[In-Depth Review] Activation of Overseas Orders and Risk Management

Once again, the 'Overseas Orders Revitalization Plan (6·15)' has been announced. Apart from selecting 30 key overseas projects worth a total of $100 billion for the government to actively manage, there is little difference from the 'Overseas Orders Vitality Enhancement Plan' announced last February. In particular, it is inappropriate that the government's overseas construction policy always emphasizes quantitative goals such as 'achieving $30 billion in orders this year.' The profitability aspect also needs to be considered qualitatively. For that, risk management is necessary. However, this revitalization plan makes no mention of risk management. Unlike the government, companies deeply recognize the importance of risk management.

Originally, the strength of Korean companies was their proactive assumption of risks, while their weakness was risk management. Without proactive risk assumption, the growth of the Korean economy and construction companies as seen today would have been impossible. The Middle East construction boom in the late 1970s was the result of actively assuming risks. Risks that materialized during the early stages of project implementation were adaptively and promptly addressed by both companies and the government. However, even after the Middle East market passed its inflection point and the environment changed, risk assumption continued for some time, resulting in the deterioration of Middle East construction and large-scale corporate restructuring.

The Southeast Asian construction boom in the 1990s was similar. While risk assumption was necessary during the growth phase of the Southeast Asian construction market, construction companies with excessive borrowing structures that became unmanageable due to the foreign exchange crisis collapsed due to failures in risk management. The overseas construction earnings shock in the early 2010s was also similar. Under the assumption that oil prices would remain above $100 per barrel, companies aggressively pursued overseas plant orders. Construction companies in the US and Europe focused on front-end engineering design (FEED) at the early stages of projects to reduce and avoid risks.

Korean plant companies assumed all risks across detailed engineering (E), procurement (P), and construction (C). Because there were not many advanced companies willing to boldly assume risks like this, Korean companies were able to maintain competitiveness in the overseas plant market. The problem is that entering the 2010s, despite rising cost ratios due to excessive and low-price orders, risk assumption was still emphasized over risk management. Even after announcing an earnings shock in 2013, overseas plant orders increased further in 2014. As a result, overseas plant insolvencies still seem not to have been fully resolved. Some companies appear to have lost confidence in overseas projects and seem to be giving up on overseas business altogether. In rapidly growing markets, risk assumption can be more important than risk management. Over-strengthening risk management during growth phases can rob opportunities for growth. However, it is questionable whether the current overseas construction market situation is a time to actively assume risks.

It is believed that the more overseas construction orders, the better. Voices calling for revitalization measures grow louder even if order performance falls slightly compared to last year. It is difficult for outsiders, except the companies themselves, to know how much profit the overseas projects have generated, and this is rarely scrutinized. Large-scale overseas construction projects often take several years to complete. At the time of ordering, it is impossible to know precisely whether there will be losses or profits. If overseas construction during boom times was obsessed with order records, overseas construction during downturns inevitably faced sharp order declines and earnings shocks. As mentioned earlier, since the 1970s, large-scale losses hidden behind surging overseas orders have been revealed through earnings shocks three times.

Orders are quantitative indicators. Profitability is a qualitative indicator. Both are important, but quality is more important. No matter how many overseas orders there are, if profitability does not support them, sustainability is impossible. Companies know this well through painful experience. Since achieving a record-high order performance of $71.6 billion in 2010, orders have continued to decline, but companies still say they will pursue 'selective orders based on profitability.' They are still in risk management mode. The government cannot emphasize only risk assumption to revitalize overseas orders. Despite policy support over the past two to three years, it is necessary to analyze the structural reasons why order performance remains poor. Without this, it will be difficult to expect results from the newly announced overseas orders revitalization plan.

Lee Sang-ho (President, Korea Construction Industry Research Institute)

This content was produced with the assistance of AI translation services.