[Namsan Ddalggakbari] Overseas Construction Companies' 'Earnings Shock' Is Ongoing

To Revitalize Overseas Construction, System Must Shift to 'Global Standard'
Factory Production and Modular Assembly Methods Prevail... Korean Companies Must Hurry

[Asia Economy Reporter Kim Jong-hwa] "The history of Korea's overseas construction is filled with 'order-winning miracles,' and since the 1970s, it has been a repeated cycle of 'order-winning miracles and earning shocks' three times over."

What were the results after the three overseas construction booms: the early 1980s Middle East construction boom, the mid-1990s Southeast Asia construction boom, and the early 2010s overseas plant construction boom? It is unknown how much profit the overseas construction projects won actually generated, and it was also outside the public's interest.

The leading companies of the three overseas construction booms all delivered 'earning shocks' to their shareholders each time. An earning shock refers to a situation where a company announces results worse than market expectations, causing shareholders to panic and stock prices to fall. The biggest shock occurred in April 2013.

◇ Did performance improve after the shocking earning shock reflection and countermeasure establishment?

In April 2013, GS Construction announced an operating loss of 535.5 billion KRW in the first quarter due to worsening cost ratios in overseas plant and environmental projects. Samsung Engineering recorded an operating loss of 219.8 billion KRW in the first quarter of the same year, which decreased to 88.7 billion KRW in the second quarter but then surged again to a massive loss of 746.8 billion KRW in the third quarter.

SK Construction also reported a cumulative operating loss of 314.7 billion KRW from the first to third quarters. Daelim Industrial turned to a loss in the fourth quarter with an operating loss of 319.6 billion KRW. Most companies cited rising cost ratios in Middle East plant projects as the cause of the losses.

The author of "Order-Winning Miracles and Earning Shocks" diagnosed, "Earning shock announcements by major overseas construction companies occurred not only in 2013 but also in 2014, 2015, and even 2018," adding, "It is difficult to find objective evidence that the profitability of these companies has improved since then." He further wrote, "The 2013 earning shock was not a one-time event but is still ongoing."

Given the severity of the earning shock, was there thorough reflection and countermeasure establishment at the individual company level? It would be reasonable to expect that overseas plant projects normalized to some extent afterward. However, the author claims there was no improvement at all.

The author recalled, "Despite the earning shock caused by large-scale overseas plant project losses, construction companies' performance improved significantly thanks to the domestic housing market boom after 2014," adding, "In the end, losses from overseas plant failures were repaid by selling apartments domestically; there were many sarcastic remarks that overseas losses were covered by emptying domestic consumers' pockets."

The author's evaluation, who experienced the market situation at the time as GS Construction's strategy officer and head of the management research institute, president of HanmiGlobal, and director of the Korea Construction Industry Research Institute, is painful. The claim that Korean companies fell victim to the 'winner's curse' due to excessive competition under the overseas clients' 'lowest bid system' is just a plausible excuse.

◇ Were all orders low-priced? Normal orders were more common?

Were all projects won at low prices? The author criticized, "Normal orders were actually more common, and the problem is that losses occurred even in normal order projects," adding, "They are blaming only external factors rather than identifying the causes." He said, "Low-priced orders are one of the causes of earning shocks, but not all."

The author believes the answer lies in system improvement. The industry must move from the 'past system' to the 'future system.' The past system refers not to the 1980s or 1990s but to the Korean overseas construction industry's system from the late 2000s to the early 2010s. He argues that a so-called 'reset of the overseas construction system' is necessary, improving all aspects such as market information collection and analysis, business strategy, organization, personnel, and management.

The author emphasized, "Global companies' business strategies are established and executed based on the construction system of their country," and "To revitalize overseas construction, domestic construction regulations must be converted to global standards."

He also called for a sober judgment regarding China, which has emerged as a major competitor in overseas markets. He pointed out, "Realistically, except for plants, it is questionable whether we have construction products more competitive than Chinese companies."

The author cited the example of hospital construction in Wuhan, China. The Chinese government started building Huoshenshan Hospital on the night of January 23 to accommodate COVID-19 patients. Over 800 heavy equipment units and more than 7,000 construction workers were deployed. While a traditionally constructed hospital with 1,000 beds would take about two years to complete, China finished it in just ten days.

The author evaluated, "It is not just a matter of completing a hospital that would take two years in ten days by simply deploying massive manpower in a human wave tactic," adding, "To build large-scale facilities using factory production and assembly methods, there must be building material companies capable of mass-producing panels or structures, supported by design, engineering, project management capabilities, and logistics networks."

Therefore, he advised, "Korean companies should also gradually shift to factory production and assembly methods using third-country labor in overseas construction markets." He highly praised GS Construction's acquisition of three modular companies in the US, UK, and Poland in January and its preparation to enter the overseas modular market. This means factory production and assembly methods have now become mainstream.

He said, "Now is the time to prepare for overseas construction after the newly unfolding COVID-19 era," advising, "To do so, companies and the government must learn lessons from past experiences and mistakes and develop capabilities to respond to new environments, including digital transformation."

As the saying goes, good medicine tastes bitter. For the government, construction companies, and the media representing them, this is a very bitter book.

(Order-Winning Miracles and Earning Shocks / Lee Sang-ho / Laeui Nun / 20,000 KRW)

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