More builders face massive retooling

By Cho Mu-hyun

There seems no end to the plight of construction companies as domestic orders shrink due to the prolonged economic slump while expansion abroad overloads them with uncontrollable costs.

A week ago, STX Construction, the building arm of STX Group, filed for court receivership. It has suffered capital erosion after it reported a net loss of 91 billion won ($81 million) last year.

Ssangyong Engineering & Construction went under a debt rescheduling program in March. Earlier, Doosan Engineering & Construction received financial support from its parent group to preempt a cash shortage problem.

Most small- and mid-size builders are far from well-off and expect massive restructuring. Many face extreme measures, including workouts and court receiverships.

Though the government recently unveiled measures to reinvigorate the local property market _ by offering tax and interest incentives for home purchases _ the domestic market growth rate is expected to remain low and firms must look abroad.

“There may be momentums from new projects, but ultimately firms have to continue to venture into untapped market overseas,” said an industry source. “Though going abroad will continue to hurt bottom lines, construction firms rely on their brand recognition to win projects, which takes many years to build, especially in new markets in South America, the Middles East, India and Africa.”

According to multiple industry sources, most mid-sized firms are mulling job cuts and reshuffles to protect their bottom lines.

Many employees are migrating to different companies. “Apart from the major companies, engineers of other firms usually move between jobs multiple times,” said an official of a subcontractor, working with one of major builders, adding that POSCO was considering a “major reshuffle” soon.

“There is fear because now bankruptcy and receiverships have become a reality,” he said.

Only Korea’s four major construction firms ― Daewoo, Hyundai, Samsung and Daelim ― have managed to weather the market downturn by posting higher than expected growth last year.

“The plan right now for the major companies is to endure. Despite the overall slump, they are confident that their know-how and smart maneuvers will allow them to maintain higher than market growth,” said an insider of one of the four, who declined to be named.

“The talk of declining profit rate is true but not as serious for the major companies: they have a longer track record abroad than their smaller counterparts and will sustain their rates,” the official said.

Hyundai saw 2.8 trillion won in revenue and 178.7 billion won in operating profit for the first quarter, a rise of 5.8 and 21.9 percent, respectively. Daewoo saw 2.3 trillion won and 109.3 billion won, an increase of 25.8 percent and a decline of 3.0 percent year-on-year.

The biggest success came from Daelim, with revenue of 2.5 trillion won and operating profit of 124 billion won, a surge of 22.7 and 31 percent. “Daelim, foreseeing the rise of costs due to the economic situation, limited their project financings for the past couple of years,” said an official from a subcontractor. “Daelim is almost unanimously praised in the industry for maintaining its growth rate despite the recession.”

Samsung Construction & Trade saw a 34 percent year-on-year increase in revenue of 2.5 trillion won, but operating profits fell 25 percent to 61.2 billion won. “Samsung was the biggest disappointment, and the lower figures compared to its rivals with high-profile brand powers will continue to exasperate the group’s decision makers,” said the official.