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2 U.S. Construction in International Competition The U.S. construction industry has fared poorly in this diffi- cult climate of stagnant markets en c! growing competition. A more detailed Took at the structure of the U.S. industry and some of its principal competitors in international markets reveals erosion of traditional technological advantages and failures to keep up in devel- oping the skills needed for competition. Available data indicate that U.S. construction firms in 1986 captured $22.6 billion in new contracts, almost 31 percent of the international export market (see Table 3~. This amount represents a decline of more than 40 percent in sales dollars since 1982. U.S. design firms (engineers, architects, and construction man- agers whose markets are driven by construction) working internation- ally often provide some advantage for U.S. construction firms. These firms garnered $917.8 million in 1986 billings, about 26 percent of the market (see Table 4~. Again, these figures represent a sharp decline from 1982, when U.S. firms captured 36 percent of a market made fat by the spending of prosperous oil-producing countries. THE U.S. INDUSTRY The small number of U.S. firms competing in the global mar- ket are generally very large employers (by construction industry standards) and are key players in the international competition. 23

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24 BUILDING FOR TOMORROW TABLE 3 International Construction Shares, 1986 Nation of Number TotalAwards Contractor of Firms $BillionPercentage American 43 22.630.6 Japanese 29 9.412.7 Korean 14 2.63.5 European 126 33.745.5 Italian 35 7.410.0 French 18 7.19.6 British 17 7.09.5 German 17 5.57.5 Yugoslavian 6 1.41.9 Swiss 5 1.31.7 Dutch 7 1.11.5 Other 21 2.93.9 Turkish 9 2.23.0 All other 29 3.44.7 Total 250 73.9100.0 Source: Engineering News Record, July 16, 1987. Note: Data are based on voluntary responses to a survey. In 1983, U.S. firms involved in international contracting employed 45,000 Americans and 99,000 people of other nationalities. Domestically, the construction industry consists of many small firms that respond to externally determined demand!. Consolidations are taking place across the industry, with foreign investors buying large interests in some firms, and still other firms are closing shop. Some people believe that these consolidations and mergers are an attempt by the marketplace to sort the industry into two broad categories: the all-purpose firms (not unlike their Japanese coun- terparts), and the specialized "boutiques" (small, but highly spe- cialized). Overlying this restructuring of the industry is a constant struggle with a litigious society in which each party to a contract has found itself confronted in a court of law. In such a climate, too many organizations devote energies and management structure largely to minimizing risks, rather than building new markets or applying innovations.

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U.S. CONSTRUCTION IN INTERNATIONAL COMPETITION TABLE 4 International Design Shares, 1986 Nationality of Designer Number ,Forei~n Billing of Firms $Million Percentage American 49 917.825.9 European 106 1,958.455.3 British 26 481.413.6 French 15 306.38.6 Gennan 21 282.18.0 Dutch 8 259.37.3 Scandinavian 11 227.16.4 Swiss 8 174.74.9 Other 17 227.96.5 Canadian 14 204.05.8 Japanese 12 220.56.2 Korean 4 54.01.5 All other 15 185.15.3 TOTAL 200 3,539.9100.0 Source: Engineering News Record, August 6, 1987. Note: Data are based on voluntary responses to a survey. A Short Historic Perspective 25 Until the Industrial Revolution, construction remained little changed from Roman times. Stone, brick, and timber were used for buildings, and infrastructure was rudimentary. By the end of the nineteenth century, a "second generation" of essentially urban inventions (structural steel frames, the elevator, electrical systems, sewer and water systems, indoor plumbing, cen- tral heating, the telephone, the automobile and highway, and the subway) was ready for worldwide diffusion and installation. Most of the world's construction industry known today came into being to integrate these inventions into individual communities. After World War ~ and the subsequent boom and bust periods of the 1920s and 1930s, construction capabilities increased to include the building of national highways, large reclamation projects, and dams for water control and power production. The U.S. Army Corps of Engineers and the Bureau of Reclamation played major roles in shaping and managing such projects. As the country matured so did the industries of construction. At the end of World War IT, the physical restructuring of the

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26 BUILDING FOR TOMORROW worId's cities, many of which had been destroyed or damaged by the war, was aided by such major government programs as the MarshaH Plan and President Harry ~uman's Point Four program for Third World countries. The devastated urban areas of the European conti- nent, the Soviet Union, the Middle East, North Africa, many islands in the Pacific, China, Korea, and Japan were much in need of "con- struction" and "reconstruction." The United States alone retained relatively undamaged physical facilities, an economic base, and the resources to aid in this global program. During the war, the United States had created the impressive organizational capacity of the mil- itary construction arm of the Army Corps of Engineers and the Navy Seabees. With the development of multinational corporations, which became clients for construction projects in other countries, a further incentive was added for other U.S. design and construction firms to move into the international arena. A "military" component to the Marshall Plan included the place- ment of U.S. military bases on foreign soil to counter the perceived Soviet threat. Most of the physical infrastructure for these mili- tary bases was originally built by the engineering elements of the U.S. armed forces, who were soon superseded by a number of the larger and more aggressively profit-motivated private sector design and construction firms. U.S. engineering and construction firms were employed by European industry to undertake much of the reconstruc- tion work for the private sector as well. In turn, a parallel effort was begun by European firms who were reentering the market following a period of dormancy during the war, and who were adopting many of the techniques and much of the equipment of their U.S. counterparts. This pattern persisted throughout the 1950s and 1960s, in both military and civilian sectors, first in Korea and then in Vietnam. The phenomenal growth of the South Korean construction industry can be attributed in large part to the close working relationship between the Corps of Engineers and its South Korean counterpart. The Koreans were rapid learners and within a few years had put together a number of large and capable construction companies. These companies became especially prominent and successful in the latter days of the construction boom in Saudi Arabia, and became a very lucrative source of foreign income for Korea. To a much lesser extent, the same pattern was followed in Japan and Taiwan. The case of Saudi Arabia, and to a lesser extent other oil- producing nations, in the 1970s is a special one and not likely to be repeated. Oil and of! pricing made available an unprecedented

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U.S. CONSTRUCTION IN INTERNATIONAL COMPETITION 27 amount of capital to Saudi Arabia and its neighbors for imports and construction projects. The Saudis had enjoyed a close relationship with the United States since the early phases of Aramco and dur- ing World War IT. Because Saudi Arabia did not have any of the requisite technological capability or project management expertise, its national leaders turned to the United States. The result was major participation by U.S. engineering and construction firms- such as Bechtel, Fluor, and Ralph Parsons in contracts for plan- ning, civil and mechanical engineering design, and some construction management. The U.S. Army Corps of Engineers, familiar with large-scale projects, was designated the overall project manager for many military-related projects, working very closely with the Saudi Arabian authorities. Practically all design and engineering projects were awarded to U.S. design firms, since U.S. specifications were being used. The construction projects were open to international competition. Early involvement in a project usually increases the odds of later work for the design and engineering team (see box), but American design teams cannot ensure that the construction phase will go to American firms when public funding is used. Once the actual construction is under way, the products used in the building can be purchased from a country other than the home country of the design team. In the past few years the Trade Development Program within the U.S. State Department has provided critical funding for a large number of feasibility studies by U.S. design and construction firms. The financial support is given to those firms whose projects show the prospect of a major return to the economy if they obtain the contract. Market Structure Construction, the largest industry in the United States and the major employer, is a relatively disaggregated and volatile market that responds to interest rates and levels of general economic activity. The industry's 1.2 million firms undertake more than $360 billion in contracts each year and employ 5.5 million workers. When the suppliers of materials, machinery, insurance, and design services, and the operation and maintenance of all constructed facilities are added to this total, the overall industry accounts for 17 percent of the U.S. work force. Construction has traditionally made up some 55 to 65 percent of the nation's capital investment.

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28 BUILDING FOR TOMORROW

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U.S. CONSTRUCTION IN INTERNATIONAL COMPETITION TABLE 5 U.S. Construction Market by Sector, 1985 (in $billions of new construction) Market Sectors Federal Industry b Informationa Information Residential Office and commercial Institutional Hotels and motels All other private Subtotal 159 159 60 60 10 10 7 7 8 85 8 85 Industrial 16 54 Electnc power 16 20 Other utilities 17 17 Subtotal 49 91 State and local government 50 50 Federal government 12 12 Total 355 397 aU.S. Census Bureau data. bConstruction Industry Institute (CII) adjustments to data, based on the knowledge of their members. The CII estimates are larger for the industrial market sector and the electric power sector because of enforces accounts, that is work done by the employed staff of industrial firms and therefore not publicly bid or counted in census data which are largely based on records of building permits. 29 The design and construction industry is organized around market sectors that are widely different in terms of the type of customer, the method of financing, the work force used, and even the level of technology. Table 5 presents a common way of indicating these market sectors. The "residential" (housing) design and construction sector is primarily made up of smaller independent builders. The largest home builders and developers in the United States have no more than $2 billion of this $159 billion market. The balance of the business is conducted by the thousands of firms with fewer than 100 employees. The manufactured housing industry has grown to capture a larger share of this market since World War IT (29 percent of the

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30 BUILDING FOR TOMORRO W market in 1980), but still is confined largely to housing units mar- keted at the lowest end of the price spectrum (82 percent of all housing units sold for under $50,000 in 1983~. For several reasons the housing sector of the U.S. industry has almost no experience in international markets: . The small size of most companies limits available funds to explore markets in other countries; . Home building technology is based primarily on wood-frame construction, which is not the case in the rest of the world; . Housing programs in most other countries are largely in- fluenced by their governmental policies, and are not open to the speculative building characteristic of the United States. The sectors termed "office and commercial," "institutional," "hotels and motels," and "all other private work" are influencer! by the availability of a combination of land and financing packages. In recent years a large amount of investment capital from other coun- tries has been placed into this sector. For example, the Los Angeles Times indicates that 75 percent of the large, downtown once build- ings in Los Angeles are foreign owned or controlled, which is up from 25 percent just eight years ago. As will be discussed, such investment sometimes brings with it foreign constructors. The heavy-construction sector ("industrial," "electric power," and "other utilities") generally involves the work of large firms, many of which participate in the international arena. Foreign heavy- construction firms, which tend to be large in size, are now looking to this area in the Uniter] States as a source of market growth. The federal, state, and local government sectors generally attract firms that concentrate on government work because of the special marketing skills, and sometimes special political visibility, needed to gain work from governmental units. While government contracting requires open bidding, it is not always possible or desirable for many construction firms to bid on such work. Architectural and engineering firms do not bid on government work (although from time to time there is pressure from legislators to have them do so), but qualifying for consideration on government design awards takes a very different business strategy than getting design contracts in the private sector. In general, the markets for work with government clients have become increasingly price-competitive, reducing some firms' ability to invest in new technology.

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U.S. CONSTRUCTION IN INTERNATIONAL COMPETITION TABLE 6 Major U.S. Contractors Working on a Global Basis (in $million), 1986 Construction Contracts Foreign Total Company The M. W. Kellogg Company, Houston, Texas The Parsons Corporation, Pasadena, California Bechtel Group, Inc., San Francisco, California Brown and Root, Inc., Houston, Texas Lummus Crest, Inc., Bloomfield, New Jersey Foster Wheeler Corporation, Livingston, New Jersey Fluor Daniel, Inane, California Santa Fe Braun, Inc., Alhambra, California Stone and Webster Engineering Corporation, Boston, Massachusetts Jacobs Engineering Group, Inc., Pasadena, California Kaiser Engineers, Inc., Oakland, California Dillingham Construction Corporation, Pleasanton, California Fru-Con Coloration, Baldwin, Missouri Kiew~t Construction Group, Inc., Omaha, Nebraska 5,085.0 3,823.3 3,439.0 1,818.3 1,760.0 1,219.0 985.3 630.0 428.0 275.5 267.7 169.3 159.5 147.2 Note: Of the total global construction market of $73.9 billion (available for bids from outside of client country), 43 American firms obtained $22.6 billion (30.6 percent). The 14 firms shown in this list had more than 90 percent of the U.S. volume. 31 6,945.0 6,408.9 7,079.0 3,540.6 2,335.0 1,847.0 6,075.3 710.0 1,625.6 982.3 945.5 1,121.6 672.5 1,262.5 Market segmentation and the preponderance of small firms pre- clude much of the U.S. construction industry from international business. Of the top 400 U.S. contractors listed in Engineering News Record in 1987, 54 are involved significantly in international compe- tition. The 14 largest firms account for more than 90 percent of U.S. construction work abroad (see Table 6~. Forty percent of the 500 largest U.S. design firms are involved in international work. The 22 firms listed in Table 7 were responsible for more than 85 percent of the work. Construction Machinery The United States has about 800 construction machinery pro- ducers, many of which export (or manufacture abroad) machinery to about 150 foreign countries. The primary markets are Canada, Saudi Arabia, Australia, and many nations in Western Europe. The large producers have quite extensive dealer networks around the world, both for sales and service.

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32 BUILDING FOR TOMORRO W TABLE 7 Principal U.S. Design Firms Practicing on a Global Basis, 1986 International Billings $30 million or more Louis Berger International, Inc., East Orange, New Jersey Daniel, Mann, Johnson, and Mendenhall, Los Angeles, California DeLeuw, Cather and Company, Washington, D.C. Gibbs and Hill, Inc., New York, New York Harza Engineenng Company, Chicago, Illinois Holmes and Narver, Inc., Orange, California Metcalf and Eddy, Inc., Wakefield, Massachusetts Morr~son-Knudsen Engineers, Inc., San Francisco, California Under $30 million Black and Veatch, Kansas City, Missoun CRS Simne, Inc., Houston, Texas Camp Dresser and McKee, Inc. Boston, Massachusetts Dames and Moore, Los Angeles, California A. Epstein and Sons, Inc., Chicago, Illinois Gilbert Associates, Inc., Reading, Pennsylvania Frederick R Harris Inc., New York, New York Lester B. Knight and Associates, Inc. Chicago, Illinois Charles T. Main Inc., Boston, Massachusetts Pacific Architects and Engineers, Inc., Los Angeles, California Parsons, Bnnckerhoff, Inc., New York, New York Skidmore, Owings and Merrill, Chicago, Illinois Sverdrup Corporation, St. Louis, Missouri Williams Brothers Eng~neenng Company, Tulsa, Oklahoma aAE = architect/engineer; EA = engineer/architect; and CE = consulting engineer. ~BAA-~ Note: Of the total global volume of $3,543 million in design fees available to design firms from outside the client country, 49 American firms captured some $917 million (25.9 percent) of this total. The 22 firms shown on this list were responsible for more than 85 percent of the U.S. share. Services CE AE EA EA CE EA EA CE EA AE CE CE EA EA EA AE EA EA EA AE EA CE The value of U.S. exports of construction equipment was at its peak of $6.3 billion in 1978 and has declined steadily to about $2 billion today. Similarly, U.S. employment in the equipment industry reached its peak in 1979 at about 175,000 workers and has declined by two-thirds. Caterpillar Tractor Company of the United States is the world's largest construction machinery producer, with Komatsu, Ltd., of Japan following. There is at present substantial excess capacity in the world's construction equipment industry, and cost-reduction

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U.S. CONSTRUCTION IN INTERNATIONAL COMPETITION 33 measures, more efficient and less costly manufacturing methods, and other similar measures are being undertaken by the producers. While price competition will probably remain the dominant factor in the industry, investments in research and development may yield fu- ture advances. For example, the development of more automated equipment extending the range of weather conditions under which construction is possible may be forthcorn~ng. FOREIGN FIRMS IN THE U.S. MARKET The U.S. construction community faces a new challenge in terms of both cooperation and competition. With the general slowdown in other parts of the world, design firms and contractors from other countries see the very large American market as an attractive way to maintain or increase their business opportunities. As Case Study 2 illustrates, companies from Europe, Japan, and South Korea have been developing working arrangements in this country for some time. In the five years from 1978 to 1982, the number of foreign design and construction firms entering the U.S. domestic market grew an- nually at rates of almost 8 percent and 13 percent, respectively (see Table 83. Revenue of foreign firms in the United States increased TABLE 8 Foreign Design and Construction Firms in the United States Category Number of U.S. Affiliates 1978 1980 1983 Design and engineering services Construction 40 53 58 45 70 82 U.S. Income to Foreign Owned firms ($millions) 1978 1980 1983 Design and engineering affiliates669694892 Construction affiliates European1,1423,8965,394 Canadian61243144 Japanese245081 Other3174151,308 Construction total1,5444,6046,927 Source: U.S. Commerce Department, Bureau of Economic Analysis. Note: By 1985 the Japanese construction volume in the United States had increased to more than $1.5 billion, making Japan's penetration of the U.S. market the most dramatic.

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34 BUILDING FOR TOMORRO W during that same period at an annual rate of 35 percent. Japan's volume has shown stunning growth, reaching more than $~.5 billion by 1985. While total foreign work in the United States is only about 2 percent of the domestic market, it ~ concentrated in the large and technically complex areas of work that have been the mainstay of U.S. international business. Experts in the field find the situation alarming.

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U.S. CONSTRUCTION IN INTERNATIONAL COMPETITION CASE STUDY 2: JAPAN'S ONBAYASHI GUMI: DOING CONSTRUCTION IN THE UNITED STATES FOR 20 YEARS 35 In the early 1920s, the California-basec! F]uor Corporation in- vited executives of a Japanese construction company to America to study acivancecl U.S. construction technology. Today, this company is back, bringing advanced Japanese construction technology with it. Over the past 20 years and more, Ohbayashi Corporation has built clams, tunnels, offices, and residential projects in the United States. Founded in 1892 by Yoshigoro Ohbayashi, the company has been among the Big Five Japanese construction companies, which include KaJima, Taisei, Shimizu, and Taken aka Komuten. (Today, with Kumagai Gumi, they are the Big Six.) Ohbayashi is among the world's most experienced dam builders. Its finisher] clams number in the sixties. It has been a leader in the development of ro]Ier-compacted concrete dams, as wed as the use of deep concrete cut-offwaRs to con trod subsurface seepage. Ohbayashi spends significant sums of money on research and development. It has one of the finest research facilities in Japan, the Ohbayashi Technical Research Institute, where the firm deve]- ops clean rooms for hospitals and semiconductor factories; super- strong concrete for nuclear reactors; concrete for use in underground continuous walk; computer software for complex engineering ca~cu- lations, analyses, and simulations; polymers that prevent cave-ins; energy conservation systems; and other technologies. The firm has developed a dynamic suspension method that substantially mitigates damage to a building during an earthquake. Ohbayashi has built a reputation for modifying existing techno]- ogy to fit the job at hand. For example, it replaced the shied on its tunnel boring machine with a backhoe-]ike excavator on a major project in Phoenix, Arizona. Ohbayashi's adaptation of the New Austrian Tunneling Method (NATM) improves on that technique. The NATM process uses rock bolts driven into the circumference of the tunnel to provide rein- forcement. Concrete ~ then sprayed on the tunnel waR with an Ohbayashi-deveJoped concrete distributor robot. Ohbayashi did its first work outside Japan in Cambodia, bui]~- ing an agricultural center. since then, it has done much work in Southeast Asia, including bui] OCR for page 23
36 BUILDING FOR TOMORROW for technical supervision of construction work on the Shanghai Inter- nationa] Airport Ohbayashi came to the United States in 1966, opening an office in Honolulu, Hawaii, and registering to do construction there In the same year, it began construction of the Surfrider Hotel in Waikiki as a construction manager The hose] was finisher! in 1969 It also built the Princess Kaiu~ani Hotel in Honolulu, which was completed in 1970 Both hotels had Japanese owners, and the genera] contractors under construction management by Ohbayashi were Americans In 1972, a subsidiary company, Ohbayashi Hawaii Corporation, was estab~ishecl to engage in read estate rleveJopmerlt in Hawaii Since 1972, this fully owned subsidiary has been cleveloping read estate com- piexes throughout the islands Also in 1972, Ohbayashi came to the West Coast and established its wholly owned Ohbayashi America Corporation (OA C), a genera] contractor, in Los AngeJes OAC is currently involves] in a Jow-income housing complex for the Los An- geles City Redevelopment Authority and is developing a Jarge-scaie shopping centerin the Little Tokyo area OAC's major local affl]i- ates are 2975 Wilshire Company, for office rental management, and James E Robert, Inc. for condominium en c] apartment development in northern California In 1974, after two years in Los Angeies, OAC won a hose] con- struction contract, Kyoto Inn, located in San Francisco The owner, Kin tetsu, also owns a Japanese railroad company Following the ho- te] project, OAC undertook banks, offices, restaurants, and housing contracts, mostly for Japanese clients In 1976, Ohbayashi participated in developing a ~arge-scaie resi- dentia] complex near Seattle, Washington This was a joint venture with Tokyo Corporation The 11,000-acre site in Mill Creek includes a golf course, shopping center, and 3,200 housing units In 1979, Ohbayashi Corporation formed a joint venture with a local company to bid for a San Francisco sewage tunnel project, the first U S public work Ohbayashi was to undertake Expertise in soft ground, using the earth pressure balance shield] tunneling method, led to success in biclding on this project The method cut costs substantially, compared to alternative methods The owners were the city and county governments of San Francisco Ohbayashi's San Francisco office became its headquarters for heavy construction in the United States and in 1981 the heavy division successfully bit] the Strawberry Tunnel in Utah, a federally funded project In 1982 a New York City office opened, and in 1984 it won the

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U.S. CONSTRUCTION IN INTERNATIONAL COMPETITION 37 construction contract for a 17-story building for a Chinese maritime company. In 1985, Ohbayashi established a subsidiary in the Southeast named Citacie] Corporation, headquartered in Atlanta. This was established from scratch, staffed and operated by Americans. An open-shop (i.e., nonunion) contractor, Citade]has been activein the region, completing five projects. The stafl.is American; the ownership is Japanese. In 1986, Ohbayashi was selected as a construction manager for the big Toyota manufacturing plant in Kentucky. It is the largest project Ohbayashi has undertaken in the United States, entailing supervision of five American genera] contractors. In 1987 the company beat U.S. competitors to win construction of tunnels for flood run-off in San Antonio, Texas. Japanese personnel in U.S. Ohbayashi offices tote] 30 to 40 peo- pie. Some have studied engineering or management in this country. Eiji Noma, genera] manager in New York City, who studied at the University of Chicago in the late 1960s, says it is more diBicuit now to get Japanese profession ads to work in the United States. It is no longer their "hardship post" with perquisites and bonus pay, but rather an expensive place to live when paid in dollars, no better than living on yen at home. "That gap of income has narrowed, while hardships never lessened," says Noma. Still, every year four or five Ohbayashi people come to stubbly in the United States, usually in the heirs of engineering or management. An Ohbayashi manager states the company* U.S. business ok jectives succinctly: J . To satisfy tradition e] Japanese clients needing commercial or industrial buildings in the United States. To serve the needs of its Japanese clients is more important than to make money here. . To compete and to do joint ventures with Americans for heavy construction work where Ohbayashi may have useful tunneling or dam-building expertise. In 1986 Ohbayashi contracted for $226 million worth of construc- tion in the United States.