator as a desirable strategy (rather thana recourse a ftc r other opt io IIS were c Iosed ).


Technology24

In contrast to many of their foreign competi-tors, American E&C firms have seldom oper-ated their own R&D laboratories or investedheavily in proprietary construction technol-ogies. Although successful companies providetheir clients with highly competent engineer-ing advice, most U, S.-based E&C firms haveseemed content to adopt construction technol-ogies pioneered elsewhere. Even in the area ofprocess engineering—e.g., for petrochemicalplants—where American firms excel, not allhave wished to develop proprietary technicalpositions. Although control of chemical engi-neering technologies has meant constructioncontracts in the past, managers typically ration-alize this choice by pointing out that a client-oriented E&C firm should scan the terrain,maintain a high level of technical knowledge,and select the best available technologies foreach client’s particular needs. Independent de-velopment of proprietary technologies would,in this view, compromise the interests of clients.

Indeed, most U.S. R&D relevant to the E&Cindustry takes place outside the industry—inuniversity civil engineering departments(where industry funding has been rare), in Fed-eral laboratories (notably those of the Depart-ment of Defense and the National Bureau ofStandards), by owners of large facilities (e.g.,utilities, through the Electric Power ResearchInstitute), and in firms that supply equipmentand materials (Caterpillar, DuPont, Monsanto).A later section treats Federal Government sup-port for R&D in more detail.

While world leaders in petrochemical andother process technologies, American compa-nies start out behind in construction methods,In contrast, proprietary technical positions inconstruction have been a mainstay of competi-tive strategies in Europe and Japan for years,with E&C firms from these countries now well-entrenched. They have invested in R&D in con-

ZAThis section, and most of the detailed information on E&Ctechnology, comes from “Final Report, Tasks 1/2, Technologyin Architecture, Engineering, and Construct ion,” op. cit., and“Final Report, Task 3, Technology in Architecture, Engineer-ing, and Construct ion,” op. cit.

struction and also in the development of spe-cialized equipment. The German firm Dyker-hoff & Widmann holds many patents coveringpre-stressing and post-tensioning of reinforcedconcrete. The company gets a substantial shareof its earnings from licensing its patents andknow-how. Another German company, PhilippHolzmann, controls a set of proprietary tech-niques for tunneling in frozen ground, whileJapanese firms are leaders in boring where geo-logical conditions are unstable.

The Role of Technical Expertise

Traditionally, many American E&C firmshave specialized: T.Y. Lin in structural engi-neering of pre-stressed concrete; Guy F. Atkin-son in heavy construction; Brown & Root inoffshore oil projects; M.W. Kellogg in petro-chemicals. Some have continued with suchstrategies, while others have diversified.Bechtel, with its past experience in heavy con-struction, including the Hoover Dam—aug-mented by expertise in process engineering andmanagement—has moved into design and con-struction management for all types of projects,Specialized expertise determines which firmswill compete for contracts. Before turning tothe firm’s bid and the details of financing pack-ages, a client is likely to ask: Can this firm dothe job? In fact, under design-bid-build proce-dures, technical qualifications become the pri-mary criterion for awards to the design firm,Construction companies may have to pre-qual-ify before bidding on a job. Clients must oftenjudge the capabilities of prospective biddersbased on past performance.

Technical expertise in engineering and con-struction, then, stems in considerable degreefrom the accumulated experience of the firm.Even companies that depend heavily on inter-national contracts tend to remain strongest intechnologies important in their home market.It is no surprise to find American companiesleaders in offshore drilling technologies, sim-ply because much of the original work tookplace in the Gulf of Mexico. And, while Amer-ican firms have a great deal of experience intelecommunication projects, they would havetrouble competing with French or Japanese


companies for work on high-speed railroads.The Swiss and the French have well-honedskills in bridges and tunnels for mountainousterrain. So do Japanese firms, while the addi-tional pressures of high population density inJapan have led to unusual emphasis on under-ground construction. Many other examples(box K) illustrate the point: E&C expertise comesin large measure from experience in solvingproblems of a local nature. Thus U.S. capabil-ity in construction management stems frompast experience with large and complex proj-ects at home as well as abroad, and the U.S.lead in applying computers to managementtasks throughout the economy.

Computer Applications

With many more computers installed in theUnited States than in any other country, Amer-ican E&C firms have a good deal more accu-mulated experience than their foreign compe-titors, They can hire people with the latest skills,and draw on the know-how of a large independ-ent software and services industry (ch. 5). Incommon with other American corporations,U.S. E&C firms have already automated stand-ard business functions like payroll and account-ing. They are leaders in applications of com-puters to construction management and incomputer-assisted design and engineering.

Firms like Bechtel, Fluor, and Ebasco havedeveloped proprietary CADD software, gener-ally starting with packages available from ven-dors. Compared with manual drafting, CADDsystems cut labor hours by factors of three ormore. Interactive CADD, with software thatmaintains an online database and automaticallyissues change notices, revised drawings, andupdated bills of materials will lead to furthersavings. With integrated databases, CADD sys-tems will be tied directly into construction proc-esses, where U.S. firms already take advantageof the best software for estimating, projectscheduling, cost accounting and control, andmaterials tracking (Box J). Computer-assistedengineering calculations—for structural anal-ysis, foundation design, slope stability, earth-quake resistance—have also become routine forAmerican E&C firms.

The next step will be to apply expert systems(a form of artificial intelligence) to the morestandard design calculations (and to other E&Capplications—cog., operations and mainte-nance). Stone & Webster, for instance, has de-veloped expert systems for optimizing weldingparameters, and for diagnosis of operatingproblems with pumps. Eventually, computer-assisted automation of many construction proc-esses will become practical.

Field use of small computers will acceleratethe trends outlined above, and multiply the ben-efits. Today, the larger American E&C firmstypically operate with two levels of computersupport: mainframes or powerful minicom-puters for complex design, engineering, andmanagement packages, with PCs for runningsmaller programs both at the head office andon the job. Where once a scheduling problemcaused by, say, late delivery of materials wouldhave been referred back to the home office,today a revised production plan can be pre-pared in a branch office or in the field.

Foreign E&C firms make use of some of thesame techniques, but the American industryremains the leader, notably in integrating engi-neering and management databases—a criticalstep for cutting costs, and one with great po-tential for further savings. While Japanese andEuropean firms have been developing com-puter-aided systems for management, as wellas design and engineering, most fall well be-hind the U.S. state-of-the-art. Nor can foreignfirms match the Americans in the intensity withwhich they use computers; Bechtel, for in-stance, has more than 10 times as many CADDwork stations installed as the large JapaneseE&C firms. For the time being, with Americanfirms continuing to develop applications suchas three-dimensional CADD, the U.S. leadshould remain secure. But without continuinginvestments, these sources of advantage couldquickly shrink or vanish.

The U.S. edge in computer-based technol-ogies has helped American design firms holdtheir own in the international market, and alsoworks to the benefit of large integrated E&Cfirms that offer turn-key projects. Nevertheless,when it comes to projects less demanding tech-


Box K.-Technical Knowledge in the E&C Industry: Three Examples1. New Austrian Tunneling Method

The so-called New Austrian Tunneling Method(NATM), developed more than 20 years ago forprojects in the Austrian Alps, has more recentlyhelped foreign firms penetrate the U.S. market.With NATM, shotcrete-a fast-drying concrete-based mixture-is sprayed onto tunnel walls tostabilize them as boring proceeds. Temporarysupporting structure can be minimized, with theshotcrete replacing steel or reinforced concretetunnel liners. Polyvinyl chloride (PVC) sheetingbetween the layers of shotcrete provides water-proofing.

Widely used in Europe, NATM was introducedinto the United States in 1983 for the Wheatonstation portion of the Washington, DC subwaysystem. The lead contractor, the Austrian firmIlbau, won the job with a lowbid of $51 million,and then submitted a proposal to use NATM ata cost of only $45 million; the job had been esti-mated at $84 million based on conventional meth-ods.* This is only one example where U.S. firmsappear to be well behind foreign competitors inground stabilization techniques and tunnelingtechnology generally.

2. Up/Down Construction**

The Up/Down construction process providesan example in which U.S. firms adopted a tech-nique first developed in Europe. As used in theRowes Wharf project in Boston, the Up/Downprocess entailed excavation of five below-groundlevels while simultaneously erecting a buildingabove. In a conventional project, the foundationwould first be excavated and the below-groundstructure put in place, with the building erectedlast. With the Up/Down process, the contractordigs a trench for the perimeter walls, while sink-ing interior columns to provide the foundation.Then the building goes up, while at the same timethe below-ground levels are dug out around thecolumns. At Rowes Wharf, as each below-groundlevel was excavated, a floor slab was laid, andanchored to the pm-sunk columns. The floorslabs were complete except for a 30-square-footaccess hole, through which the earth excavated

below could be removed. In essence, the struc-ture is built upward and downward at the sametime.

On the Rowes Wharf project, the developer waswilling to pay an extra $2 million in construc-tion costs to save 4 to 6 months in schedule time.The architect, who had previous experience withthe necessary design techniques, originally sug-gested the Up/Down method, which was inde-pendently proposed by an English constructionfirm. After reworking the project design, sched-ule, and cost estimates, the client decided to pro-ceed. Resign and construction plans were fur-ther refined by several pre-qualified constructionfirms. After a good deal of consultation amongclient, designer, and the construction firms, thedeveloper chose an American contractor for thejob, even though this firm had no previous ex-perience with the Up/Down method. The clienttook out a largo insurance policy.

3. Partially Automated Fine Grading

Here, the innovation came from an Americancompany. Grading in preparation for pavingroads, highways, parking lots, and airport run-ways must be carried out to tolerances of 1/8 inchor less. Surfaces must be accurately contoured,not only for drainage, but to minimize consumptionof expensive paving materials, Given tight toler-ances, grading typically begins with a crawlertractor (bulldozer)that makes a rough cut to bringthe surface to within about an inch of the re-quired elevation. Then, in the fine grading step,a highly skilled operator uses a motor grader tocut the surface to the required specification. Theoperation is slow and expensive. A surveyingcrew places stakes every 10 feet or so to guidethe grader. With this conventional approach, acrew can grade about 30,000 square feet [or abouttwo-thirds of an acre) in an 8-hour shift.

Grade-Way Construction Co., a small contrac-tor in San Francisco, began work on automatingthis process in 1977. Unable to interest US.equipment manufacturers, Grade-Way’s employ-ees designed, built, tested, and refined a systemthat permits a bulldozer, rather than a more ex-

*S. Neuatadtl, “Tbe New Underground,” Hfgh Technology, February 1SS$, pp. 46-s2.● *WA on ‘lExa@~ of l~ova~on On En@nWring and Ccmatruction k%o@cte and Impiicatione for the construction hmovation system,”

prepared for OTA by C.B. Tntum under contract No. S33-2725. TM report ia &o the eource for the fine grading example, below.


pensive motor grader, to carry out fine grading.A rotating laser beam defines the plane of thecut, replacing the surveying stakes. The bulldozercarries a sensor that registers the laser beam andsignals a microprocessor-based control systemtied into the bulldozer’s hydraulic system. Man-ual control of the blade in response to an opera-tor read-out is also available, and has proved use-ful for training purposes.

It takes about 8 years’ experience for an equip-ment operator to master the art of manual finegrading, but the laser-based system can be usedby an apprentice. Productivity has gone from30,000 square feet per shift to 200,000 square feet,costs from 80 per square foot to 1¢. (Despite this,few of Grade-Way’s competitors have sought toautomate their own grading operations.) Sincedeveloping its system for bulldozers, Grade-Wayhas adapted it to graders, bucket scrapers, com-

ically, and for much construction, the costsavings from computer applications have gen-erally been insufficient to counter U.S. disad-vantages in labor costs. Nor, with few exceptions,does the United States lead in computer appli-cations for engineering and management ex-tend to construction processes themselves.

Productivity in Construction

In sharp contrast to factory production ofstandardized manufactured goods, construc-tion remains a craft-based industry. Automa-tion will change this on the job site, just asCADD has changed it in the drawing office. Theeventual payoffs in the field will be enormous,although they may take many years to realize.Those companies that master computer-aidedconstruction processes—e. g., automation ap-plied to earthmoving or steel fabrication—willbe able to carve out strong competitive posi-tions. Some of these technologies will lead toadvantages even for projects in the LDCs, mostof which have abundant labor but lack skilledworkers; automated construction equipmentwill greatly reduce the need for skilled opera-tors (see the third example in box K).

pactors, and trenching equipment. As of mid-1986, the company had eight laser-based systemsin use. Grade-Way’s annual revenues have grownfrom about $1 million when development began,to more than $80 million, despite a declining lo-cal market.

Grade-Way now plans to integrate its gradingsystem with a CADD database. At present, a de-sign firm specifies the grade, frequently usinga computerized drafting system. The resultingdrawings are passed along to Grade-Way, whichmust enter the specifications in its own database,first for estimating, and then, if the companywins the job, for carrying out the work. Grade-Way produces a new set of drawings for use insetting up the rotating laser guidance system.Cutting out this step would lower costs stillfurther.

Two paths, broadly speaking, lead to greaterproductivity: 1) better techniques on the job site,including automation and onsite prefabrication(e.g., using mobile shops); and 2) offsite prefabri-cation, With some exceptions, the United Statesis behind in both; indeed, productivity in theAmerican construction industry has changedlittle since the 1960s. Examples of productivityimprovements through better techniques in-clude slipform construction for high-rise build-ings and onsite precasting of concrete, Whilecontinuous pouring of concrete using slip formshas been adopted by U.S. companies, the Euro-peans continue to push into more sophisticatedapplications. The vast majority of U .S. compa-nies still use manually constructed forms, whileuniversal formwork has begun to penetrate jobsites elsewhere. To take an example of onsiteprecasting, Ilbau, an Austrian contractor, re-cently built an arch bridge in Bavaria by set-ting in place two half-arches, fabricated on site,with the aid of a computer-controlled cablesupport system. Notable examples of off siteprefabrication include ocean drilling platforms—generally built in drydocks, then floated totheir final destinations. Similarly, the steel cais-sons and parallel strand cables for the Bisan


Photo credit: Beloit Corp.

Two generations of engineering design, turn-of-the century and 1960s era.Today, computer-based graphics systems are taking over

much of the drafting and design work.


Straits suspension bridge in Japan were pre-fabricated in their entirety, with the caissonstowed to sea and sunk in place. In many partsof the world, structures such as high-tensiontowers can now be prefabricated and placedby helicopter.

Major productivity improvements often re-quire new approaches to design. The Europeanlead in concrete technologies begins with de-sign experience and extends to the manufac-ture of high-capacity concrete pumps; the Jap-anese have begun testing still more advancedmethods, with automated booms for pouringand for spreading and finishing concrete. TheDanes and Swedes, especially, have becomeknown for high-quality precast concrete. BothJapanese and European firms are working toautomate the highly labor-intensive tasks of cut-ting, bending, and placing reinforcing bars andcables. At one time, the United States led theworld in bridging, especially suspensionbridges. This is no longer true. With concretereplacing steel for many bridges, the Europeanshave gained the advantage. The Saudi Arabia-Bahrain causeway, built by the Dutch firm Bal-last Nedam, made use of piles and spans caston site for most of its 7¾ mile length. BallastNedam’s experience with heavy lifting bargesfor assembly made this approach possible.

If U.S. firms generally lag in technologies forconcrete construction, they have thus far re-mained at the forefront in fabricated steel struc-tures. Here, however, the Japanese have beenmaking considerable progress in automation,exemplified by their well-publicized robots forspraying fireproofing insulation onto girdersand columns. Japanese firms have also spentheavily on R&D for automated earthmovingequipment, a technology that Komatsu has beenpursuing in its efforts to win sales from U.S.heavy equipment manufacturers like Caterpil-lar. The Japanese are also clear leaders in softground tunneling, while European firms havesuperior technology for hard rock tunneling.Although the Japanese have successfully devel-oped modular prefabrication methods for pip-ing, electrical wiring, and industrial controlsystems—e.g., for portions of the A1-Jubail re-finery in Saudi Arabia—U.S. firms have also

been quick to pursue these techniques, As a fi-nal example, improvements in constructionmaterials—e.g., synthetic fibers for use in pave-ment bases and drains—have again often origi-nated overseas. While the United States hasbeen generally strong in materials R&D, rela-tively little of this work has been directedtoward construction, Few American E&C firmshave pursued innovative applications of mate-rials, or pushed their suppliers to develop newproducts.

Implications for Competition

Poor showings by U.S. firms in constructiontechnologies can be traced back to the commonstrategy of seeking a position as technologybroker or service provider, rather than technol-ogy originator, and also to bidding proceduresin the United States. The design-bid-build sys-tem splits the responsibility for design and con-struction. The result? Weak incentives for E&Cfirms to adopt cost-saving design features, orto move toward a design-for-cost or design-for-constructability approach. Under design-bid-build, the contractor will be constrained byspecifications typically established by anothercompany, Not only may superior constructionmethods be precluded, but the system rewardsconservative choices. Once the contractor haswon a job with a fixed-price bid, there is littleincentive to do anything but follow the speci-fications the bid was based on. In contrast, engi-neering firms in Europe must often submitproposals covering construction methods; withevaluation of alternative construction tech-niques an explicit part of the competition, theyhave incentives to design projects so as to takeadvantage of new, low-cost methods.

In focusing on the services portion of the in-dustry, U, S.-based E&C firms have stressedmanagement of complex projects rather thanconstruction techniques themselves. Instead ofdeveloping their own technologies, Americancompanies have preferred to serve as technol-ogy brokers, relying on their ability to matchavailable knowledge with their clients’ needs.This brokering strategy does sometimes leadto acquisition of technologies through licens-ing or joint venture agreements, but U.S. E&C


firms—except for some that have specializedin fields like petrochemical processing—haveseldom invested their own funds in proprietarydevelopments. European and Japanese E&Cfirms spend more heavily on R&Din construc-tion methods, with the larger Japanese compa-nies maintaining substantial R&D programs. InJapan, research staffs of several hundred peo-ple working on construction technologies, withannual budgets of $10 million or more, are notunknown. In contrast, few of the large U.S.firms have anyone at all working directly onnew construction methods, although staff engi-neers do monitor developments elsewhere.25

R&D undertaken by U.S. E&C firms gener-ally focuses on the computer applications out-lined earlier, or on petrochemical and other in-dustrial process technologies, rather thanconstruction. In industrial process technol-ogies, a small group of relatively specializedcompanies—e. g., Kellogg Rust in ammonia,Lummus Crest in ethanol—have developedstrong proprietary positions. When a firm ownsthe process technology for, say, production ofammonia, it maybe able to insist on a turn-keycontract, avoiding the need to bid separatelyon design and construction. Even when thefirm does not control the process technology,it can trade on its skills in process engineer-ing. But the position of technology broker canbe dangerous when it comes to constructionmethods such as tunneling or bridge building.Here, an E&C firm without a proprietary posi-tion may find itself forced to rely on its compe-titors for know-how, with predictable results—having to settle for second best. Technologiesdo diffuse to the United States–e. g., tunnel bor-ing techniques from Europe—but foreign firmswill try to protect their position through con-tinuing refinements in methods and by main-taining a work force well-trained in the latesttechniques.

American E&C firms plainly have access tothe expertise necessary for designing projects

Z5Dur ing a visit to a Japanese research laboratory, a vice pt’es 1-dent of a major U.S. construction firm has been reported as say-ing that, if he were in charge, he would fire all the R&D staffand save the company $25 million a year— ’’Final Report, Task3, ‘1’echnology in Architecture, Engineering, and (construct ion,”0[). cit., pp. 6-7.

that would make greater use of industrializedproduction techniques—offsite fabrication ofsubassemblies, automated construction (asmuch a function of design as of constructionequipment), innovative uses of new materials.But U.S.-based E&C firms will need to reshapetheir corporate strategies before they can hopeto take the lead in reshaping construction proc-esses; over the past several decades, AmericanE&C companies have adopted and adapted, buthave seldom been innovators.

The Future

Battered by rapid decline in traditional mar-kets abroad, an overvalued currency during theearly 1980s, and stiffer foreign competition,large U.S.-based E&C firms have undertakenagonizing reappraisals of their strategies. Somehave retrenched, scaling back business devel-opment programs aimed at overseas contract-ing—a choice that means participating in theinternational market as opportunities arise, butat a much lower levels than before. Morrison-Knudsen, for instance, has closed its foreignoffices and consolidated its international salesforce in San Francisco. Other companies havebegun rethinking their sources of competitivestrength, and how these might be nurtured orextended. Another response—common amongindustries threatened by foreign competition—has been to appeal for Federal assistance. Inparticular, American firms have sought helpin matching foreign financing packages. Thisand other steps the Federal Government mighttake, as discussed below, could help the indus-try, But the long run ability of U.S. E&C firmsto maintain a competitive position internation-ally will depend on their own responses tochanging conditions in markets here andabroad. Different firms will choose differentdirections, within a range of strategic possibil-ities that has already become apparent. Thisrange is not a broad one, The nature of inter-national competition leaves few real choices.

American E&C firms face four primary con-straints:

1. For projects with a heavy component ofrelatively unskilled labor (which may in-


elude supervisory labor), competition is al-ready stiff; it will grow still more intensein the future,

2. Many foreign E&C firms, including those

3

in the Third World, can now adapt and ap-ply a relatively broad range of technologiesas needed. Once the backbone of the U.S.industry, technologically based strategiesare now open even to firms from the NICs,many of which have become quite compe-tent in design and engineering.When it comes to innovation, particularlyin construction processes, European andJapanese firms are ahead in some technol-ogies. No matter the counter-efforts of U. S.-based firms, it will be difficult to regainuseful leads.

4. Governments will continue to intervene incompetition for international E&C projects,with this involvement taking two primaryforms—aid for domestic firms seeking for-eign contracts (e. g., through subsidizedfinancing), and protection of markets athome.

Perhaps needless to say, these conditions arenot unique to the E&C industry. They can alsobe found in many sectors of manufacturing.American E&C firms, which dominated inter-national markets into the 1970s, have joinedother U.S. companies in facing new foreigncompetition. This, in turn, suggests that the stra-tegic responses in engineering and construc-tion will show parallels with industries rang-ing from steel to electronics?

Technologically Based Strategies

What, then, are some of the possible strate-gies? First, and perhaps most obvious, Amer-ican E&C firms could develop new productofferings for the international market, much asAmerican banks and financial service firmshave been doing. Second, they could put moreresources into management technologies andconstruction methods that will reduce costs andimprove productivity.

In this industry, most new product develop-ment begins with existing technologies that canbe applied in new ways—e.g., computer-con-

trolled heating, ventilating, and air-condition-ing systems for buildings. Operations and main-tenance services provide many other examples;M.W. Kellogg forecasts that 15 percent of itsrevenues and 30 percent of its gross marginsover the next 5 years will come from mainte-nance and training. In other cases, new indus-trial processes—and new industries, like bio-technology—mean new opportunities for E&Cfirms. American companies are attempting toadapt their expertise in chemical process engi-neering to scale-up in biotechnology. Japaneseand German firms, however, may have a headstart in bioengineering techniques for the pro-duction of specialty chemicals. 26

O&M services have the great advantage thatthe work does not end when construction hasbeen completed (although ongoing contractswill normally be small compared to construc-tion contracts). By making use of skills avail-able in the United States—ranging from remotesensing to computer-based process control, pro-duction scheduling, and database management—American firms can hope to maintain com-petitive advantages in contract O&M services.Training local personnel offers complementaryopportunities. It may even be possible for Amer-ican firms to adapt training methods originallydeveloped by the U.S. military; the problemsof teaching poorly educated Americans tomaintain high-technology military systems arenot unlike those of training unskilled workersin LDCs.

U.S.-based E&C firms can also turn theirknow-how toward renovation and rehabilita-tion of existing facilities—in part, an extensionof the O&M strategy. At some point, equipmentbecomes obsolescent; replacement, rather thanmaintenance or modification, will be called for,Particularly for complex industrial plants,many companies look to external contractorswhen redesign and renovation are called for.Once again, most of the contracts will be smallrelative to those for new facilities, but oppor-tunities will grow faster.

~~(~cjnlln(?r(:l~] []i{]f<>{,]]l][]l(]g\.: ,-in lntf>rnatif)nal .4nal)w5 [\lril\tl-ln~torl, 11(;: Of fi(, c of ‘khIi]() ~\’ Assessment, ]anuar~” I {)84],])]). 8:)-84,


New technologies—mostly originating inother industries—create another set of oppor-tunities for American E&C firms to develop newproducts. Developments like fiber-optic com-munication systems or bioengineering stimu-late capital investment, with one of the conse-quences greater demand for E&C services.While many of these opportunities will dependon technical advances beyond their control,E&C firms with the expertise to apply newknowledge should be able to establish competi-tive margins. Such abilities have been a tradi-tional U.S. strength, but the technology brokerstrategy will not be as effective in the futureas in the past. With other nations—notablyJapan–moving into fields like optical commu-nications and biotechnology as rapidly as theUnited States, it will be harder for AmericanE&C firms to capitalize on new opportunitiesarising from new technologies.

To be competitive in the future, AmericanE&C firms will probably have to make their owninvestments in proprietary know-how rangingfrom control of hazardous wastes to the designand construction of clean rooms for manufac-turing integrated circuits. Thus far, interna-tional markets for many of these specializeddesign and engineering projects have been slowto materialize. At some point they will, and thecompanies prepared to take advantage will reapthe rewards.

It will take more than success in developingnew E&C products—whether O&M services orknowledge of bioengineering—for U.S. firmsto rebuild their competitiveness in engineer-ing and construction. They will need to con-tinue building on their strengths in computerapplications and in management, while seek-ing ways to keep up in construction methods.Expertise in engineering and design givesAmerican firms something to trade: while theUnited States imports construction technol-ogies, foreign firms come here seeking softwareand management know-how. So long as theystay ahead in these fields, American E&C firmswill have leverage for negotiating joint venturedeals and technology transfer agreements. Inparticular, American companies will need toextend their managerial advantages beyond the

large and complex projects in which they ex-cel. With fewer such projects internationally,management skills on smaller and more rou-tine jobs will take on greater significance. Thereis no reason why U.S. firms should not be ableto move from skills in the management of com-plexity to equal reputations in management forincreased productivity and reduced costs.While they have not yet done so, their lead incomputer applications gives them a powerfulweapon.

Management for productivity and construc-tability will plainly take on greater importancein the future. With construction know-howwidely available to firms in the NICs and LDCs,the grounds for competition will shift from tech-nology itself to the management of technology.In the past, for example, earthmoving in theLDCs depended on cheap labor and simpleequipment that relatively unskilled operatorscould use. Meanwhile, cost pressures in the de-veloped nations led to capital-intensive meth-ods. Contractors turned to very large pieces ofequipment, with which a few skilled operatorscould achieve high levels of output. They alsosought specialized equipment for small jobs orfor work in congested areas (e.g., laying pipe-lines). Similar cost pressures lie behind the R&Don automated earthmoving procedures men-tioned above—automation that will eventuallymake it possible for an unskilled labor forceto use advanced machinery and equipment. Al-ready, partial automation—e, g., laser-guidedgrading (box K)—has reduced skill require-ments. When companies anywhere can leaseor purchase the same equipment, managementability, in the sense of tailoring operations tolocal conditions, will become a prime sourceof competitive advantage—one that Americanfirms may still be able to exploit.

The demands of customers and the innova-tions that emerge elsewhere in the U.S. econ-omy will help shape the future strategies ofAmerican E&C firms. In the longer term, themore successful companies will be those will-ing to invest their own resources in adaptingtechnologies from other industries to the prob-lems of engineering and construction. Amer-ican firms should be able to do well, given the


U.S. position at or near the forefront of so manytechnologies, but they will have to put moneyinto R&D. E&C firms in other industrializedcountries face the same choices and the sameopportunities. As in manufacturing, part of thetask for U.S. E&C companies will be to moreaggressively monitor and learn from their for-eign competitors.

International Contracting Practices

American E&C firms enter into internationalconsortia not only to take advantage of thestrengths that foreign firms can bring to suchventures, but to meet bidding requirements;U.S. companies contribute management andtechnical skills, while foreign firms may pro-vide less expensive labor, access to low-interestfinancing, and their own specialized expertise.A recent example saw Bechtel team with theJapanese firm Kumagai Gumi to build a $l70million dam in Canada .27 Such arrangementsseem bound to increase, given the current real-ities of global competition.

Among these realities, government interven-tion looms large: often, the formation of inter-national E&C consortia follows quite directlyfrom government policies that permit foreignparticipation in local projects only through jointventures with domestic firms. In this way, gov-ernments seek to speed technology transfers—e.g., by requiring that engineering and designwork be shared. Where they do not seek jointventures, governments may require local hir-ing by foreign contractors. In other cases, do-mestic firms receive preferences on contractawards—common in industrialized countriesas well, where employment has been a primarymotive. In the United States, constructionprojects paid for with public funds have oftenbeen restricted to U.S. companies, while BuyAmerican clauses may cover materials and sup-plies. Canada places restrictions on foreign ar-chitects. The United Kingdom requires thatengineering contracts for North Sea oil projectsgo to firms with majority British ownership.28

‘-]d])iinlsc f]nanc. ing l~rd~ ~)drt oi tll(? 01 igindl aim. ~1’hil(’ tl]i~~ I I c1 n [)t ~it) rh {III!, the [)I[)]c[ t [)onet l)el(’~~ ~)r{)( II(I(lt)(l -–1 ‘ .tS -] d [)at)f’~f~ ‘1’(I,I m S})ff’(1 \ ( :(I naf] 1(111 11 11 m, [;l]~in(v’ring ,k’f’il i

R{’( or(l. ()( t 2:1, 1 080.” [). 20.

‘H] Rd]l(loll) t), “ E’01 [~igll (;f)l I’rllll]lrll ‘l’(]rqf’t i 11~ 01 I;n~infJf~rl])~-

What do government pressures for local par-ticipation mean for corporate strategy? Primar-ily this: any foreign firm that resists govern-ment pressures to join with local companieswill lose out, in the absence of literally enor-mous advantages in technology or financing,One or a few foreign firms may decline to par-ticipate, but others will be only too happy totake their places. While the United States cer-tainly needs to continue pressing Third Worldcountries to abandon such policies, LDC gov-ernments will continue to seek advanced tech-nology in one guise or another—leaving Amer-ican managers seeking ways of remainingresponsive to these requests while also preserv-ing technically based competitive advantages,a dilemma E&C firms share with those in high-technology manufacturing. At the same time,the nature of the international E&C businessoften makes it necessary to have a local part-ner, regardless of government involvement.

Beyond entering joint ventures and consor-tia with foreign companies, American E&Cfirms have begun to explore joint developmentwith manufacturing firms as a route to propri-etary technologies and possible competitive ad-vantages. For example, Bechtel and VarianAssociates have combined to supply clean-roomfacilities for the microelectronics industry,while Fluor has joined with the Allen Groupto offer a package of services for the design andconstruction of automated factories. Althoughthese efforts are in their early stages, they willprobably expand in size and scope. If hard-pressed American firms in several industriescan join, taking advantage of the technical po-

Corrstru(:t ion Servic es,’ memora II(I II m, 1)tI~)CI rt nlt~nt ofCommerce, Washington, DC, Fet)ru,]r\ I {][][,.

I n pre~)ardt ion for the [ lruguay Rol]n(l t ra(]t~ rl[~~( )[ I~tt ioI]\, t h[~[ 1,s, ~o\(31.11n lent has [;omp iled a long 1] \t of l]{]lati[)n~ of I):i-t ional treat merit —the principle that (i[)nl[)~t I{ :1 I){ I I ( )r~; igr) f i In)\I]t: treated the same—in the a~var(lin~ oi Ii&(; ( ( ]I]t ra( t~ S[;[J“’1’ri](le Issues in the Engineering an(] (;onst I U( ! ]or) ,111(] R~Jl,lt(vj(;(]nsl]ltancj Ser\ices 1n(lustry,” hackgrol]r](i l), Il)fII, ofi I( [I ofthf: [ J nit[x] States ‘I”ra(l[; Represe I)tat ii (I. L!’,1 \lI I II XI ( )11, I )( [ II( I[iatr),

\fanj I n the L 1,S, E&(; industry hat e strong reser~atlorls (:on-{ e r n I rlg t h (I nt;ll t ra d (; IOU n d, N 1 a 11 a~c r~ fear the (” n It C( 1 St,1 I [’snla \ ha( L a~~’a}” from (’lIrrent polI[ i[’s that iupport the industr? —{’. ~., p I’(; f [’ rc n (:tl~ d n d set-as I (1 [’s (In fort: i~n pro j ects such as m 11 i-tary t)a~[~~—in [J\(.hdnge for lih[;ra]izat ion t~ls[~where. ‘rh(t in[lust r}() i) [)( I if’\ t h (’ (Jxt (~n \ i( ) n of t h t’ (;:1 ‘[”1’ I ) r-()1 u r(~nl (In t (:()(1[> t () IJI] g in IIt’r’l n g ,! n (i ( I ) n st rl~ [t io n ~f’ ri ] ( (>i f ( ) r >] m i 1 a r I-t>a >( ) ns,


sitions that each retains, they should fare bet-ter internationally. For the E&C industry, thesejoint endeavors suggest somewhat belated rec-ognition that a continuing technological edgedepends on advances in other sectors of the U.S.economy.

Finally, American firms have the option ofeschewing international markets entirely, andretrenching inside the Nation’s borders, Al-though the size of the U.S. market makes thisoption potentially attractive, the choice is arisky one, as the experiences of American man-ufacturing corporations demonstrate. Whileforeign penetration of U.S. construction mar-kets has thus far been minor relative to the over-all size of the industry, firms in Japan and Eur-ope clearly see in the overseas problems ofAmerican contractors evidence of vulnerabil-ity at home, With foreign E&C companies mak-ing penetration of the U.S. market a major ele-ment in their own strategies, American firmsthat pull back internationally may quickly findthe competition following them here. So longas the U.S. economy remains a relatively open

one, the home market will not necessarily bea safe haven for American E&C firms.

Moreover, abandoning the international mar-ket carries implicit costs. First of all, reentryin later years—e.g., when the world economyhas picked up—will be difficult, Reputationswill be tarnished if not lost, along with criticalstores of overseas experience. Mobilization ofresources will be difficult once foreign baseshave been abandoned; companies will face newexpenses. Furthermore, a corporate viewlimited to the United States could cause E&Cfirms to overlook potential sources of competi-tive advantage valuable, not only in interna-tional competition, but at home—e.g., technol-ogies pioneered overseas. Again, the analogywith U.S. manufacturing, where many purelydomestic companies remain ignorant of foreigninnovations, seems appropriate. Today, aprovincial view of technology development isan invitation to competitive obsolescence. Andultimately the real worry is that inability to com-pete abroad may foreshadow inability to com-pete at home.

POLICY ISSUES: TECHNOLOGY DEVELOPMENT AND DIFFUSION

As earlier sections of this chapter suggest,the major policy issues for the U.S. E&C indus-try center on financing and technology. Whenit comes to financing, success in U.S. effortsto combat foreign government subsidies wouldbe a major step toward equalizing the terms ofcompetition. The Export-Import Bank’s Engi-neering Multiplier Program, through which thebank extends loans to foreign purchasers ofU.S. architectural and engineering services, hasalso provided some help, as has the Trade andDevelopment Program. Chapter 10 discussesthese and other topics related to financing, in-cluding specific policy options. This section fo-cuses on technology.

As noted earlier, U.S. E&C firms do littleR&D. Most of the support for research relatedto construction comes from the Federal Gov-ernment (box L), from suppliers to the indus-try, and from the owners of large facilities.

There are no authoritative figures on total U.S.expenditures for construction R&D, but spend-ing is probably in the range of half a percentof construction revenues; Japan’s constructionR&D, in contrast, has been put at 3 percent oftotal industry revenues, 29 Not only is spendingin the United States low, but the military focusof federally supported R&D contrasts sharplywith the typical approach in Japan and Europe,Many European governments have ministriesof construction. Among their other activities,these ministries sponsor and coordinate R&D,In the United States, as box L indicates, the De-partment of Defense accounts for most govern-ment R&D related to construction. Much of themoney goes toward the water and port projectsof the Army Corps of Engineers; technology


Box L.—Federal Government R&D Support for Construction-Related Technologies

While a good deal of Federal support goes toward technologies tangentially related to the E&Cindustry —e.g., new materials, robotics and automated manufacturing—directly relevant work out-side the military totals less than $30 million per year. Spending by the National Bureau of Standards(NBS, part of the Department of Commerce) accounts for about $20 million of this total.

Civilian AgenciesThe fiscal year 1987 budget for the NBS Center for Building Technology (CBT) comes to $12 million.

The Center for Fire Research, also part of NBS, gets another $8 million. (Both figures include workundertaken on a reimbursable basis for other agencies.) In past years, the Reagan Administrationhas sought to eliminate both NBS centers, arguing that their activities could be undertaken by Stateand local governments; the current Administration proposal for fiscal year 1988 calls for mergingthe two centers and reducing funding.

Consistent with NBS’s overall mission, the CBT develops measurement techniques, databases, andtesting methods—a set of technologies with broad and general relevance to the construction industry.Because of this, support at State and local levels seems unlikely. Why should one State pay for R&Dthat the other 49 will also benefit from? Although Congress has kept the CBT’s programs going, fund-ing has declined from a high point of $14.7 million in 1980 to the 1987 level of $12 million, whileman-years have fallen from 199 to 126 over the same period. With two-thirds of the Center’s workundertaken on a reimbursable basis for other organizations (mostly government agencies), a continueddecline in direct appropriations means that more of CBT’s research will reflect the narrow missionsof these agencies, Congressional appropriations—some $3.4 million in 1987—provide most of the sup-port for generic R&D at the Center.

The National Science Foundation (NSF) funds construction-related research in civil engineering,almost all of it at universities. Three programs account for most of the relevant NSF grants. The Struc-tures and Building Systems program funds research on construction processes, including automa-tion, at a 1987 level of $3.8 million. A program focused on infrastructure and on existing buildings,entitled Systems Engineering for Large Structures, has a 1987 budget of $2.7 million. NSF’s Earth-quake Hazards Mitigation program ($14.4 million) funds some R&D related to construction. In addi-tion, NSF has awarded a grant for an Engineering Research Center on Advanced Technology forLarge Structural Systems to Lehigh University; this center is scheduled to receive $10.4 million over5 years, with additional support from the Pennsylvania State Government.

Finally, the Federal Highway Administration spends something less than $1 million per year onresearch, development, and technology transfer related to highway pavements and bridges. SomeState highway departments also maintain research programs. Currently, the National Research Coun-cil’s Transportation Research Board is coordinating the Strategic Highway Research Program, witha 5-year budget from several State and Federal organizations of $150 million. About half the budgetwill be spend on materials-related research; little will go to R&D on construction processes.

Defense-Related R&DMilitary projects at six Federal laboratories run to much higher levels—a total of about $270 million

in 1986. The Army maintains a combat engineering laboratory at the Belvoir Research and Develop-ment Center, while the Army Corps of Engineers operates three facilities—the Construction Engi-neering Research Laboratory, the Cold Regions Research and Engineering Laboratory, and the Water-ways Experiment Station. The total R&D budget for the Corps of Engineers came to $67 million in1986, with 1987 estimates of $62 million to $75 million. The Air Force and the Navy each maintaincivil engineering laboratories of their own, while the Department of Defense began in 1986 to fundCenters of Excellence on Advanced Construction Technology at MIT and the University of Illinois.

Some, though not all, of the military research is relevant to civilian construction problems—mostcommonly, the work of the Army Corps of Engineers, which is responsible for heavy constructionon many U.S. dams and waterways. But work that could be used in the civilian E&C industry findsits way only slowly and sporadically to the one million-plus American E&C firms.

150 • Intemational Competition in Services

transfer from the Corps’ laboratories to indus-try has been occasional.

The analysis in earlier sections of this chap-ter indicates that, to be competitive in the fu-ture, U.S. E&C firms will have to rely heavilyon advanced construction technologies. Overthe next several decades, construction willgradually emerge as a high-technology indus-try, with extensive automation replacing thecraft-based methods in current use. Rapidproductivity gains will cut costs for firms thatlead in applications of high technology; theneed is as much for creative use of tools andtechniques that already exist (perhaps in em-bryo form) as for new research. At present,American firms do a good job of applying com-puter-based technologies during the designstages of E&C projects, and for constructionmanagement, but they are well behind in con-struction methods, automated and otherwise.That is where most of the costs are incurred,and where the big payoffs lie.

That future international advantages for theU.S. E&C industry will be based in part on tech-nology could, in itself, justify higher levels ofFederal funding for construction research. Butthe potential domestic impacts—through greaterproductivity y and lower costs for projects rang-ing from residential building through infra-structure improvement (roads, waterworks) toheavy construction—argue much more power-fully for higher levels of R&D. But why shouldgovernment pay? Because much of the workrequired falls in the category of generic orprecompetitive R&D. For reasons explored ingreater detail in chapter 6, private firms in theUnited States seldom pursue such R&D veryextensively. Simply put, no one firm can ex-pect to capture the rewards from R&D that ben-efit’s an entire industry.

For the U.S. construction industry, the im-mediate opportunities lie in utilization of ex-isting knowledge, including technology fromother industries and know-how originatingoverseas (e. g., European approaches to rein-forced concrete construction). Institutionally,perhaps the most pressing need—given the vastsize and fragmented character of the industry—

is for better-developed mechanisms for diffus-ing technology, and the lessons of experiencein applications of new technologies. so

Again, note the parallels with U.S. manufac-turing. The Nation’s base in scientific researchand in high technology is unmatched in theworld. Much of this research, in principle, canbe applied to industrial problems. But relativelyfew of the firms, in construction or in manu-facturing, that might draw on this research basehave staffs capable of picking and choosingwhat is needed for a particular problem. Nordo that many firms have the strategic visionat executive levels necessary for reshaping theiroperations over periods of years (which wouldinclude recruiting and training the right kindof employees) to take advantage of new tech-nological opportunities. Such difficulties existaround the world. But particularly in the UnitedStates—where the gap between advanced re-search and applications is widest—attempts attechnological solutions to problems in eitherconstruction or manufacturing too often failbecause of a mismatch between the company’sreal needs and the means brought to bear (tech-nology for the sake of technology), because ofan inappropriate mix of people and machines(integrating the work force out of the processrather than into the process), or for lack of com-mitment (management backs out after initialfailures, rather than seeking to learn from ex-perience). In essence, U.S. E&C firms have notbeen very good at appropriate technology.

A positive Federal role, then, would be to helpcreate infrastructural mechanisms for: 1) con-ducting R&D on construction methods; and 2)transferring know-how and results to the E&Cindustry, in part through ongoing company in-volvement in the R&D projects themselves.NSF’s Engineering Research Centers providea possible model (although one center for con-struction might fill 1 percent of the need); other

~~~loor attendance at meetings on technology’ transfer or~anlmjb} militar~ laboratories that conduct construction-related R&Llshows, not that there is no problem, but how deep-seated theproblems are—” Military R&I] Up for Grabs, ” Engineering Ne\*rs-Record, Nfar, 6, 1986, p. 11.


models also exist, both here and overseas .31Given the size of the E&C industry, and therange of applicable technologies (includingthose originating in other industries), a robustand self-sustaining infrastructure for develop-ing and transferring construction-related tech-nologies might involve dozens of such centers.

Certainly there appears to be room for oneor more industry-cooperative R&D consortia onthe lines of Microelectronics& Computer Tech-nology Corp. The Federal Government couldfacilitate the creation of such consortia by con-tributing seed money and/or incorporatingsome of the ongoing activities of the existingNBS Center for Building Technology. Further-more, ongoing Federal funding of some per-centage of the work conducted by R&D consor-tia could serve the public interest. For example,government support for testing and commer-cialization of new construction technologieswould help ensure the safety and long life ofstructures built with public funds. (NBS, the

31 See “I)(3\(;lcJ[Jnl[;nt ~il(l I)iff L]sion of Commercial T~(;hnOl-og ie>: Should the F’e(l era [ ~o~’crnrncnt Redefine Its Ro]e?’ staffrnf}nlo ra Ildll m, of fl( f> Of ‘1’[)[, hnnlogy ASS f? SSITlf311t, w~Shi Il~to Il,

1)(;. Nlar(; h 1984.

CONCLUDING

Into the 1970s, developing countries lookedto U.S.-based E&C firms to design and buildelectric generating plants and power distribu-tion networks, refineries and petrochemicalcomplexes, pipelines and offshore oil platforms,steel mills and cement plants. American com-panies, with a great deal of experience fromwork in the U.S. energy industry, were able totransfer their skills quite directly to competi-tion for international projects in the MiddleEast. In the poorer LDCs, much of the workconsisted of infrastructural development, oftenfinanced by international lending agencies.Here, U.S. advantages were based on domes-tic experience with large water and highwayprojects and on political and economic ties withLatin America.

These once comfortable patterns have bro-ken down. In part, the shrinking U.S. share of

Federal Highway Administration, and the ArmyCorps of Engineers do some of this already,)

Government agencies might also help speedinnovation by experimenting with contract pro-cedures that would permit bidders to proposealternative techniques, following the Europeanmodel, to be evaluated by an independent boardof experts. Alternatively, government agenciescould move toward design-build contracts, orgreater use of performance-based specifica-tions, Congress has already directed the Depart-ment of Defense to pursue nontraditional ap-proaches to construction projects in an effortto reduce costs.32 Related needs and mecha-nisms range from a national system for infor-mation exchange on construction technologiesto upgraded teaching equipment in tradeschools and university engineering depart-merits .33

32 Mi]i(ary cons(rll~(ion Appropriations .!3i]], 1987, Report99-648 to accompany H.R. 5052, Committee on Appropriations,House of Representatives, June 19, 1986, p. 13.

u Tech no]og\r and f]l~ Future of the [‘, h’, ~’[)IJ.Str U[:tlOn Indli ~-

tr.t;, Proceer i inks of the Pane] on Technical Change an{] the [ 1,S.Building Construction Industry, Office of Technology A\w;\\-ment and the American Institute of Architects (tlrashin~t[jn. 1)(::AIA Press, 1986), p. 75.

REMARKS

international markets has been a consequenceof Third World debt and declining oil prices.So long as developing countries face demandsfor austerity programs to qualify for additionalloans—often needed simply to service theirdebt–new construction undertaken by outsid-ers will be the exception rather than the rule.

But much more is at work than the creditcrunch and declining oil revenues. E&C firmsin the developing world have themselves ma-tured technologically; taking advantage of lowlabor costs, they can now win some kinds ofcontracts in competition with companies basedin the advanced nations. Government policiesin the LDCs and NICs have helped the processalong. Viewing construction as a vital indus-try for development, governments have pro-tected local entrants and forced internationalcontractors to enter joint ventures and trans-


fer technology. And when it comes to construc-tion methods, American contractors generallylag behind competitors in Europe and Japan,while typical U.S. contracting procedures dis-courage innovation. With financing a major ele-ment in winning new contracts, and a troubledworld economy, competition will remain stiff,and the U.S. share of E&C markets will prob-ably continue to decline.

Nor can the U.S. industry afford to feel thatits current lead in management expertise willbe secure. With O&M contracts accelerating thespread of expertise, any strategy based on su-perior managerial skills will probably fail un-less complemented by a major effort to makeup lost ground in construction technologies.Indeed, U.S. firms need to catchup in construc-tion know-how simply to protect their domes-tic markets from foreign incursions.

Today, the competitive environment facingAmerican E&C firms resembles that for manymanufacturing companies. Some E&C firmshave reacted much like those manufacturersthat have called for government assistancewhile retrenching or withdrawing from inter-national markets. But reactive strategies willnot rescue this industry, although governmentpreferences and set-asides might help provideneeded cash flow (while also meaning higherconstruction costs for Federal agencies). On theother hand, those American firms that take theinitiative in technology development, and intapping the skills of U.S. financial institutions,will—when they cannot win projects on theirown—often be able to enter international con-sortia and joint ventures on favorable terms.Certainly, these international combinations willbecome more common; to the extent that suchconsortia become standard features on the com-petitive landscape, firms that can bring distinc-tive advantages to them will do better, whilethose that cannot will lose ground.

Relatively few American E&C firms are ac-tive in the international market, and loss of com-petitive advantage internationally, in and of it-self, would not be a devastating blow to the U.S.economy, Greater dangers come from possiblelosses of downstream sales by suppliers of

materials and equipment. While exports ofAmerican E&C services do not automaticallytranslate into exports of goods, such linkagescontinue to benefit the Nation’s balance of pay-ments, as well as U.S. employment. By encour-aging the formation of cooperative ventures be-tween E&C companies and other Americanfirms–e.g., trading companies–the FederalGovernment could help strengthen these link-ages. Team America, a consortium assembledto bid on China’s huge Three Gorges projectoffers a suggestive model (the group includesU.S. E&C firms, suppliers, and banks).

In terms of Federal policies, however, thegreatest short-term need is simply to force otherOECD nations away from subsidized financ-ing for international projects. For years, the ma-jor industrial economies have used exportcredits to sweeten deals, particularly those withdeveloping countries. When it comes to E&Cprojects, most of the industrialized nations of-fer generally similar development assistanceand export credit packages, Several of the NICs,notably South Korea, also provide financingassistance to support their E&C industries. s*

Once some governments began offering sub-sidized financing packages, others followed suitto avoid losing sales. While an agreementwithin the OECD (see ch. 10) established con-sensus interest rates on loans, with lower ratesand longer maturities on credits for the poorestdeveloping countries, the agreement did notcover tied aid or mixed credits, leaving a loop-hole exploited by France and other Europeannations, along with Japan. Congress approveda $300 million mixed credit war chest in 1986,with the intent of creating leverage for nego-tiations aimed at moderating the use of mixedcredits by other nations. A revised OECD agree-ment, in the spring of 1987, promises to be astep in the right direction. But the United Stateswill probably have to keep the pressure on,

Over the longer run, Federal support for in-novation and technology development carries

34] n ~(jc] it jon S[)u t h K ~r~~ ‘S co~rf;rn mf)n t of f’f?rs tax 11) cent i Y’flS

tu en(;ourage R&I) hy constru(:t ion firms-~lr. Arnold, “Rcscucpt]ckage for (;~nstruf;tl~n %;tOr,” Det’fkpment F o r u m , JUn(’

17! 1985, ~). 1.


the greatest promise for helping this industryrebuild its competitiveness. Currently, Amer-ican E&C firms do almost no R&D. Meanwhile,the larger European companies have manyyears experience in turning proprietary con-struction technologies to competitive advan-tage. precasting, pre-stressing, and post-tensioning techniques for concrete, for in-stance, have been developed mainly in Europe.

Given the continuing inability of Americancompanies to compete on costs for routine in-ternational projects, successful strategies willnecessarily entail technological leadership be-yond that already achieved in design and man-agement. American E&C firms are in much thesame position as countless manufacturing com-panies. Without strenuous and continuing ef-forts in R&D and technology development, U.S.contractors can look forward, first, to furtherdeterioration of their competitive positionsabroad. This will almost inevitably be followedby an increase in competitive pressures athome. The pattern has long since become clearin other industries.

Renewed technical leadership will depend inconsiderable measure on developments else-where in the U.S. economy. Much as they havedone in the past with computer-assisted con-struction management techniques, E&C firmswill have to draw on other American industriesin building proprietary technical positions.Most of these companies have avoided strate-gies based on proprietary technologies in thepast. For that reason alone, long-term effortswill be necessary.

Future international success will probablyalso require more diversification than Amer-ican E&C companies have preferred. Narrowexpertise tied to the energy industry or to powergeneration carries high risks in a period of sloweconomic growth and volatile energy prices;specialized firms will be vulnerable to both cy-clical (or secular) decline in their clients’ in-dustries, and to the competitive thrusts of tar-geted policies by foreign firms and foreigngovernments, Diversification can reduce thevulnerabilities only too evident over the pastfew years among E&C firms that dependedheavily on energy projects.

While new corporate strategies are evolvingin some American E&C firms, old habits willdie hard in others; for those in the latter camp,international competition will be harsh and po-tentially devastating. Many companies still ap-pear at sea, unable to home in on new strate-gies suited to new competitive conditions.While some U.S.-based E&C companies havebegun to place more emphasis on R&D, theyare in the minority. Those that aggressively seekand adapt technologies from other industries,and from foreign E&C firms, will be better posi-tioned to gain with respect to competitors bothat home and abroad. Eventually, prefabricationand automation will be common in the con-struction industry. Productivity will jump. IfAmerican firms take the lead in developing newapproaches to construction methods, they maybe able to renew their competitive ability in-ternationally. If they fail, their markets withinthe United States could be deeply penetratedby able foreign competitors.

chapter 4 international competition engineering and

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