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OCR for page 38
3
Competition in the Global Market
U.S. industry faces stiff competition in the international con-
struction market. Foreign firms in many countries enjoy strong sup-
port of coordinated government policies that encourage export of
services and enable these nations' firms to present a united front in
competition.
COMMON CHARACTERISTICS
The committee's experience and review of lirn~ted available doc-
umentation reveal several common characteristics of these national
policies. Outstanding features include central government leadership
and strong financial support.
Many countries have a primary agency that takes responsibil-
ity for construction policy. In most cases, particularly in Japan
and France, a government ministry at the cabinet level or a quasi-
governmental entity deals with both domestic and international con-
struction policy matters.
Collaboration within the full range of relevant organizations is
apparent and includes leadership representing financial institutions,
construction fimns, research organizations, educational institutions,
and development and export agencies in government. The compo-
sition of such policymaking groups reflects the comprehensiveness
38
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COMPETITION IN THE GLOBAL AŁ4RKET
39
of the policy formulation process and the depth and breadth of the
policy response.
Policies typically reflect a number of considerations. These in-
clude ramifications for using design services to gain follow-on con-
struction, the relationship of construction to follow-on equipment
sales, the relationship of construction to follow-on capital goods sales,
and operations and maintenance aspects as well as replacement parts
activity related to construction projects.
Policies also attempt to exploit national competitive advantage,
that is, in which parts of the world the national industries have the
most advantageous position and what elements of the competitive
package are their strongest. In some cases, this has led to ranking
technologies for further emphasis and investment and identifying
target areas of focus for national investment.
Studies underlying policy often include some specific considera-
tion of the nation's potential in the U.S. market. The U.S. market
remains the largest stable and open construction market in the world
(although the elimination of trade barriers in Europe's common mar-
ket will create a combined market comparable in size to the United
States). All of its Asian and European competitors have strategic
programs for penetrating the U.S. market.
SPECIFIC CASES
The specific policies of several countries are instructive.
Great Britain
The government of Great Britain openly and clearly provides
a number of mechanisms for supporting the efforts of British con-
struction and engineering firms to obtain work on overseas projects.
An Overseas Project Fund administered by the Department of Trade
provides direct subsidies. In this arrangement, the government puts
up a limited amount of financing to cover prebidding costs, with the
subsidized firm required to return about 20 percent to the govern-
ment if it is the successful bidder.
The government also engages in providing mixed credit,* us-
ing a "war chest" similar to that recently obtained by the U.S.
*Mixed credit is a means of reducing borrowing costs through provision of
government-backed loans at concessionary rates together with commercial loans
at market rates.
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40
BUILDING FOR TOMORRO W
Export-Import Bank. This war chest is almost always used as an
interest-balancing support and is obtained from British commercial
banks. The funds so collected and utilized are administered through
a governmental agency, the Overseas Development Administration,
which, in many respects, is quite similar to the U.S. Agency for
International Development. Requests for these monies from private
sector companies are channeled through the Department of Trade.
The British Export Credit Guarantee Department (ECGD) is
an institution which funds projects similarly to the U.S. Export-
Import Bank and the Overseas Private Investment Corporation. Its
resources are available for both engineers and contractors, and can
be used to finance capital goods purchases.
The British construction and consulting industry prospered in
the late 1960s and 1970s on projects in the Middle East, but with
the severe diminution of that market, the industry has been forced
to scramble for domestic work. Very few British firms have com-
peted for World Bank projects because of the lengthy bidder list
and because they are averse to the multilateral arrangements often
required. Most British firms are privately owned, and several have
made partnerships or other arrangements with U.S. counterparts,
especially in the housing market. On the other hand, a number of
the larger U.S. construction industry firms operate in the United
Kingdom, especially in connection with North Sea of] field projects.
Within the European community, the British have found it quite
difficult to obtain projects, because of many administrative barriers,
expectations of reciprocity, and no commonality of qualifications or
standards. The British currently view the United States as their
primary overseas target market.
The British have two organizations which, with governmental
acquiescence and assistance, greatly assist their design and construc-
tion companies. The first is the British Consulting Bureau, headed
by the Duke of Gloucester, which is active in developing such po-
tential project areas as the People's Republic of China and Africa.
Its member firms provide primarily engineering services, but also
consultant services in health, agriculture, and various development
disciplines. The second organization is the Export Group for the
Construction Industries, whose purpose is to encourage others to use
British construction companies on international projects. It, like the
bureau, closely monitors overseas intelligence reports on potential
projects, and receives strong support from the commercial sections
of British embassies. The organizations act as a central intelligence
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COMPETITION IN THE GLOBAL MARKET
41
point and disseminate the information to their members much more
rapidly and accurately than is done by the U.S. Departments of
Commerce and State.
France
The international activities of the French design and construction
industry are backed by a French Ministry of Construction concerned
with exports, construction economics, and global development. This
ministry deals with such matters as cooperation and coordination
among the construction firms in obtaining foreign projects and other
export matters.
The ministry has also posted 40 persons in French embassies
around the world, where they are considered to be investments in
future projects of the host nations. The present international em-
phasis of the French construction industry is on urban systems, such
as water, transportation, and nuclear power. There are also de-
tailed analyses by the involved trade associations as to future market
potential and concentration.
France has no specific government-sanctioned policies on inter-
national construction, but it does have an informal policy statement
and understanding with industry. The French policies are reported to
be based on an analysis that indicated the country receives a seven-
to ten-fold return on each investment made in design and engineering
projects in other countries. As in other countries, the French have
found that its international markets peaked in 1980-1982 and have
subsequently declined.
stem
The first major international construction project by the Italians
was a large dam in Zimbabwe, completed in 1956. By 1986 the
Italian international construction volume had increased to a point
where it stood third in the world, behind only the United States
and Japan. Italy, in recent years, has concentrated on obtaining
plant construction projects, rather than only civil works projects.
Its international construction projects have included a $1.3 billion
steeTworks plant in the Soviet Union, a power distribution station in
Saudi Arabia, a refinery in Greece, and the second Bosphorus Bridge
in Turkey. In 1986 the Italians were working on 240 construction
projects in 76 nations and 120 design contracts in 62 nations.
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42
BUILDING FOR TOMORRO W
Three major groups, which include both design and construc-
tion firms, dominate the Italian construction sector. These are
FIAT (through the Milan-based holding company Fiatimpresit); IR!
(through the Rome-based holding company Italstat); and the League
of Cooperatives. Among the top 50 Italian construction firms, 4 con-
tractors belonging to the FIAT group (the largest private company
in Italy) account for 15 percent of the total contracts; 6 firms be-
longing to TR! account for another 15 percent; and the 7 cooperative
contractors have about 12 percent.
One of the reasons for the Italians' success is their ability to main-
tain a lasting presence in various nations, including Africa, Turkey,
and Greece. Italian companies are fully competent to handle a wide
range of rather specialized jobs, and close cooperation exists between
the public and private sectors of the industry. The Italians have also
come to realize the vital importance of "financial engineering" and
to put forth proposals, both technical and financial, that are well
suited to the needs and capabilities of the developing nations.
The Association of Italian Engineering and Techno-Economic
Consulting Organizations (DICE, founded in 1966) represents its
members to national and international client organizations. The
efforts of OICE are directed at supplying clients with integrated
technical and complex interdisciplinary solutions to plants, infras-
tructure, and engineering works in general. These services are not
limited to technical and design services, but include organizational
management and financial expertise, applied to both infrastructure
and commercially oriented projects.
The Italians have Tong realized that to succeed in the interna-
tional arena, a basic element is successful financial engineering. A
major step was undertaken in 1977 when the Italian government or-
ganized a comprehensive and articulated program (the Ossola Law)
to provide Italian exporters with the necessary financial support
to compete successfully at the international level. However, Italian
companies are still finding it difficult to compete against the mixed
credit programs utilized by some other major nations. Thus, many
Italian contractor companies use the intervention of specialized Ital-
ian investment banks with experience in the export credit field.
Sweden
In 1973 the Swedish government embarked on an ambitious hous-
ing program. Its goal of providing decent housing for every Swedish
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COMPETITION IN THE GLOBAL MARKET
43
fondly called for the construction of 1 million houses per year for a
Midyear period. This volume increased the capacity of the construc-
tion industry well beyond the "normal" market volume of previous
years.
In 1983 a report of the Swedish Council for Building Research
entitled The Swedish Building Sector in 1990 set the foundation
on which the next 10 years of Swedish construction activity will
be based. The 1983 report concluded that a continued favorable
expansion of building programs would be possible provided there
is a substantial increase in expenditures on research, development,
experimental construction, and demonstration activity. Even though
construction has declined in recent years, it still represented 12.7
percent of Sweden's GDP, or $11.6 billion, in 1984.
A matter of concern in Sweden is the very Tow priority placed
on research and development to retain and further develop technical
competence. The Council for Building Research recommended that
substantial increases in research and development expenditures by
the government and the private sector over the next 10 years are
essential.
A number of areas were singled out for attention in this research
program:
the development of building technology;
satisfactory and economical property management;
energy conservation;
municipal planning;
higher housing quality; and
the role of the construction industry in the national economy.
The Swedish government supports technical research by the
building industry as well as by technological universities.
From 1968 to 1979, the value of the Swedish export surplus of
consulting services, construction abroad, and building materials in-
creased almost tenfold. At the time of the 1983 report, the export of
building materials and construction capability was of great impor-
tance to the Swedish economy, with about 100,000 people directly or
indirectly involved in this market. The Swedish firms that compete in
the international arena fee! their competitiveness in foreign markets
is often due to local ties and contacts in the host country (a per-
ception shared by all major international construction firms). The
Swedes are also convinced that companies exporting construction
services must, in general, be sizable to be competitive.
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44
BUILDING FOR TOMORROW
In Sweden there is a centralized point of contact for the con-
struction industry, the Ministry for Housing and Physical Planning,
which is involved in both domestic and international matters and
policies. One of its roles is to provide guarantees for international
construction activities in order to help Swedish firms compete with
other nations.
Japan
The design and construction industry of Japan is considered a
unique phenomenon in both its overseas operations and in its do-
mestic practices. For the past several years Japan has been of major
concern to the nations with which it competes in international mar-
kets. This perception, however, is probably distorted by the huge
export success Japan has had in such manufactured items as auto-
mobiles and electronics goods. There has been an assumption that
the same phenomenon was, or could be, occurring in the construction
industry. However, while Great Britain and West Germany each have
over 8 percent of the total international design market, Japan's share
in 1986 was only 6 percent, a nevertheless admirable figure in view
of the nation's relative size. The United States, with 30 percent of
the international construction market, competes as much with Italy,
France, or Britain as with Japan (see Tables 3 and 4~.
Japanese domestic policies on construction have been the source
of frustration and misunderstanding on the part of those nations who
wish to work in the Japanese market. The Kansai Airport project
has been a recent and large symbol of this frustration for the United
States. Despite apparent concessions, there can be but little doubt
that the Japanese government is determined to protect a major share
of such large projects for Japanese constructors.
In June 1987, the Economic Council of Japan issued a detailed
set of policy recommendations for Japan's Economic Structural Ad-
justments. One of the recurring themes is a concern that the eco-
nomic growth of Japan be truly reflected in the quality of life for
its citizens. For example, the report indicates that the present state
of the nation's infrastructure is considerably below that which the
overall GNP would indicate it could be. There is, therefore, a poten-
tial domestic market of rather sizable dimensions for the Japanese
construction industry. The council also recommends positive efforts
to ensure that foreign companies can do business in the Japanese
construction market, and expansion of the General Agreement on
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COMPETITION IN THE GLOBAL MARKET
45
Tariffs and Trade (GATT) framework to include design and con-
struction services.
As in the United States, Japan has a handful of construction com-
panies that dominate both the domestic and international markets
and literally thousands of mid-size and smaller firms whose market
is strictly domestic. The Big Six construction companies increased
their share of the international market from about 1980 to 1985, and
then their share began to decrease significantly. While the worId-
wide shrinkage of international projects was pivotal in the decrease,
another factor was a self-imposed retrenchment. A report entitled
Overseas Construction Basic Issues: Investigation Committee, spon-
sored in 1982 by the Japanese Ministry of Construction, emphasized
that "there are many problems related to the short history of our
overseas construction activities. Further development is expected to
yield a genuine service export industry. However, the road is not
necessarily smooth." Although this report on overseas construction
was compiled in 1982, it remains the main guidance for the industry
as a whole. There has not been a reason to revise or update it in the
ensuing five years, according to the Ministry of Construction repre-
sentative at the Embassy of Japan in Washington. Even though the
experience of the Big Six contractors with U.S. offices has been that
profits are poor to nonexistent, the companies do not dare, as yet,
abandon the U.S. construction marketplace.
India
In 1986 the Indian government set aside $1 billion for a three-
year period to boost its engineering sector, funded by a combina-
tion of World Bank loans matched by India's contributions from
both the government and private sectors. With the second largest
population in the world, there is potentially an enormous backlog
of infrastructure work required within the country. India's design
and construction firms, however, are more interested in working on
projects outside the country, acting as subcontractors or joint ven-
ture partners with firms from the larger developed nations. This
emphasis stems from two desires: technology transfer to the Indian
firms involved, and an increase in foreign exchange earnings.
India has no central authority for construction and engineering,
but these sectors are nominally under the purview of the Ministry of
Housing and Public Works. India has a number of engineering and
construction councils, most of which are private, that actively seek
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46
BUILDING FOR TOMORROW
projects both within India and outside the country for their member
companies.
The Soviet Union
The industrialization of the Soviet economy since the 1930s has
given designers and builders of plants and large civil engineering
projects the credentials required to work in the international arena.
Most of this work is in the less-developed countries, especially those
nations with large public sectors and socialist forms of government.
All design and construction activities of the USSR. are organized
within the mammoth agency known as Gosstroy. To export these ca-
pabilities the Soviets have formed about a dozen foreign trade orga-
nizations (FTOs) that are, in reality, large contractor organizations
with formidable capabilities. Although generally confining them-
seIves to proven Soviet technologies, the FTOs, on occasion, will
design new plants, equipment, and infrastructure for their clients.
For fundamentally simple phases of a given project, the FTO will
usually depend on the local contracting abilities of the client coun-
try for basic construction. However, for heavy equipment and other
more complex phases, the FTOs depend on their own sources of sum
plies, supplemented surprisingly and quite frequently with Western
equipment and material.
Since all foreign projects are viewed as ventures of great pres-
tige to the USSR, only the very best engineers and technicians are
sent abroad. Although complaints are often voiced in the Soviet
press concerning the calibre or slowness of domestic projects, these
complaints are seldom heard on foreign ventures, which are turn-
key type projects, with the project management subcontracted to
Austrian and Finnish companies. Of the 65 FTOs in the USSR,
the dozen that are allowed to engage in foreign projects have been
licensed to form joint ventures with Western firms and to purchase
supplies, technology, and equipment from Western suppliers.
Each FTO that engages in overseas projects has one basic spe-
cialty, with a number of other capabilities. These specialties in-
clude an FTO that is one of the worId's largest suppliers of power-
generating and transmission equipment, one that has built more than
600 industrial plants and communications facilities, one specializing
in infrastructure projects, and one that is expert in iron- and steel-
making equipment.
The magnitude of foreign activity may be judged by the fact that
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COMPETITION IN THE GLOBAL MARK13T
47
the USSR has signed agreements with 83 nations for economic and
technical cooperation. A total of 3,054 international projects were
completed between the end of World War IT and 1986. These projects
include 1,769 industrial enterprises and power-generating plants, and
329 agricultural projects.
U.S. RESPONSE TO COMPETITION
External economic forces have had substantial influence on how
U.S. construction has responded to international competition. The
high value of the U.S. dollar in international exchange has until
recently had particularly strong impact on this response. Abroad,
and at home, U.S. firms have appeared relatively more expensive
than their foreign competition.
The strong U.S. dollar between 1980 and 1985 served as a mag-
net for imported goods and investment. A series of major tax cuts
and increases in government spending during this period fueled a
strong recovery in the United States while other industrialized na-
tions consistently pursued slow growth policies. U.S. industry was
placed at greater disadvantage in both domestic and international
markets, with the result being stagnant exports and a rapid growth
in import penetration of the U.S. markets.
However, as economist Robert J. Samuelson wrote in the January
26, 1987, issue of Newsweek:
Real changes underlie our competitiveness anxiety. The United
States no longer enjoys unchallenged superiority in trade and technol-
ogy. Some of our supremacy was artificial: World War II destroyed
our most potent commercial rivals. Europe's reconstruction restored
this competition. The spread of technology, modern education and
multinational companies to Japan and the developing world created
new competitors. Reversing these trends is impossible. A competitive
vision that reinstates the United States sitting astride global markets
is pure nostalgia.
Nevertheless, the examples reviewed here illustrate that the
United States has been slower than many of its competitors to de-
velop national trade and economic policies in support of international
engineering and construction. While industry and trade groups have
been vocal in reporting the practices they face in the global market,
the industry lacks both central representation in national policy dis-
cussions and the means to pull together diverse public and private
interests to present a unified competitive front.
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48
BUILDING FOR TOMORROW
In addition, there are specific problems. Foreign policy consider-
ations can make U.S. firms unacceptable in a country after substan-
tial investments have been made in market development. The U.S.
Foreign Corrupt Practices Act (FCPA), enacted by Congress for im-
portant ethical reasons, hampers the ability of U.S. firms to conform
to local business and cultural standards. Competition from other
countries not subject to such regulation can put American firms at a
disadvantage in business negotiations.
Other more specific disincentives are found in U.S. policy:
. Income tax requirements for U.S. citizens working abroad
impose a greater burden than those of other countries, making it more
costly to provide incentives needed to attract high o,,alit~v n~r~Onn~1
to foreign assignments.
. Double taxation occurs on design work performed in the
United States for overseas projects, because foreign corporate taxes
on imported engineering services may not be deducted from U.S.
earnings.
--a-- -~---~ rip ~^
. U.S. antiboycott laws that conflict with the boycott laws of
other countries restrict opportunities open to U.S. firms.
The previously described activities of the U.S. Trade and Devel-
opment Program, Export-Import Bank, and Overseas Private Invest-
ment Corporation provide valuable but severely limited assistance to
U.S. design and construction firms seeking to provide competitive
financing for projects. The increasing importance of finance has en-
couraged U.S. firms such as Bechtel, Fluor, and Kellogg to form
consortia with British, French, German, and Japanese companies:
. Bechtel associated with American, French, and Japanese sup-
pliers and export finance sources for the $450 million Rio Zulia to
Covenas pipeline and associated facilities constructed for Ecopetrol
and Occidental in Colombia.
. The Fluor Company built a pipeline for the Petroleum Au-
thority in Thailand (PTT) as part of a consortium that included the
four largest steel producers in JaDan. with Nine nr~vidPH he t.h"
Bank of Tokyo.
~0 ~v ^^ _
. The Kellogg Company developed a cooperative agreement
with the West German firm Thyssen to undertake a $1 billion aro-
matics project in Indonesia.
U.S. companies bring specialized technological skills and man-
agerial expertise to these consortia, while their partners provide the
financial support through their own government agencies, which can
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COMPETITION IN THE GLOBAL MARKET
49
provide money and guarantees to support the export of services, ma-
terials, and equipment. Indeed, these specialized technicalskilIs have
been the source of U.S. competitive advantage in the past, although
this advantage is not exclusive, as the work of Shimizu with IBM
illustrates (Case Study 3~.
American companies still are generally given high marks for their
abilities in design, engineering, project management, and the opera-
tion and maintenance procedures for facilities. U.S. firms still lead
the world in the design of process plants for the petroleum and petro-
chemical industry, as well as the technologies of chemical plants and
power stations. The nation leads in the use of computer-aided design
and drafting techniques, and the use of computer-based tools for con-
struction management, scheduling, and inventory controls. However,
the present shortage of large projects around the world reduces the
advantage of this management know-how as price becomes increas-
ingly decisive in client decisions. Of greater Tong-term importance is
the concern of industry leaders that other countries are catching up
with and passing the United States.
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BUILDING FOR TOMORRO W
CASE STUDY 3:
SEIMIZU MEETS IBM'S NEEDS
In the spring of 1986, IBM faced its greatest construction chal-
Jenge in more than a decade. Its prime semiconductor development
and manufacturing facility in East Fishki]], New York, neecied a
new technology center of approximately 300,000 square feet. Ant]
occupancy was required in less than two years.
The new Advancer] Semiconductor Technology Center (AS TC)
was described by operating management as an important milestone,
playing a rode in the future of IBM and its ability to remain competi-
tive in the development and manufacture of advanced semiconductor
products. The statement of requirements called for levels of environ-
menta] purity en c] vibration resistance never before achieved within
the company. IBM management wanted the new building to be the
best in the world.
Design and construction of the new building would be the respon-
sibiJity of the Real Estate and Construction Division (RECD), which
began a search for an outstanding semiconductor facility design firm.
In view of the considerable accomplishments of Japanese companies
in the design and construction of semiconductor facilities-including
an IBM plant in Yasu, Japan RECD considered two Japanese firms,
Shimizu and Ohbayashi. RECD management also considered several
U.S. design and engineering firms for the project.
IBM recognized that considerable clevelopment studies would be
required ciuring the design stage and that close coordination would
be required between the design and construction people.
RECD representatives visited Shimizu facilities in Japan in the
late spring of 1986; they came away favorably impressed with what
they had seen and learned.
Shimizu is over 180 years old and one of the five largest design
and construction companies in Japan with annual sales of over $6
billion. The company has offices in the United States, including a
New York City location. Most of the work Shimizu had clone here
had been for Japanese companies with U.S. operations.
Shimizu has an annual research and cleveJopment (R&D) budget
of $60 million, which is I percent of annual company sales. This is
typical of major Japanese design and construction firms. In contrast,
RECD found only limited research at either design or construction
firms in the United States. At Shimizu, 630 people are engaged
in R&D work on systems development, product technology, infra
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COMPETITION IN THE GLOBAL MARKET
51
structure engineering, intelligent buildings, construction automation,
robots, and clean room design.
Shimizu* work in clean room design and vibration prevention
was particularly noteworthy, and applicable to semiconductor facil-
ities. Shimizu hac] achieved class 1 capability for particles of 0.5 to
0.3 microns in size. A considerable amount of the R&D activity was
in testing filters. The firm had a large vibration table to concinct
seismic tests on structures from which it developed state-of-the-art
designs.
The RECD team also reviewed Shimizu management systems for
planning, cost estimating, scheduling, and project control, which are
very similar to those used by U.S. construction companies. A con-
struction job was also observed. Shimizu is basically a construction
company. It will construct a design prepared by another firm, but
would not produce a design to be constructed by another company.
RECD also reviewed the often discus working conditions at East
FisEki]] with Shim~zu.
RECD then recommended to senior IBM management that
Shimizu be hired to design and construct the ASTCproject. Manage-
ment agreed, and in July 1986 Shimizu began working with an RECD
engineering team. The goad was to develop a design concept based
on the IBM requirements and design criteria. Shimizu established
a base of operations across the street from RECD's headquarters in
White Plains, New York.
Overall, the working relationship between the IBM and Shimizu
teams went well. There were Jangu age and cultural differences to
overcome; however, as the participants worked together, sound mu-
tua] respect was developed. IBM was very impressed with the ski]]
and dedication of the Shimizu designers. They often worked "round]
the clock" to answer questions (an expedient in view of the time dif-
ference between the United States and Japan). Also, work in support
of the U.S. team was done at Shimizu 's R&D facilities in Japan. The
turnaround time on most of this work was excellent. In the area of
administration, the design contract took much longer to negotiate
than a like contract with a U.S. design firm because of the unfa-
miLarity of the people with each other. Also, some difficulties with
Shim~zu's billings were experienced by IBM because of the absence
of supporting detail.
Shimizu and IBM spent considerable effort on cost estimates, the
mutual definition and understanding of costs, and the negotiation of
the cost of work. Shimizu's initial cost of construction work was
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52
BUILDING FOR TOMORROW
about 10 percent more than the IBM budget. By working closely
together, IBM and Shimizu came to a project cost agreement in the
summer of 1986, which was reiterated in November 1986.
In the early stages of design, Shimizu hired a U.S. architectural
engineering firm, Gibbets Associates, Inc., of Southfie]d, Michigan to
share the design work. Gibbets was chosen in part by Shimizu because
of knowledge of conditions, local codes, and working practices at East
FisEkilI, where during the prior five years the U.S. firm had design ec!
many facilities. Although Shimizu provicled the design direction, a
considerable amount ofthe work was done by Gibbets. Shimizu also
set up a liaison team in Giffeis offices.
The Shimizu design hac] a strong bias toward] initial cost effec-
tiveness in contrast with future lower maintenance costs. Life-cycJe
cost appeared] to be a lesser consideration. Overall, the design work
proceeder] well although the working drawings fed] behind schedule.
In November 1986, Shimizu hired Huber Hunt & Nichols (HHNJ,
Inc., Indianapolis, as genera] contractor on the construction of the
building. Shimizu chose HHN because ofthe successful work the firms
had clone together on other U.S. projects, plus HEN* familiarity with
working in the East Fish bill area. Although as of that date IBM and
Shimizu had a contract for the design work only, it was the intent of
both parties that Shimizu would manage the construction phase.
Sufficient design had been compietec] to begin the construction
work of gra<:ling, footings, and foundations. In December 1986, a
groun~lbreaking ceremony was he'll.
The first schedule dif iculties arose in January 1987, when 50
percent of the working drawings were clue for bidding purposes; only
15 percent of the drawings were complete. Nevertheless, the subcon-
tractor bidding process began. On February 2, Shimizu reiterated
the budget cost which hac] been agreed to in 1986. On February 13,
Shimizu anal IBM o~ci~s met at RECD headquarters in Stamford,
Connecticut. Shimizu said that the project's cost of construction
had increased by nearly 40 percent-over the cost of record. They
could not explain the cost increase except to state that it was based
on inputs of the genera] contractor and subcontractors. The initial
occupancy schedule Late had also slipped. Inasmuch as IBM had not
changed project requirements, the new Shimizu cost was rejected by
IBM.
A month later, IBM, with inputs from Shimizu and others, was
able to define the reasons for the cost increase, which can be sum-
marized as follows:
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COMPETITION IN THE GLOBAL MARKET
53
~ Shimizu seemed to experience clifficulties in working with
the subcontractors in the East F`sEkil] area. In Japan, much work
is done on not much more than a handshake between the parties.
Here, the subcontractors appeared apprehensive about working for
a foreign contractor. The language and custom differences, which
were overcome by Shimizu, IBM, and Giffels during the design work,
coulc! not be surmounted] during the comparatively short bidding
cycle. The role of HHN in the bidding was less than one would
expect of a genera] contractor.
~ Shimizu seemed to have limited confidence in U.S. specialty
products, manufacturers, and supplies. Their designers wished to
.
specify many Items trom Japanese suppliers with whom they had
extensive experience.
~ Shimizu seemed to expect that U.S. client companies such
as IBM would approve the budget cost increase, trusting Shimizu*
efforts as the best possible.
It should be notes] that Shimizu accepted the East Fishkill area
labor practices, productivity levels, and so on as a given, whereas
IBM believed a fresh approach based on the Japanese mode] could
yield some improvements here, as has been the case in the automotive
industry. IBM was also disappointed that Shimizu 's guarantees went
no further than HEN* guarantees, which in turn were baser] solely
on the inputs of the subcontractors.
Intense negotiations with Shimizu failed to result in a cost de-
crease. Therefore, IBM requested that Shimizu complete the design
and act as a consultant during construction, but not as the construc-
tion manager.
Shimizu continued with design completion while IBM began
intense negotiations with U.S. contractors to clo the construction.
These negotiations were successful, and the project was awarded
to Walsh Construction Company of Trumbull, Connecticut. The
project cost is now within the IBM buclget, albeit at a higher number
than the origin e] Shimizu contract en c] with less contingency. The
project will be undertaken on a phased basis in view of the schedule
delays that were experienced. (Shimizu does not recommenc] this
approach as it is more diflicuit to guarantee project quality.}
Initially, Shimizu watt reluctant to act as a consultant because of
its corporate policy not to contract for design work without act uaIly
managing the construction. However, ultimately IBM and Shimizu
signed a consulting agreement. IBM* practice is to retain the design
firm to support the construction.
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54
BUILDING FOR TOMORRO W
The value of an IBM/Walsh/Shimizu relationship during con-
struction is that the involvement of Shimizu wild better ensure that
the project is built per the plans and specifications. Shimizu wild
gain vaJu able experience in the U.S. market, and Walsh will have the
benefit of a quality-oriented associate with an intimate knowledge of
the design.
Representative terms from entire chapter:
construction industry
