growth reimagined - pwc · 2015-06-03 · order to resume growth.’ arup group is also looking...

Growth reimagined Engineering & Construction industry summary

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Key industry findings from the 14th Annual Global CEO Survey

2 14th Annual Global CEO Survey

Engineering & Construction industry summary

The PwC 14th Annual Global CEO Survey documents a surprising level of confidence in this environment; chief executives are nearly as confident of growth this coming year as they were in the boom years before the crisis. The survey also revealed where CEOs see growth coming in 2011, and how they are going to achieve it. In ‘Growth reimagined: Prospects in emerging markets’, we show how CEO confidence is being driven by targeted investments in particular emerging markets – often far from home.

We also identified three strategic focal points to achieve that growth: innovation, talent and a shared agenda with government. These three business imperatives have always had their place on the CEO agenda. But now, with their worst fears about the crisis behind them and an emerging recovery ahead, CEOs are adopting new attitudes and approaches, tailored to dealing with the issues of the multi-speed global recovery that they hope is underway.

This is a summary of the findings in the engineering & construction (E&C) sector, based on interviews with 77 E&C CEOs heading construction and building products companies in 36 countries. To explore the full results of the 14th Annual Global CEO Survey, please visit www.pwc.com/ceosurvey

The global economy is still recovering from the worst economic crisis in 75 years, as many countries grapple with the aftermath of the recession. So we set out to uncover how chief executive officers (CEOs) are approaching growth during a time when sustainable economic growth is far from certain. We surveyed 1,201 business leaders in 69 countries around the globe in the last quarter of 2010, and conducted further in-depth interviews with 31 CEOs.

Engineering & Construction industry summary 3

largest, providing around a tenth of total global GDP. And it’s highly sensitive to general economic conditions, so it’s not surprising that 74% of E&C CEOs are ‘somewhat’ or ‘extremely’ concerned that uncertain or volatile economic growth could derail their plans for expanding.

E&C CEOs are also monitoring a broad range of other macro-economic threats. Substantial public sector deficits are one big concern. Again, this is understandable, given that government projects represent a large proportion of overall construction activity. Concerns about whether highly-leveraged countries can refinance their debt and secure funding for capital programmes could make the business community more cautious about investing in new construction schemes or major renovations.

E&C CEOs are relatively confident this year; indeed, 44% are ‘very’ confident of achieving revenue growth over the next 12 months. That’s slightly less than the overall average of 48%, but it’s a marked contrast with the mood a couple of years ago when only 18% were very confident about the short-term prospects for growth (see Figure 1).

However, the degree of optimism E&C CEOs feel varies significantly, depending on where they’re based. The construction sector typically lags behind the economic cycle, and some regions are still struggling to shake off the recession. It’s no coincidence that, although only a few E&C CEOs are not confident at all, they are all based in Western Europe, reflecting the more subdued outlook there.

E&C CEOs are targeting the most promising opportunities with a discipline honed by the recession. Many are also refining their corporate strategies and keeping a wary eye on the overall economic situation. The construction industry is the world’s

Figure 1: CEOs’ confidence is back up – and E&C CEOs are no exception

Q: How confident are you about your company’s prospects for revenue growth over the next 12 months?

Base: All respondents. 2011 (Total sample, 1,201; E&C, 77), 2010 (Total sample, 1,198; E&C, 75), 2009 (Total sample, 1,124; E&C, 80), 2008 (Total sample, 1,150; E&C, 68)Note: Interviews for each year were conducted in the second half of the previous year, so 2009 interviews represent views from September-November 2008.Source: PwC 14th Annual Global CEO Survey

2008 2009 2010 2011

Total sampleE&C

Very confident about company's prospectsfor revenue growth over 12 months:

48%

31%

21%

50%44%

28%

18%

56%


Partnering will be important

There are a number of signs that E&C CEOs are thinking about restructuring. A substantial 87% say they are anticipating making some changes or major changes to their company’s organizational structure. Thirty-five percent are planning a merger or acquisition over the next 12 months, while 55% are planning to enter into a new joint venture or alliance.

Indeed, 21% – double the overall average – believe that joint ventures and alliances hold the most potential for ensuring future growth. That’s because the sector is changing. Philip Dilley, Chairman of UK-based Arup Group, believes there will be a greater emphasis on collaboration: ‘I think in the future we’ll see a lot more partnering, a lot more sharing, a lot more acknowledgement of the specialised skills of other firms. And that’s partly because there is going to be greater stratification in our industry’, he commented.

Targeting emerging markets

The International Monetary Fund predicts that growth rates for 2011 will still be sluggish for developed economies. But emerging markets are booming1 – and plans for massive spending on infrastructure in key countries like China and India translate into major opportunities for E&C companies. Much of the construction growth that takes place over the next 5-10 years is likely to happen in these markets (as well as in Asia Pacific more widely, Brazil and the Middle East), the need for additional investments in ageing infrastructure in developed countries such as the US notwithstanding.

Indeed, most E&C CEOs, like those in other sectors, anticipate that most of their companies’ growth will come primarily from emerging markets. They have high hopes of Asia, particularly China. The divide is striking: 82% of E&C CEOs with operations in Asia expect them to grow, whereas only 47% of those with operations in Western Europe are similarly optimistic.

Marcelo Odebrecht, CEO of Brazil’s Odebrecht, described the situation from his company’s perspective: ‘We are quite optimistic about what lies ahead of us. We do believe that most of the countries in Latin America, Africa and Asia will continue to grow steadily for the next few years, especially those that have done their homework and/or have plenty of natural resources. For its part, the US has always proved able to reinvent itself, and it does have the flexibility and pragmatism to keep doing so. My doubts regard Europe and its capability and even its willingness to change and do what has to be done in order to resume growth.’

Arup Group is also looking beyond Western Europe, ‘Historically, rebalancing has meant shifting our focus more towards infrastructure from buildings. And this matches today’s economic cycle where infrastructure opportunities are growing, and building opportunities are reducing. Geographically, rebalancing means greater activity outside of Western Europe and into the rest of the world, especially Asia’, Philip Dilley explained.

1 IMF World Economic Outlook (October 2010).

‘Today, we’ve become more strategic about what we do and where we operate in order to avoid becoming too reliant on any one market.’

Philip Dilley Group Chairman, Arup Group Ltd


Moving into new markets isn’t always easy, though. In fact, it poses special challenges for the construction industry, which has historically been dominated by national players. Foreign companies may be at a disadvantage in winning government contracts. Informal networks of contacts are also still very important to winning work, particularly in the key emerging markets of China and Russia, and local companies have a distinct edge in this respect. Furthermore, local players have a better understanding of contractual terms, the supply chain and how to engage with local clients.

Putting customers at the centre of innovation

CEOs in every sector are placing a higher premium on innovation today. For the past few years, they’ve typically concentrated on penetrating existing markets more effectively to generate

growth. Now they’re just as likely to be focusing on the innovation needed for new products and services.

E&C CEOs are no exception in prioritising innovation, although, unlike their peers in other industries, the main draw is process improvements. Sixty-two percent think that innovation will lead to significant new revenue opportunities, but a full 83% hope to gain a competitive edge from the efficiencies innovation can generate (see Figure 2). That’s because new techniques like using more mass production in the construction process, including offsite fabrication, can make construction quicker and cheaper. Seventy-four percent of E&C CEOs are also investing in IT, including Building Information Management (BIM) programmes which use three-dimensional, real-time dynamic modelling to speed up and coordinate design and construction.

Figure 2: E&C CEOs are looking to innovation to boost efficiency and drive revenues

Q: To what extent do you agree or disagree with the following statements about your expectations regarding your company’s innovation over the next 3 years?

Base: All respondents (E&C, 77)Note: ‘Neither agree nor disagree’ and ‘Don’t know/refused’ excluded.Source: PwC 14th Annual Global CEO Survey

1 60 23

1 53 23

10 43 19

1717 35 10

302612 3

We expect the majority of our innovations to be co-developed withpartners outside our organisation

We use M&As as a significant source of innovation

We expect government assistance (including financing, tax credits and/ortechnology transfer) to boost our innovation output

Our innovations will lead to significant new revenue opportunities

An important part of our innovation strategy is to develop products orservices that are environmentally friendly

Our innovations will lead to operational efficiencies that provide us witha competitive advantage

DisagreeDisagree strongly Agree Agree strongly

18 31 25 8

%

4

6

0


2 ‘New realities for construction: The comprehensive spending review', PwC and PinsentMasons (2010).

The E&C industry doesn’t have as strong a history of innovation as some other sectors. But innovation is absolutely vital to deliver and operate built assets more efficiently. In our recent paper on the impact of the UK Comprehensive Spending Review on the sector, we argued that innovation should go beyond design and technical issues.2 The very way in which projects are commissioned and procured needs to change – and newer, more modern methods and approaches will be required.

Philip Dilley describes one such change: the shift to value-based contracting. ‘Value is an issue of great interest to us at the moment because I believe we tend to bring more value to our clients than a time-related fee would reward. And so value-based contracting is something which we are pursuing more often and with some success. Value-based contracting is usually structured around success fees or some performance-based bonus arrangements’, he explained.

Many CEOs, regardless of the sector in which they operate, are also joining forces with business partners to drive innovation across the whole supply chain. Such efforts could make a particularly big difference to both construction and building products companies, as many E&C CEOs recognise: 45% anticipate that the majority of the innovations their companies produce will be co-developed with partners. However, there are big hurdles to implementing open innovation in the E&C sector, where the supply chain is often fragmented and partners change from project to project, or even midstream. In such circumstances, it’s all too easy for an innovation to get ‘lost’ along the way.

Greening the built environment

Some of the most promising opportunities for innovation in both the construction and building products sectors relate to the increasing drive to build more sustainably, and refit existing buildings to improve their environmental profile. Seventy-six percent of E&C CEOs think that developing environmentally-friendly products or services is an ‘important part’ of their companies’ innovation strategy (see Figure 2). More and more consumers and businesses want to build sustainably. Government is starting to get in on the act, too, with legislation cropping up around the world.

And this trend isn’t confined to developed markets. Philip Dilley explained: ‘The impact on us has been enormous because sustainability is of interest to our clients everywhere. All of them want to make sure that they are seen to have taken the principles of sustainability into account. China, for example, takes sustainability very seriously. Now, it is true that China is responsible for an increasing portion of the world’s carbon emissions, but at the same time, they’re putting much more effort into creating sustainable solutions than anyone else. They are serious about research into these areas and there’s a lot going on there. And I am delighted that our business in China is thriving as a consequence.’


Bridging global skills gaps

The ‘war on talent’ was declared more than 10 years ago, but few CEOs are prepared to declare victory. More than half of E&C CEOs expect to hire more people in the next 12 months, but they may have trouble filling open spots. Marcelo Odebrecht told us, ‘The large growth we are experiencing means that identifying and integrating the right people has been our major concern. In 2010 alone we have had to hire more than 30,000 new staff, taking our global headcount to 120,000.’

Labour mobility and demand for new skills are two key challenges. The limited supply of skilled candidates is also an issue for more than two-thirds of E&C CEOs. And given widely

varying standards for training and certification across countries, assessing the talent pool can be very complicated – particularly when a contract means it’s necessary to assemble a multinational team.

Cross-border contracts mean more expats on projects

As many E&C companies try to win more cross-border contracts, so it’s becoming more difficult to get the right people on projects. E&C CEOs are therefore stepping up their people strategies to cope: 64% are deploying more staff on international assignments (see Figure 3). But this is often difficult: 51% of E&C CEOs say they’re having trouble deploying experienced people globally.

Figure 3: Retention, skills, deployment figure highly in CEOs’ talent strategies

Q: To what extent do you plan to change your people strategy in the following ways over the next 12 months?

Base: All respondents (E&C, 77)Note: Points included are where more than 50% of E&C CEOs are planning changes. ‘Don’t know/refused’ excluded.Source: PwC 14th Annual Global CEO Survey

51 23

32 55 13

34 39 25

3644

Deploy more staff on international assignments

Incentivise younger workers (roughly age 16-30 today) differently than others

Increasingly recruit and attempt to retain older workers

Work with governments/education systems to improve skills in the talent pool

Use more non-financial rewards to motivate staff

Some changeNo change Significant change

48 38 14

%

26

19


Achieving shared priorities with government

For E&C companies, governments are often major customers. But many governments with large deficits are now drawing in their horns, so E&C CEOs are understandably pessimistic: 45% believe their revenues from public-sector contracts will decline (see Figure 4). This is more than twice the percentage for the full survey population – and highlights the extent to which the sector needs to find new solutions to fund major projects. It also probably reflects recognition that stimulus initiatives cannot be continued indefinitely, although some E&C CEOs can see a silver lining: 37% think that responses to public debt, such as a reshaped public sector and greater outsourcing, could actually present them with a strategic growth opportunity.

But it’s not just their home countries that E&C CEOs need to consider. As E&C companies expand across national borders, they expose themselves to more risk from other economies, too – a fact of which top management is well aware. Fifty-eight percent of E&C CEOs anticipate that public spending cuts or tax increases in other countries will slow down economic growth in their key overseas markets, compared to just 44% of CEOs in the full sample.

Indeed, international mobility is often an even bigger problem for E&C companies than it is for those in other sectors.3 In most industries, only a few expatriates will be sent to foreign subsidiaries or branch offices, or brought in to headquarters, at any given time. But, with major construction projects, it’s often necessary to mobilise a large team of in-house staff and external contractors – and many such projects are located in developing countries with a relatively weak infrastructure.

Keeping good people on board longer

We’ve argued before that greater sharing of good practices can help the industry cope. And we’ve talked about the need to focus not only on moving talent around, but on keeping it on board afterwards. Out of sight should not mean out of mind when it comes time for performance reviews and pay increases – particularly when the next project may also require an international move.

There are other ways of hanging onto the good people, too. Seventy-four percent of E&C CEOs are increasingly using non-financial incentives. These can take many forms, but often include training and mentoring programmes. And 52% are stepping up their efforts to keep valuable older workers – an especially important strategy in countries with ageing populations.

3 'International Mobility in the Engineering & Construction Industry: Analysis and insight on trends and best practice', PwC (2008).

Figure 4: E&C CEOs expect responses to public debt to stifle sales

Q: How strongly do you agree that your company’s sales to government will decline because of governments’ response to rising public debt?

Base: All respondents (E&C, 77)Note: ‘Neither/Nor’ and ‘Don’t know/refused’ excluded.Source: PwC 14th Annual Global CEO Survey

E&C

Total sample

Disagree strongly Disagree Agree Agree strongly

30 29 16

%

2523 614

13


Building the world’s infrastructure

Most CEOs, irrespective of the industry in which they operate, think that building a more robust infrastructure should be a top priority for governments in every country outside Western Europe and Japan (where the infrastructure is well developed) and China (where the central government has allocated almost US$ 600 billion of stimulus spending for infrastructure projects over the past two years). But private capital is also essential; the World Economic Forum recently estimated that the world needs to spend an estimated US$ 3 trillion per year on infrastructure in the coming decades.4 This is far more than the public purse can cope with, so governments everywhere will have to engage with the private sector and tap a range of funding sources.

Inevitably, E&C companies have a key role to play in making infrastructure investment happen, and many are also actively involved in helping secure the necessary funding. Our survey results suggest they’re taking the issue seriously: 48% of E&C CEOs are significantly increasing their commitment to improve infrastructure. Not surprisingly, that’s significantly more than the 19% of CEOs with such plans in the overall sample.

PPPs, in their varied forms, are one way in which the sector can work with government on infrastructure projects. ‘PPPs will take root in other countries because most countries don’t have a lot of spare cash right now’, Philip Dilley said. ‘We see substantial PPP activity already in European countries.’ He expects similar partnerships to evolve in India in particular – where 88% of CEOs told us the inadequacy of basic infrastructure was a threat to growth. The Indian government aims to increase investment in infrastructure to more than 9% of GDP by 2012.5

4 ‘Paving the Way: Maximising the Value of Private Finance in Infrastructure’, World Economic Forum (2010).5 Eleventh Five-Year Plan, Government of India Planning Commission (2008).

‘Through public-private partnerships, the private sector can also make possible certain investments with optimal allocation of risks and responsibilities. This enables the government to concentrate its investments in key social areas.’

Marcelo Odebrecht CEO, Odebrecht


Globalisation reimagined

CEOs’ shift towards a targeted strategy signals the advance of globalisation – but it may diverge from how it’s looked in the past. Companies are not only affected by globalisation; the actions they take will shape it. That 82% of E&C CEOs support ‘good growth’ is recognition that they would like to see globalisation evolve in a way that links economic growth and social

development. Good growth is a long-term path towards value creation that creates lasting prosperity for both shareholders and society. The E&C sector will be at the heart of that growth and has a lead role to play in ensuring that construction is cost-effective, makes best use of the world’s scarce resources and builds infrastructure and communities for the 21st century.


Jonathan Hook Global Engineering & Construction Leader +44 (20) 7804 4753 [email protected]

Erica McEvoy Global Industrial Products Business Development & Marketing +61 (3) 8603 4827 [email protected]

Contacts

Our CEO Survey coverage includes a full report, in-depth interviews, and a visual story of the data. Explore the entire story in the full report. Simply download at www.pwc.com/cesosurvey. To view other publications and learn about our Engineering & Construction industry practice, visit www.pwc.com/construction.

www.pwc.com/ceosurvey PwC firms provide industry-focused assurance, tax and advisory services to enhance value for their clients. More than 163,000 people in 151 countries in firms across the PwC network share their thinking, experience and solutions to develop fresh perspectives and practical advice. See www.pwc.com for more information.

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