By Wissam Batran, consultant, Business Advisory, Contax Partners
One of the most striking aspects of the GCC energy EPC market in the last few years has been the rise of the South Korean contractors as the dominant players. This is not a surprise to South Korean companies who seem to have a talent in going up the learning curve relatively quickly. One example of this rise to excellence is car manufacturing: in the 1990’s, South Korean manufactured cars were considered bottom end and relatively unreliable. It took, however, only a dozen years for South Korean cars to become some of the most reliable and price-competitive cars in the world with recognised brand names such as Kia Motors and Hyundai.
A more relevant and more formidable example is ship-building, where South Korean companies have become global leaders and are credited with making LNG transport cost-effective, and thus contributing to the globalisation of the gas market which has culminated in the worldwide LNG boom. The South Korean EPC experience is no different, where eagerness to learn and years of hard work has resulted in them becoming one of the hottest topics of discussion in the GCC energy sector over the past few years.
Going through the Learning Curve
Throughout the boom years and up to the third quarter of 2008, projects were being announced frequently and one of the main concerns for project owners was finding contractors that were capable of executing projects with good quality standards and without delays. Costs were also an issue but a less imminent one as cash and credit were available. South Korean EPC contractors were regarded as being in a lower league than their Western and Japanese counterparts and bid for mostly non-process packages.
Generally, when they bid for process packages, it was in a consortium with a Western or Japanese contractor where the South Korean contractor would be responsible for the construction and its consortium partner would be responsible for the engineering. These consortia gave Western and Japanese contractors the ability to place price-competitive bids – thanks to the lower costs of South Korean contractors – and allowed South Korean contractors to participate and gain experience in such complex projects.
To illustrate South Korean contractors’ role in the GCC energy market towards the end of the boom years, Contax Partners estimates that in 2007 and 2008 combined, South Korean contractors won over c.US$29bn worth of projects (both alone and in consortia) which represented c.23% of the energy Capex for that period. Although still winning mostly non-process packages, we started to see South Korean contractors such as Daelim and Samsung Engineering single-handedly winning major process packages in Kuwait and Saudi Arabia, especially in petrochemicals and refining (e.g. the Saudi Kayan project).
The Breakthrough
2009 saw a major breakthrough for South Korean contractors. After the credit crunch, the energy project market went from being EPC-led to a project owner-led market, as contractors were thirsty for work and project owners were eager to reduce costs as much as possible. South Korean contractors were the perfect match for these owners as they had gained considerable engineering experience and exposure to major projects yet were able to keep their costs much more competitive than the traditional top tier EPC contractors.
These new conditions resulted in South Korean contractors winning just under c.US$47bn worth of energy Capex in 2009 alone, c.62% more than 2007 and 2008 combined. Their share of the energy EPC market more than doubled from c.23% to c.49%. The highlight of these awards was the c.US$20bn UAE Nuclear Power Plant, which enhanced South Korean companies’ position as an important player in the high complexity and mega-project space. What is even more astonishing is that over c.75% of the projects won by South Korean contractors in 2009 were process-related (including the nuclear power plant). In the UAE, Takreer’s Ruwais Refinery Expansion project is another example in 2009 where South Korean contractors were awarded the responsibility for the execution of the majority of the project, winning 5 packages worth c.US$9.6bn: more than c.90% of total project Capex.
2010 was again a remarkable year for South Korean contractors as they were awarded c.US$28.5bn worth of projects which represented 45% of the total GCC energy Capex. These project awards were not only important for their Capex amounts but also for the size of projects undertaken (including packages of mega-projects). Of the 2010 Capex awarded to South Korean contractors, c.75% is considered large scale (above US$1bn in size). This year’s percentage saw a slight dip from the c.81% in 2009 which was largely due to the award of the UAE Nuclear Power Plant. Taking this latter mega-project out of the picture, their large project percentage stood at c.68% of Capex won in 2009, signifying that 2010 in fact saw a slight increase in the percentage of large project awards for South Korean contractors over the previous year.
Another interesting development is the increasing acceptance of South Korean contractors as sole bidders, especially on these large sized projects. In 2010, over c.56% of the large scale projects awarded to South Korean contractors were on a sole-bidder basis i.e. to contractors bidding on their own. This is a considerable increase from 2009 when it stood at only c.32%, with the remaining c.68% being won by South Korean/non-South Korean consortia.
In addition, over the past decade South Korean contractors have focused their business development efforts on the countries that have been leading capital expenditure in the GCC. In 2010, c.54% and c.25% of their projects were won in Saudi Arabia and UAE respectively. This was the reverse of the situation in 2009 where the majority of South Korean awards were in the UAE. In addition, not only did South Korean contractors concentrate their efforts on countries with large Capex spending plans, but they have also done so with a good success rate: in 2010, c.55% of all projects which were bid on by South Koreans was awarded to a South Korean contractor. This means that through this period, non-South Korean contractors had only 45% chance of winning when one or more South Korean contractor was on the list of bidders.
Are the Chinese the New South Koreans?
It is clear that South Korean contractors have become entrenched in the GCC energy EPC scene and that they will continue to cause credible and powerful competition to the “old school” Western and Japanese contractors who have dominated the market over the past few decades. As with all market cycles, the next group of contractors is already lining up and adopting a similar strategy. These are the large and ambitious Chinese contractors. In 2009, their share of the GCC energy EPC market stood at c.7%.
To date in 2010, this has increased slightly to c.9%. Just like the South Korean contractors, Chinese contractors also have a focused business development strategy: they have won 100% of the projects that they bid on in Saudi Arabia this year. They are currently bidding on c.US$15bn worth of projects that are due for award by the end of 2011, c.80% of which are process-related. With their ability to bid in consortia for large complex projects and under price competition, they are quickly becoming competition to South Korean contractors and, with the balance of the global economy continuously leaning on their side, there is no doubt that they will continue to expand their share of the EPC market.
In a crowded EPC market with the intensity of rivalry continuously increasing, it has become imperative for contractors to have a deep understanding of who their competitors are as well as their strengths, weaknesses, habits and behaviours. Early identification of these competitors and potential partnership options for projects can help companies plan for and mitigate against the risks of losing considerable market share to new and incumbent competitors in the future, and thus ensure their sustainability in the long run.
