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Building for Tomorrow: Global Enterprise and the U.S. Construction Industry (1988)
Commission on Engineering and Technical Systems (CETS)

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Introduction The prominent role of construction in the wealth of nations is readily apparent in the buildings and infrastructure facilities that enable much of modern life. Leaving aside the related industries that produce and transport the materials and equipment of construction, new building accounts for roughly 9 percent of the Gross Domestic Product (GDP) of the United States and employs 5.5 million peo- ple, making the industry the largest single component in national accounts. Comparisons among nations show that construction tends to account for an increasing share of GDP as per capita incomes rise in early stages of growth, and dominates investment in countries at all levels of development. Given the scale of construction and its associated design, ma- terials, and equipment businesses within the U.S. economy, there is a surprising lack of detailed statistics and definitive analysis of this sector's structure, performance, and contribution to the nation's growth and development. Knowledge of the construction industry in other countries is poorer still. a The Committee on the International Construction Industry found it necessary to rely on its members' experience and accounts told by others to supplement the meager base of statistical data. The committee found in some cases that these accounts taught informa- tive lessons and made them the basis for the case studies presented herein. 10

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INTROD ACTION 11 The committee's work reveals a picture that is somewhat impres- sionistic in nature, based on a combination of these limited statistical data and case studies. The committee found, nevertheless, a need for changes in education, support for research, and enthusiasm for innovation in the construction industry. These changes are needed to enhance both the nation's ability to capture major new opportunities from technological progress that seems likely to after in basic ways the physical infrastructure of society, and its competitive strength in an increasingly global market for construction services. THE SCALE O1? WORLD CONSTRUCTION Estimates based on governmental records indicate that the world invests about $1,430 billion every year in the construction of housing, other buildings, civil works, and utilities (highways, water and sewer, railroads, telephones, gas, and electricity), or a little more than 10 percent of the worId's GDP (see Table 1~. Actual amounts may be even greater. Construction is the largest industry in the world. As individual countries develop, rising per capita incomes spur growing demand for more and better buildings and infrastructure, and construction accounts for an increasingly significant share of national economic activity. Some evidence suggests that construc- tion's share of economic activity may stabilize or decline at higher levels of development, but the level remains high even in the most advanced country. The U.S. annual domestic construction volume of $330 billion to $390 billion is about 25 percent of the worldwide total. Much of the worId's construction is done by small-scale builders who produce single houses or maintain roads over small areas, using very traditional building materials and methods. Only perhaps one- fifth of the total volume of construction is consistently carried out by large-scale organizations using more modern methods, as well as traclitional methods that remain predominant in current practice. Much of this submarket is in turn limited by political and eco- nomic reasons to domestic firms or government agencies using local materials, labor, and design and management services. Total con- struction undertaken in a fully internationally competitive market in 1986 exceeded $74 billion, or about 5 percent of the worId's con- struction (see Table 2~. This market, while only a fraction of total construction, is nev- ertheless a big business and it is dominated by a relatively few major

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12 BUILDING FOR TOMORROW TABLE 1 Comparative Statistics on Building as a Component in National Economies, 1984 Building Value GDPa Percentage Total Country ($million) of GDP ($million) Source Low-Income Economies Ethiopia4,270 3.0128 Bangladesh12,320 5.0616 UN Mali980 3.029 Zaire4,700 3.0141 13url;ina Faso820 3.025 Nepal2,290 7.0160 UN Burma6,130 3.0184 Malawi1,090 3.033 Niger1,340 3.040 Tanzania4,410 3.0132 UN Burundi1,020 4.041 UN Uganda4,710 3.0141 Togo420 8.034 UN CentralAfrican Republic460 4.018 India162,280 5.08,114 UN Madagascar2,380 4.095 Somalia1,364 4.055 Benin900 4.036 UN Rawanda1,600 4.064 Cl~ina, People's Republic of281,250 4.011,250 Kenya5,140 5.0257 UN Sierra Leone900 4.036 Haiti1,820 4.073 Guinea2,100 4.084 Ghana4,485 4.0179 Sri Lanka5,430 7.0380 UN Sudan6,730 4.0269 Pakistan27,730 5.01,387 UN Senegal2,390 4.096 Afghanistan3,000 5.0150 UN Bhutan3,000 4.0120 Chad360 4.014 Laos, People's Democratic Republic of765 4.031 Mozambique2,000 4.080 Vietnam18,100 4.0724 Total, Low-income economies 25,216 Middle-Income Economies Mauritania 660 4.0 26 Liberia 980 7.0 69 UN Zambia 1,060 4.0 42 UN Continued

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INTROD ACTION TABLE 1 (Continued) 13 a Building Value GDP PercentageTotal Country($million) of GDP ($million) Source Lesotho360 4.0 14 Bolivia3,610 5.0 181 UN Indonesia80,590 6.0 4,835 UN Yemen Arab Republic2,940 5.0 147 Yemen, People's Democratic Republic of792 4.0 32 Cote d'Ivoire6,690 9.0 602 UN Philippines32,840 19.1 6,272 CICA Morocco13,300 5.0 665 Honduras2,840 5.0 142 UN ElSalvador4,070 5.0 204 UN Papua New Guinea2,360 5.0 118 Egypt, Arab Republic30,060 5.0 1,503 UN Nigeria73,450 5.0 3,673 Zimbabwe4,580 3.0 137 UN Cameroon7,800 5.0 390 Nicaragua2,830 3.0 85 UN Thailand41,960 5.0 2,098 UN Botswana990 5.0 50 UN Dominican Republic4,910 5.0 246 Peru18,790 2.0 376 UN Mauritius860 5.0 43 Congo People's Republic2,010 5.0 101 Ecuador9,870 7.0 691 UN Jamaica2,380 5.0 119 Guatemala9,400 5.0 470 Turkey47,460 5.0 2,373 UN Costa Rica3,560 5.0 178 Paraguay3,870 5.0 194 Tunisia6,940 5.0 347 UN Colombia34,400 4.0 1,376 UN Jordan3,430 12.0 412 UN Syrian Arab Republic15,930 5.0 797 UN Angola4,000 5.0 200 Cuba14,900 6.0 894 Korea Democratic Republic23,000 6.0 1,380 Lebanon5,300 6.0 318 Mongolia1,200 5.0 60 Total, Middle-income economies 31,857 Upper-Middle-Income Economies Chile 19,760 6.0 1,186 Brazil 187,130 5.0 9,357 UN Portugal 19,060 11.4 2,173 CICA Continued

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14 BUILDING FOR TOMORRO W TABLE 1 (Continued) a Building Value GDP PercentageTotal Country($million) of GDP ($million) Source Malaysia29,280 6.0 1,757 Panama4,540 6.0 272 Uruguay4,580 5.0 229 UN Mexico171,300 15.5 26,552 CICA Korea, Republic of83,220 9.4 7,789 CICA Yugoslavia38,990 11.0 4,289 UN Argentina76,210 6.0 4,573 South Africa73,390 6.0 4,403 Algeria50,690 6.0 3,041 Venezuela47,500 7.0 3,325 UN Greece29,550 9.0 2,660 UN Israel22,350 10.0 2,235 UN Hong Kong30,620 7.0 2,143 Trinidad and Tobago8,620 8.0 690 UN Singapore18,220 23.9 4,355 CICA Iran Islamic Republic157,630 5.0 7,882 Iraq27,000 5.0 1,350 Total, Upper-middle-income economies 90,259 High-Income Oil Exporters Oman 7,680 8.0 614 UN Libya 30,570 11.0 3,363 UN Saudi Arabia 109,380 15.0 16,407 UN Kuwait 21,710 3.0 651 UN United Arab Emirates 28,840 10.0 2,884 UN Total, High-income oil exporters 23,919 Industrial Market Economies Spain 160,930 8.0 12,874 UN Ireland 18,270 9.0 1,644 Italy 348,380 11.4 39,715 CICA New Zealand 23,340 4.0 934 UN United Kingdom 425,370 8.5 36,156 CICA Belgium 77,630 7.0 5,434 CICA Austria 64,460 28.0 18,049 CICA Netherlands 132,600 13.0 17,238 CICA France 489,380 11.3 55,300 CICA Japan 1,255,006 23.3 292,416 CICA Finland 51,230 10.0 5,123 CICA Continued

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INTROD ACTION TABLE 1 (Continued) 15 Building Value GDPa PercentageTotal Country($million) of GDP($million) Source Germany, Federal Republic of613,160 14.085,842 CICA Denmark54,640 10.05,464 CIGAR Australia182,170 12.021,860 Sweden91,880 12.711,669 CICA Canada334,110 12.040,093 Norway54,720 12.06,566 United States3,634,600 9.0327,114 Census Switzerland91,110 14.713,393 CICA Total, Industrial market economies 996,887 East European Nonmarket Hungary 20,150 12.02,418 UN Poland 75,410 11.08,295 UN Albania 2,700 11.0297 Bulgaria 56,400 8.04,512 UN Czechoslovakia 127,900 8.010,232 German Democratic Republic 163,700 7.011,459 UN Romania 117,600 10.011,760 UN Soviet Union 1,957,600 11.0215,336 UN Total, East European nonmarket 264,309 World Total 13,027,922 1,432,447 aGross Domestic Product. Note: Data are from United Nations' (UN) reports, the Swedish industry report (CICA), and the U.S. Census Bureau. firms. More than half of the work (in dollar volume) is done by the top 30 contractors. In the United States, which may have a higher proportion of moderately sized firms than other countries, 200 firms (about 1.7 percent of all U.S. constructors) conduct about 85 percent of the business. THE CHANGING MARKET The need for construction of new facilities combined with poorly developed domestic construction industries has made developing countries the primary locus of international competition in the past.

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16 BUILDING FOR TOMORROW TABLE 2 Summary of Estimated Market Structure for International Construction Market Segment Annual Amount (U.S. $billion) Estimated total construction worldwide Small scale and restricted Modern method and management Restricted or communist bloc projects International construction market Foreign contracts of top 30 constructors Remaining international construction market 1'430b 1,140 290b 216b 74c 44C 30b bFrom United Nations' data and surveys. (See Table 1.) Committee staff estimates. CInternational construction week, En~neer~n~ News Record, July 20, 1984. The economic upheaval of oil and commodity price fluctuations and growing debt burdens, however, has slowed construction growth from the average of 6 percent annually between 1967 and 1976 to 1.5 per- cent in 1983. Construction of large and technically complex projects has come to a virtual standstill in many countries. Some countries are beginning to show signs of slow recovery, but without question the international market remains constricted. At the same time, larger numbers of firms are competing in this limited market. These firms fall into four categories. First, some firms (typically British, French, Dutch, and Scandinavian) have long experience with construction export and extensive contacts through- out developing countries. This experience has been fostered largely by economic and political opportunity. As a result of former colo- nial ties, for example, the French construction industry has special access to many countries in West Africa and the Middle East, and the British construction industry to the subcontinent of Asia, South- east Asia, the Middle East, and East Africa. To some degree the United States has enjoyed such a relationship with Saudi Arabia. The markets these relationships provide are sensitive to changing economic and political environments, but give these firms a distinct competitive advantage.

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INTROD ACTION 17 The second category includes firms based in industrialized coun- tries that have not previously been substantial exporters of construc- tion, but in the past 10 to 15 years have initiated efforts to export their surplus domestic capacity. In countries such as Italy and Japan, reconstruction efforts following World War I] created extensive con- struction industries to meet domestic needs. Such demand is now dropping off sharply, and considerable surplus construction capacity exists in their domestic industries. Companies from these indus- trialized countries are operating under conditions similar to those of American firms. They have a highly developed technology base, they have sophisticated management and technology products, their financing capability is considerable, and their architectural and engi- neering fees are comparable to those of the United States. The nature of the competition among these countries is based on the quality of technological ability and the adequacy of financing. Scheduled re- moval of trade barriers among nations of the European Economic Community (the EEC, or Common Market) will give these firms a domestic market comparable to that of the United States, and competition may be intensified. Firms based in newly industrialized countries, such as Korea, Brazil, Taiwan, Turkey, India, and the Philippines, constitute a third form of competition. These countries have developed construc- tion capacity as an element of their national economic planning and have invested in export construction capability as a means of rais- ing export income. Firms in these countries are characterized by a developing but limited technical capacity and by relatively Tow wages. Advanced technology is typically available by license or other arrangement. However, their fundamental basis for competing in in- ternational markets is essentially low price, both for construction labor and for professional services. Management skills and techno- Togical capability are increasing in these countries at a very rapid rate. There are now few projects upon which the national construc- tion industries of these countries cannot bid competitively. However, where sophisticated technology is required, there continues to be a strong incentive to involve European, Japanese, or U.S. contractors. Firms based in the developing countries constitute a fourth group of competitors, but they currently do not have the capability to pose a serious commercial threat in world markets. However, in many developing countries emphasis is being placed on the development of a basic local construction industry for import substitution. This

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18 BUILDING FOR TOMORROW emphasis reduces hard currency expenditure for goods and commodi- ties that can be provided domestically, and in many such countries has provided a vehicle for gradual increase in technological capability and labor skills, and investment in industrial capacity. In these coun- tries there is often a strong effort to protect this domestic industry (organizations such as the World Bank have institutionalized a pol- icy preference for utilizing the developing country's own sources of construction). Many developing countries that previously provided opportunities for foreign construction companies are no longer open to the international market. While the number of U.S. firms that compete in this global mar- ket is small compared to the total number of firms in the design and construction business, these firms are generally very large em- ployers (by construction industry standards) and are key players in the international competition. Unlike its foreign competition, the United States has been slow to develop national trade and economic policies in support of international engineering and construction. In this country there is no central policy-coordinating agency for con- struction, in contrast with much of the rest of the world, where there is a cabinet-level officer who heads a ministry of construction or its equivalent. Domestically, the construction industry is largely decentralized and generally in a defensive mode. Consolidations are taking place across the industry, with foreign investors buying large interests in some firms, and other firms are closing shop. The design community now finds mergers and acquisitions with firms from other countries commonplace, especially for those firms that became visible by com- peting in the international arena. While some companies established leadership through control of technology valuable to manufacturing firms that are clients for construction (see Case Study 1), most U.S. international construction companies have grown from an initial spe- cialization in one of the following market segments: electric power generating facilities, highways, mining, refinery facilities, and large dams. Regardless of their origins, however, these firms maintained leadership through technology developments and management skills that are increasingly shared by competitors.

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INTROD ACTION CASE STUDY 1: TECHNOLOGICAL ADVANTAGE PAYS OFF: M. W. KELLOGG AND THE OIL AND PETROCHEMICAL INDUSTRY 19 U.S. construction firms have reaped over several decades the benefits of the nation* technological leadership in industry. Some U.S. builders simply followed their Jong-time domestic manufacturer clients who moved abroad in a quest for larger markets and supply sources. Other firms have player! a more active rode in developing the technology that opened market opportunities in countries seeking to expand their industrial bases. Since its formation in the first year of this century, the M. W. Kellogg Company has reiiec] on experienced mechanical and chemical engineering techniques and laboratory research and development to grow as an engineering contractor by creating and improving new processes for the of] and petrochemical industry. A sm a]] pipe fab- ric a tion an c] ch imn ey b u sin ess so on e vo] vet] in t o p ower pipin g. Th e company began experimenting with a new hammer-forge welding technique it learned from German industry, en c] subsequent deve]- opment work improved the methods used, providing the basis for entrance into the petroleum field. Approached by Richard Fleming in 1919 to develop a new of] cracking method, Kellogg hired the inventor and developed his pro- cess. Fleming units were installed at several of] refinery units, provid- ing much higher gasoline yields than with con ventiona] equipment. In the early 1920s of] refineries were converting only 30percent of their crude of] to gasoline, and the heavy demand for motor gasoline dictated a need for higher recovery. The answer came in 1924 with the introduction by the Cross brothers of a new high-pressure thermal cracking process. Under a special agreement, Kellogg was brought in to help develop the process, anal for this purpose a laboratory was set up in 1926. One of the first petroleum laboratories in the country, its studies resulted in the successful commercialization of the Cross process. In the 10 years following, Kellogg built more than 130 Cross units in the United States en c] abroad. Twenty Cross units were built overseas: five in Argentina; three in England; two each in Japan, Poland, and the Dutch West Indies (Aruba); and one each in Brazil, France, Inclonesia, Italy, Mexico, and Portugal. The Cross process development was followed by further ~leveJop- ment of thermal processing technology. By 1939 some 45 percent of the crude of] could be converted to motor gasoline.

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20 BUILDING FOR TOMORROW To study the thermal cracking process in more detail, Kellogg set up a new laboratory in 1931 especially for that purpose. This research work and the related process and mechanical engineering design produced the combination unit concept that made an important contribution tothermaicracking progress. This design was a first step in process integration for improved economy and gave an early impetus to continuous plans process design and larger, more efficient of] refineries. In cooperation with major of] companies, Kellogg's knowiecige of catalytic processing grew toward a major accomplishment the technical development of fluid catalytic cracking of gas oils. Pre- Iiminary studies in this field were a part of an exploratory research program cosponsored with Standard Oil of New Jersey, Standard Oil of Indiana, and the Texas Company. A separate laboratory was established for this work, and by 1938 Kellogg had in operation a continuous fluid moving bed catalytic cracking pilot plant and be- gan an exchange of information that led to the commercialization of the process. The origin e] idea for using a powdered catalyst came from Stanciarc! Oil of New Jersey, and Kellogg turned its attention to placing this unique concept in practical application. In 1941 fluid catalytic cracking was drafted into war service to satisfy the great need for aviation gasoline before the process had gone beyonc! the pilot plant stage. Kellogg placed its first fluid unit in operation in 1942 for Standard Oil of Louisiana at Baton Rouge en c] had 20 units in production when the nation's aviation gasoline program ended in 1944. These early units were built essentially from Kellogg pilot plant data. Paralleling the pioneering activities in the petroleum area were technical contributions in the field of cryogenics and gas processing. This began in 1937 with a study on oxygen generation to be used in a process producing hydrocarbon liquids from coal. This early research and clevelopment work led to the construction in South Africa of the world* first successful Jarge-scaie plant producing synthetic of] and gas from coal. These research and engineering activities provided strong tech- nica] positions in gas processing, synthetic fuels, and ethylene pro- duction. The extensive basic work carried on through the years has provided a large share of Ke]Iogg's domestic and in tern ationa] business over the past several decades. Since 1975 when Kellogg was eighteenth on the Engineering News Record (ENRJ annual list of 400 contractors (the ENR 400J with a

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INTROD ACTION 21 tote] contract volume of $1 billion, Kellogg has increased its business volume substantially. The company headed the list of the ENR Top 250 International Contractors for 1984, 1985, en c! 1986, with tote] contract volumes in the range of $10.9 billion (19849 and $6.9 billion (19869. The foreign contract volume as a percentage of the tote] during these three years was 60 to 80 percent. This improvement in business volume is believed to be largely attributable to the competitive edge gained through the achievement of strong technical positions in several proprietary processes such as synthetic ammonia, ethylene, and Iiquified natural and petroleum gas processing. These processes were developed and improved over many years through the continuing activities in Kellogg research and development laboratories and chemical and mechanical engineering groups. Certainly the proprietary position in these processes has contributed in large measure to the high-percentage volume of inter- nationa] business. Perhaps Kel~ogg's most impressive technical achievement was the more recent development and commercialization of a radically new process plant that makes possible the production of ammonia in large quantities at significantly reduced cost. The new approach in- corporated earlier process and equipment design developments such as higher steam reforming pressure, lower ammonia synthesis pres- sure, and the use of steam-driven centrifugal compressors instead of reciprocating compressors in a]] major services. AI] of these design innovations resulted in greatly improved energy efficiency. Operating costs were reiluced appreciably by generating super-heater! steam at elevated pressures and using the steam in a series of efficient extrac- tion steps involving both process users and steam turbine drives for a]] major pumps and compressors. The first two plants of the new large-scale singe-train ammonia plant design were sold to Imperia] Chemical Industries (ICp in Eng- Jand. Within one year, 10 more 600- and 1,000-ton-per-day plants were ordered in Europe, including a third duplicate 1,000-ton-per- day plant for [CI. In the United States, a 600-ton-per-day plant was placed in service in July 1965 for Monsanto in Louisiana, and within one year three more Jarge-scaJe plants were brought on-stream in Louisiana and Mississippi. These plants cut the cost of producing ammonia in half and sent producers off on a mayor round of new plant expansion worldwide. Between 1963 en c] 1983 the Kellogg worldwide record in Jarge- scale ammonia plants numbered 132, of which 83 are in production

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22 BUILDING FOR TOMORROW outside North and South America. These plants now supply more than half the worId's synthetic ammonia, the principal base material for most fertilizers. A significant technical and comrnercia] breakthrough was also made in the Peopie's Republic of China through the sale of Ke]Iogg's ammonia and urea technology in the early 1970s. Following the signing of the famous Shanghai Communique of 1972, Kellogg set in motion a marketing program in the fail of the year. China's need for nitrogen was we]] known and Kellogg volunteered to submit a proposal. The initial proposal was rejected because of some open cost features, and a Jump sum proposal was later accepted for one ammonia plant. This agreement was followed by a surprising request for two more plants, and a contract for the three plants was signed in June 1973. Concurrently, the Chinese were negotiating with a Japanese firm for ammonia plants using Kellogg technology. The Japanese received contracts for two plants, providing the Chinese with an excellent benchmark in negotiations with Kellogg, but at the same time giving the company addition e] revenue for ammonia design know-how. An even greater surprise fo]]owec] with a Chinese request for five more ammonia plants, and contracts for these plants were signed in November 1973. At about the same time as the ammonia plant negotiations were uncier way, Ke]Iogg's Dutch company completed contract negotiations for eight urea plants that use the ammonia and carbon dioxide prorluce~l in the ammonia plants at eight different sites in China. The contract value of Kellogg ammonia and urea work in China represented about $500 million in business.

Representative terms from entire chapter:

international construction