Varela, Lee, Metz & Guarino (VLMG)

Issues for Contractors Amid Globalization of the Construction Industry

ยป Posted June 26, 2014Brian DugdalePublications

by Brian R. Dugdale, Partner

 

 “This is a very exciting time in the world of information. It’s not just that the personal computer has come along as a great tool. The whole pace of business is moving faster. Globalization is forcing companies to do things in new ways.”  -- Bill Gates

 

Companies are innovating, and must continue to do so, in an ever-changing globalized marketplace. Contractors, suppliers, engineers, consultants and architects involved in large scale commercial construction have considerable challenges ahead of them to stay competitive in today’s global market—and considerable opportunities to thrive. This article discusses briefly some of the impacts of globalization on the construction industry and presents several broad issues for companies to consider as they attempt to remain strategically positioned for success amid globalization.

 

The Construction Industry is Global

Author Thomas Friedman famously describes globalization as “the inexorable integration of markets, nation-states and technologies to a degree never witnessed before - in a way that is enabling individuals, corporations and nation-states to reach around the world farther, faster, deeper and cheaper than ever before.” (Thomas Friedman, The Lexus and the Olive Tree, 1999). The construction industry is no exception, and the effects are far-reaching. Projects are no longer constrained by local, regional or national market boundaries; supply and demand flows through a larger, singular market where any of the parts and pieces — ranging from bricks and mortar to human capital and design concepts — can come from different corners of the world and combine to build a project somewhere or anywhere in between them.

 

The industry has evolved, and continues to evolve rapidly. With the advent of ubiquitous high speed internet and other sophisticated communication technologies over the past several decades, global construction is easier than it has ever been, and companies can easily share ideas and talent electronically across international borders. Global electronic communication has reduced or eliminated many of the former barriers to cross-border trade. With fast access to international talent pools and the free flow of ideas around the world, as well as more efficient global shipping and transit during project execution, an ever-expanding competitive free market for labor and material, near instantaneous financial transactions and access to international funding sources, among other characteristics of globalization, international teams can deliver massive projects more economically now than they ever could before. Coupled with recovering world economies over the past several years, and the widespread and seemingly endless need for infrastructure and development in emerging and war-torn markets, globalization renders savvy, interconnected global players poised to reap potentially huge financial rewards.

 

Notwithstanding the great potential for reward, confronting globalization in the construction industry is not without risk. A changing market means changing customer demands, changing rules and regulations, and for contractors, changing old small market habits. With globalization can certainly come confusion, potentially complex international legal disputes, foreign and domestic political pressures, project failure, and ultimately financial loss. Although many in the industry will stay on the proverbial sidelines and sustain small market and niche profitability, over time, major players in our industry will remain globally relevant only to the extent of their adaption to our new global market. Stemming the potential for poor performance and loss in a global marketplace, and maximizing potential for long-term success requires foresight, dedicated effort, and acquired knowledge of the new market. It requires the right personnel internally as well as across partnerships, joint ventures, contracts and subcontracts. Although we certainly cannot cover exhaustively here the risks and recommended strategies attendant to participating in a global construction market, below are several issues to consider as you strive for continued success amid globalization.

 

Global Strategy for Contractors

 

1.      Building Relationships

Strategizing for success in a global marketplace requires much more than bidding for work on foreign soil or hiring designers from overseas. There are different demands to meet and different means available by which to meet them. Perhaps the most central component of globalization is the ability to meet project demands through the utilization of global resources, rather than local resources customary of smaller construction markets. In order to effectively use international resources, companies can seek out partnerships, joint ventures and contracts with other companies or individuals across the world — potential partners who can provide more efficient international services through cost-effective access to needed labor and materials; who are geographically closer to a project and know the physical site and terrain; who hold political or foreign industry connections; who have access to different international funding mechanisms; who speak useful languages or possess a unique talent; or who hold myriad other characteristics useful in the global construction industry. 

 

Establishing relationships with those who can best help you and your international projects succeed is critical. Your favorite subcontractor or architect for projects in the Midwestern United States quite possibly may not be the best fit for a project in Dubai. He does not have to be. Resources are no longer geographically compartmentalized and global players have learned to lose old habits when they no longer fit the global model. Of course, breaking out of tried and true domestic construction practices in order to go global can be daunting, and you may endure lengthy negotiations and be forced to craft complicated legal agreements in order to memorialize the terms of your relationships and protect your business. The first step toward memorializing an international relationship is finding one to develop. It is therefore imperative that companies seeking to remain relevant on the global stage have broad access to the potential relationships that will help them do so — through effective marketing.

 

2.      Effective Marketing

Effective local, regional, and national marketing, although differing in scale and expense, share a common characteristic in that none of them are global marketing — their reach is generally and in most cases deliberately limited to domestic audiences of varying size. Domestic marketing may consist of working internally or with outside agencies to develop and promote your longstanding services or to generate interest in a new product or brand, or to create new advertising slogans, logos, websites, television and radio spots, brochures, incentives and promotional ideas to generate interest in your business. It might include participation in trade organizations and seminars, speaking engagements, industry events, private meetings, charity and award sponsorship, and of course, creative and entertaining newsletters. Global marketing is different. How can western companies earn trust and build international relationships for the first time?

 

Global market entry can be difficult and strategic planning is necessary. Costs may be higher and customer retention rates lower than you are accustomed to. Name recognition may be diminished. Old marketing schemes designed for domestic customers may not be effective at all, and could require costly modifications and painstaking trial and error before effectively reaching foreign markets and generating interest. When you have one customer, how will you expand your presence and turn one customer into two? How can you use the international connections and networks you have already built to further expand your global presence? Can you partner with another domestic company to become more qualified for international work? Do you need to account for regulatory restrictions on foreign advertising? Are you stymied by a language barrier? All of these issues and more should be evaluated in great detail in order to develop a plan for effective marketing to potential customers and partners around the globe. If your goal is to expand your global presence, fostering beneficial international (and domestic) relationships through strong, cost-effective marketing is key.

 

3.      Legal Concerns

As with any large scale construction project, international projects are governed by a set of contractual relationships memorialized through written agreements. Globalization already has prompted the evolution of certain standard procurement procedures, forms of contract, and generally accepted contract principles that are very often used in international construction. Standardization certainly helps to simplify contractual arrangements; however, there are countless variations in contract forms used here in the U.S. and there are exponentially more possibilities for variation among international agreements. Should a dispute arise regarding the terms of your international contract, do you know which nation’s laws apply or where the dispute will be resolved? Do any foreign treaties apply? Are you subject to the jurisdiction of a foreign court, or will the parties participate in an international arbitration hearing? How are responsibilities allocated among members of your foreign joint venture? What penalties may an international arbitration panel or foreign court assess against you for noncompliance with the terms of your contracts? What is your ultimate exposure, and is the potential reward of growing your global business worth the risk?

 

The ability to negotiate favorable and understandable terms is a significant advantage whether you are involved in foreign or domestic construction. With the added complexities and potential risks consequent to global construction, even those most familiar and comfortable with standard contract forms and the legalities of typical construction contracts must be sure to review and understand the terms of their international agreements.

 

4.      Cultural Understanding

Globalization of our industry implicates a variety of issues to consider. Across them all, participants are faced with the need to harmonize disparate cultures. Customs, behaviors, societal values, influences, and traditions may vary tremendously among international team members. In turn, expectations, interpretations, and opinions may vary, and communication ranging from interpersonal to project-wide at times may be challenging. It is therefore essential to the successful development of international relationships and projects for globalizing businesses to practice and foster universal respect, and cultural understanding and acceptance.

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