Korean plant construction engineers are faring well overseas, catching up with and pulling ahead of Japanese world leaders. In terms of order acceptance, Korean players surpassed their Japanese rivals for the first time in 2006 and have widened the gap ever since. The two's growth potential have shown a stark contrast during the period, too.
Recently, the National Information and Credit Evaluation (NICE) investors service released a report comparing Japan's three major plant engineering companies -- JGC Corporation, Chiyoda Corporation and Toyo Engineering -- with GS E&C, Samsung Engineering, SK E&C and Daelim Construction of Korea. According to the report, the latter are strengthening their business overseas based on outstanding performance, while the former are losing ground.
When it comes to major business indices, e.g., sales, volume of new orders and customer diversification, Korean plant engineering companies are sharpening their competitive edge over their Japanese competitors.
The distinction is especially conspicuous in regards to turnover volume. The combined sales of the aforementioned Japanese companies have been on a downward spiral since 2008. However, the four Korean companies mentioned have seen their total sales increase consistently since 2005, with the annual growth rate exceeding 23% on average. This feat is attributed mainly to their excellent track record in the Middle East region, which has steadily increased plant orders since the mid-2000s.
For JGC Corporation, the peak came in 2006, when sales topped 608.5 billion yen. A year later, the figure dropped to slightly over 414.2 billion yen, a drop of 31.9%. Chiyoda saw its turnover halved to 312.9 billion yen between 2007 and 2009, while Toyo Engineering's sales also decreased during the same period, totaling approximately 173.9 billion yen in 2009.
Meanwhile, Samsung Engineering succeeded in boosting sales from 1.22 trillion won to close to 4.80 trillion won between 2005 and 2010, an annual average growth rate of 36.2%. GS, SK and Daelim followed, growing roughly 20% each every year.
The volume of new orders is another category in which the contrast is even more striking
The figure in regards to the four Korean corporations more than tripled between 2006 and 2010, from 7.9 trillion won to 25.5 trillion. Meanwhile, the same figure for the three Japanese companies declined during the period, with the exception of 2009, when it rebounded temporarily on the back of mega-scale projects. In Q3 and Q4 of 2010, the cumulative total was limited to 484.4 billion yen or so, showing a 60.1% cut from a year earlier.
Samsung Engineering won new orders worth 2.9 trillion won in total in 2006, with the number surpassing 10 trillion and nine trillion in 2009 and 2010, respectively. For GS E&C, the figure jumped to 6.6 trillion and 7.8 trillion from 2.6 trillion during the same period, thanks to a 3.5 trillion won petrochemical project and a 2.9 trillion won urea fertilizer plant project in the Middle East and Australia, respectively. On average, the four Korean corporations are growing by over 20% annually in regards to the size of new orders.
Such differences have also had some effect on their backlogs, too. The backlog-to-turnover ratio of the four Korean companies increased from around 200% to somewhere between 300% and 400% between 2006 and 2010. In comparison, the percentage for the Japanese stood at between 140% and 240% last year, suggesting they are falling behind in terms of business stability and sustainability.
However, the gap is relatively narrower when it comes to profitability. The operating margin of the Japanese companies improved from 4% to 8.8% between 2005 and Q3 of last year, while that of the Korean companies rose from 5.5% to 10% in Q4 2010. The NICE Investors Service's report added that both groups are relatively stable in regards to finance, with their working capital not that burdensome and their liquidity rich enough.
Nevertheless, the Korean companies can be seen to be outdoing their rivals yet again in regards to market diversification. From 2006 to 2009, the ratio of domestic, Middle East and non-Middle East overseas sales of the Japanese corporations changed from 24.0:52.5:23.5 to 37.1:34.7:28.2. Meanwhile, their Korean counterparts saw their turnover in the desert region surge from 30% to 52.6%, while the domestic sales moving down to 36.1% from 57.9% during the five-year period starting from 2006.
“It might seem that the Japanese have gone through some regional readjustment, but what is worrisome for them is that Middle East sales have dropped considerably, and this has led to a higher level of vulnerability,” said senior researcher Park Se-yeong of the NICE Investors Service, adding,, “Though Korean companies' dependence on the Middle East market has risen, it is not entirely a bad thing because it can result in a higher likelihood of winning more deals there, not to mention the cost cutting effect derived from conducting multiple projects in the same region.”
Technological Improvement and Customer Diversification Important
Numerous experts are forecasting that Korean plant engineers will continue to do well in the global market for a while as they are gaining more and more footholds, not only in the Middle East but also around the rest of the world. Meanwhile, on the contrary, their Japanese rivals are now watching their new order and backlog volumes dwindle, to say nothing of their gross sales.
This is not to deny that the latter are second to none when it comes to technological strength. The point is that non-Japanese players are improving their business capabilities, while the price competitiveness of the Japanese is falling.
Nonetheless, Korean plant builders are not in a position to be smug and complacent, either. To continue their upturn, they must tackle some tasks with commitment.
Most of all, they need to heighten their technological level and become better risk managers. Furthermore, they should be wary of excessive price competition among themselves, which could stem from their over-concentration in the Middle East markets. They would do well to turn their attention to the Latin American and African markets, for example, if they hope to improve their future prospects and sustainability.