Below are the first 10 and last 10 pages of uncorrected machine-read text (when available) of this chapter, followed by the top 30 algorithmically extracted key phrases from the chapter as a whole.
Intended to provide our own search engines and external engines with highly rich, chapter-representative searchable text on the opening pages of each chapter. Because it is UNCORRECTED material, please consider the following text as a useful but insufficient proxy for the authoritative book pages.
Do not use for reproduction, copying, pasting, or reading; exclusively for search engines.
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
OCR for page 39
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.
OCR for page 40
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
OCR for page 41
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.
OCR for page 42
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
OCR for page 43
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.
OCR for page 44
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
OCR for page 45
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
OCR for page 46
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
OCR for page 47
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.
OCR for page 48
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
OCR for page 49
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.
OCR for page 50
50 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
OCR for page 51
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
OCR for page 52
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:
OCR for page 53
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.
OCR for page 54
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: