Steering the Construction Industry from Red Ocean into Blue Ocean

20 August 2018

Steering the Construction Industry from Red Ocean into Blue Ocean

(Ir Dr. Pang Yat Bond, Derrick)

The construction industry is one of the few components which make up the “original capital” of Hong Kong and is my profession. The industry used to benefit from the economic take-off in China and across Asia because the demand for construction professionals in these regions was very high. Nevertheless, only a few local SMEs have successfully established footholds in the international market despite the increase in local construction services being exported to overseas. This shows that the construction industry in Hong Kong is lacking competitiveness and has hence failed to compete with their overseas counterparts.

The followings are the three major difficulties encountered by the construction industry market in Hong Kong at present:

1. The overall productivity of the industry is declining. The construction industry is aging and recruiting new blood is becoming more difficult than ever. More than 43% (about 200,000) of our construction workers are 50 years old or above; less than 15% (about 72,000) of our registered construction workers are 30 or younger. These figures are proof that the problem of having insufficient new construction workers persists and the shortage of workforce in certain trades can be expected.

2. The major infrastructure projects in Hong Kong are monopolized by a few large local and overseas companies. It is rather difficult for small and medium-sized contractors to enter the market. For instance, among the top ten infrastructure projects we now have in Hong Kong, the following contracts worth approx. $180 billion in total: the Hong Kong-Zhuhai-Macao Bridge, the Hong Kong Section of the High-speed Rail, the Liantang Boundary Control Point and the Shatin to Central Link. Even though our company is one of the participants in these projects, only 4.5% (about 8.4 billion dollars) of these contracts are won by wholly owned Hong Kong enterprises; only 11.8% (about 22.2 billion dollars) of them are won by joint ventures formed with either China or foreign corporations. The remaining 83.7% (about 157.80 billion dollars) are won by Chinese or foreign consortiums. Obviously, it is still quite difficult for local contractors to win large-scale infrastructure contracts.

3. Low-profit margin. When compared to other industries, such as finance and real estate, which I described at the beginning as the components of Hong Kong’s “original capital”, the profits made by the construction industry in Hong Kong are indeed quite low. In 2017, the average profit margin of the top 20 construction companies listed in Hong Kong was only about 2%, and the profit margin of my company was more or less the same. What is the explanation for this predicament when opportunities are everywhere in Hong Kong? I have come up with the following reasons: First, the approval of funding applications in recent years regarding government projects has been very slow as a result of filibustering in the Legislative Council. The situation is worsened by the government’s poorly-planned timetable for the implementation of projects, which results in a volatile project volume. Because of this, small and medium-sized contractors can only focus on how they can survive at this moment. Let us first put aside subjects like how resources should be used for the introduction of innovative technologies and enhancing productivity; the fact is: the industry does not even have enough resources to provide training and recruit additional workforce. As a result, our industry is lagging behind in both research and development as well as the development of technology and the overall competitiveness of the industry continues to decline.

Second, the government's scoring standards for construction project contracts are too conservative.  According to the system, scoring is based on tender price as well as a contractor's previous experience and performance in similar projects. My question is: for small and medium-sized contractors and start-up companies, how are they supposed to win large-scale government contracts with high entry thresholds by their previous experience and performance when it has always been difficult for them to even get a share in the market? If there is no way for them to be a player in the game today, where will they find the experience required for the submission of tenders in a market monopolized by a few large companies? This is the classic chicken-and-egg problem.

Lower Thresholds & Support Local SMEs

A vicious circle in the market is formed as the industry faces these two aforesaid problems. The profit margin of the entire construction industry, therefore, is quite low, and this is severely disadvantageous for its development in the long run. It is true that large-scale infrastructure projects are available, but they very often fall into the hands of overseas or Chinese companies. Some of these companies, such as Laing O'Rourke and Kier International, have left Hong Kong after completing their projects and therefore cannot provide long-term contributions to improve the industry.

For the current difficulties facing by the construction industry, I have three suggestions:

First, optimize the business environment. It is my suggestion that the government should, together with the industry, establish an environment that allows local small and medium-sized contractors and startups to enter the local market. Entry threshold for tenders should hence be lowered. And incentives should be provided to encourage cooperation between large contractors and small and medium-sized contractors as well as startups so that contractors of various sizes can grow together healthily while participating in projects. I also suggest the government to implement requirements for large enterprises from overseas, that they have to create joint ventures with local companies when they bid for Hong Kong contracts. This will provide opportunities for local companies to gain experience through participating in projects.

Local SMEs, in general, are courageous enough to "go global" and step into emerging market countries. Nevertheless, the legal and political risks they have to face in these countries are also comparatively higher. These companies are in great need of government support to lower their risks. It is my suggestion that the government should emulate foreign countries in terms of providing additional political and legal guarantee support to such enterprises. For example, in the event Hong Kong enterprises are unfairly treated when they do business in other countries, they can seek help directly from the Chinese Embassy and receive the same guarantee “domestic enterprises” can enjoy. In addition, I also suggest that the government should work with relevant insurance institutions, such as China Export & Credit Insurance Corporation, to look into the possibility of providing more favorable investment credit guarantee to such enterprises. Low-interest loans for SMEs that "go global" can also increase their competitiveness.

Second, optimize the system. At present, the industry is required to spend a lot of resources and time to contend with the government on each project. The massive amount of supervision tasks related to planning and scrutiny, as well as the submission of administrative documents, are both great burdens. My suggestion is: the government should optimize the existing procedures for examining and approving land development and projects. We can expect a more stable project volume and less filibustering in the Legislative Council if the whole process is simplified and the project planning timetable is improved.

At the same time, the government and the industry should establish a liability regime for construction industry professionals. Relevant departments can therefore, in an appropriate manner, relax their controls and complicated administrative procedures, so that our professionals can bring their professions into full play like doctors and lawyers while improving the efficiency and professional standards of the industry. But of course, professionals must bear their professional responsibilities.

Third, support enterprises to invest in new technologies. Apart from the "Construction Innovation and Technology Fund", the government and the industry should provide more funding as well as taxation and financing support to small and medium-sized contractors and start-up companies. These will increase the incentives for enterprises to invest in innovation and technology. The tender scoring system should also be optimized to increase the proportion of innovation and technology application as a factor of consideration. In addition, the government should put more effort into promoting cooperation between contractors and start-up companies and encourage them to try working together through launching pilot projects. For instance, the “New Engineering Contract” introduced in recent years can be applied to the industry extensively after the success of pilot projects.

In the past, the Hong Kong government often ignored the difficulties and suggestions of the industry because of the non-intervention policy and free market economy system she adopted. This has been an obstacle to the development of the construction industry in Hong Kong. The industry, in particular, has missed many opportunities in recent years when facing competition from neighboring cities, of which the governments offered proactive and promising measures. I hope that the government will listen to the industry regarding our difficulties and provide the right support we need.

 

Ir Dr. Pang Yat Bond, Derrick

(This is an English translation; the original article was published in Chinese in Apple Daily (A12) on 2 August 2018)