The Asian Century
German contractors face up to competition challenges as markets for large plant construction move eastward
Germany's large plant contractors took in new orders worth nearly €25 billion in 2011, lifting business nearly back to the level of pre-economic crisis year 2008, reports the large plant contractors committee (AGAB) in the German Engineering Federation VDMA. The 11% year-on-year average order increase against the 2010 figure of €22.4 billion was driven by energy applications, which soared by 42%. By contrast, the value of new chemical process projects sank by 8%, from €2.5 billion in 2010 to €2.3 billion.
At €18.3 billion, around 73% of the Germans' project intake across all applications came from projects outside the country, with 60% of new orders originating in Asian countries. In nearly every individual engineering field, foreign business exceeded business with German customers; however, thanks to a national scheme to promote the utilization of renewable resources, AGAB members enjoyed a 38% upturn in orders for wind energy plants in their home market. The total sales revenue of €22.4 billion booked in 2011 from existing and new projects was slightly ahead of the 2010 figure of €22.1 billion.
The market for large plant construction is clearly moving eastward - to Southeast Asia as well as India and the Middle East - says Helmut Knauthe, current chairman of the contractors' committee and member of the executive board at ThyssenKrupp-Uhde. Projects in Asia-Pacific accounted for nearly 28% of their AGAB members' business in 2011, Middle East projects for 22%. In large plant construction, Chinese projects led the list with 13%, followed by Saudi Arabia with 11% and India with 7%.
In these markets, German contractors are facing ever stiffer competition from Asian engineering firms based in countries such as China and South Korea. To deal with the challenges of what is being called "the new Asian century", companies are establishing their own engineering, equipment manufacturing and services in the region. When cooperating with Chinese partners in particular - they are paying careful attention to protecting intellectual property, however.
For 2012, Knauthe predicts that German contractors' growth in order intake could slightly surpass the 2011 figures.
At the same time, he suggests, it is equally possible that growth could taper off moderately. In any case, none of the companies belonging to the VDMA committee expects that business will return to the levels of 2007 or 2008 in the foreseeable future.
Contractors for chemical process plants, based in Germany and elsewhere, are facing challenges similar to that of the engineering sector as a whole. The number of large projects worth more than €500 million is declining worldwide, and political and economic instability often delaying projects until far into the future. Contributing to the economic constraints faced by independent contractors, large chemical producers based in developed countries often revamp and upgrade existing plants rather than building new greenfield facilities, as Knauthe points out.
AGAB sees favourable chances for German contractors to make the cut in new petrochemical projects pursued in countries that are rich in oil and gas. In Russia, where in particular demand for plastics is rising, national authorities are moving to exploit these valuable resources. While Russian contractors are world leaders in some engineering segments, the German grouping believes that the strong demand for technologies needed to modernize existing plants offers promising opportunities.
North America's rush to utilize its newly tapped shale gas resources will result in a wealth of new projects, but home-grown contractors are most likely to benefit from this bonanza. By contrast, the need to build industrial gases units for chemical as well as steel plants, for example, will continue to work to the advantage of specialized German engineering firms such as Linde.
With demand for polyurethanes growing in a number of sectors such as footwear and insulation, an at least temporary revival is under way for large-scale projects in the Germans' backyard. Two chemical giants have recently announced capacity build-ups. Bayer MaterialScience, for example, is currently constructing a new production facility for 300,000 metric tons per year of the precursor TDI at Dormagen, Germany. Start-up is scheduled for 2014, the same year in which BASF will commission a new 300,000 metric tons per year TDI plant at its Ludwigshafen headquarters.
Whether German contractors stand to profit from such projects will depend on a number of factors. In recent years, the engineering departments of the large chemical producers have taken over a considerable share of the duties in-house, while dividing the "heavy lifting" among several outside companies. Here, as elsewhere, competition from cheaper foreign - especially Asian - contractors is intensive. South Korean companies are increasingly winning bids for turnkey plants worldwide.
German engineering firms traditionally have been at the forefront of technology developments in chemistry and other fields. At the same time, the companies realize that the days in which reputation alone determined who would win the prized contract are over. In order to stay on top of worldwide competition in future, they will need to make "massive investments" in expanding this leadership, Knauthe stresses. AGAB members are already addressing this issue, he says, "working on the standard project parameters such as price, quality and processing time."
Taking aim at the Asian competition, companies under the VDMA umbrella have launched a campaign to spotlight their innovative strengths in all engineering disciplines. In the past, German firms were often said to be so proud of their technological skills that they forgot to actually sell anything. With the competitive challenges intensifying, they are now collectively making a concerted effort to improve their marketing as well as risk and project management skills.
As part of the forward thrust, the contractors also will more intensively tout their own innovative competence. This, AGAB acknowledges, is all the more important where German-based companies are at a disadvantage in competition with contractors in lower-priced environments. Alongside energy and resource efficiency, trump cards they intend to play include expertise in developing holistic concepts for process plants, from start-up to shutdown. In the medium-term, the target is to further increase the service component of their business beyond the current 30%. No ballpark figure has been named, as yet.