Leaders of large construction companies in Australia plan to milk improving market conditions to boost sales and seek out new markets for growth, a new survey suggests.
Australian Industry Group (Ai Group) has released the results of its survey of 352 chief executive officers across the manufacturing, services, construction and mining services sectors, and while pessimism pervaded all sectors, the 41 leaders surveyed who operate within the construction sector were noticeably more sanguine, with half (50 per cent) expecting sales to increase in 2014 and only 29 per cent expecting sales to decline.
Moreover, whereas only 15 per cent of leaders were looking to downsize and reduce operating costs as a means of growing profit, more than six in 10 were primarily focused around top line strategies, with 25 per cent planning to improve sales of current products and services, 22 per cent planning to develop new domestic markets and 16 per cent planning to introduce new products and services.
Ai Group chief economist Julie Toth said the push toward new markets and offerings reflected a move away from declining segments of the industry and states where demand is soft and toward growing markets such as residential and infrastructure in Sydney. She added that higher levels of import penetration brought about by a strong Australian dollar (until recently) have given a previously insular and domestic focused industry greater exposure to international trade and the opportunities available in export markets, especially now that the dollar has fallen again.
“Structurally, demand for engineering has been quite weak for some time, and while demand for new residential building has picked up we know that is not a universal story around Australia,” Toth said. “In that environment, building companies out there feel there is more potential to grow the business by looking for new potential sources of demand as opposed to restructuring.”
“As well, I think the construction sector as a whole has become more aware of international trade than it would have been previously (before a strong dollar saw a surge in the dollar saw more products being imported). Even five years ago, the construction market was considered pretty much a domestic market in which you didn’t do much trade. Now it is becoming more trade exposed, not only in terms of materials used but also in terms of construction businesses heading offshore for potential work.”
While the focus on growth was encouraging, however, the survey also highlights an increasing focus upon wage pressures as the sector shifts away from the capital intensive resource sector and toward the more labour intensive housing sector.
Only 15 per cent of construction CEOs cited wage pressures or high wage costs as being among the top three factors which would inhibit their company’s growth during the downturn in 2013, but that number is now up to almost a quarter (24 per cent), making wage pressures equal with a lack of customer demand (most likely prevalent in the commercial/engineering sectors) as a factor inhibiting business growth within the sector.
Meanwhile, in other key parts of the survey, amongst construction sector CEOs in 2015:
- a third expect overall business conditions to improve whilst 28 per cent expect conditions to deteriorate
- Around the same number of expect to put on staff as those looking to reduce headcount, implying overall staff numbers throughout the sector are likely to remain at around today’s high levels
- 31 per cent expect capital investment to rise, while 24 per cent expect it to fall
- Around one third expect input prices to rise, while 14 per cent expect prices to fall
- Two thirds expect selling prices to remain stable (23 per cent expect them to rise and 10 per cent expect them to fall), perhaps reflecting margin contraction in the engineering sector offset by a rebuilding of residential margins
- 38 per cent expect labour costs to rise whereas 15 per cent expect costs to decline
- Likewise, 38 per cent expect labour productivity to rise whereas 15 per cent expect it to decline
Outside of the construction sector specifically, however, pessimism remained across most sectors of the economy, with 38 per cent of CEOs surveyed across all sectors expecting deteriorating business conditions and only 24 per cent anticipating conditions to improve.
Ai Group chief executive officer Innes Willox said the economy was struggling amid a pull-back in mining activity and subdued manufacturing sector conditions.
“It is clear from the findings of this broad survey of industry leaders that as the mining investment boom fades and commodity prices retreat, the Australian economy is struggling to achieve the rebalancing that is so clearly required,” Willox said. “The recovery in housing construction has been a welcome boost, but it is clearly not enough to support widespread growth across the economy either in terms of industrial or geographic diversity.”