Time for Construction to Get Serious about Regional Trade

Tuesday, October 27th, 2015
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Trade Minister Andrew Robb has been working pretty hard on regional trade agreements over the past few years.

The most current are the Trans-Pacific Partnership Agreement (TPP) and the China Australia Free Trade Agreement (ChAFTA). And then there are the India and Indonesian FTAs in the pipeline. So what does Australia’s construction industry plan to do about it?

The Asia-Pacific region is a key driver of global economic growth. Close to half of all global trade, and around 70 per cent of Australia’s trade, flows through the region.

No fewer than 12 parties have been negotiating the TPP agreement announced recently. Five of these parties (the United States, Japan, Singapore, Malaysia and New Zealand) were among Australia’s top 10 trading partners for goods and services in 2013-14. Australia’s participation in the TPP negotiations will strengthen trade and investment relationships with these key partners. But China, India and Indonesia are part of the mix as well.

China is Australia’s largest trading partner. It buys almost a third of all Australian exports, valued at nearly $98 billion in 2014, and is our top overseas market for agriculture, resources and services exports. Chinese investment in Australia has been growing strongly in recent years, reaching almost $65 billion in 2014. ChAFTA will build on Australia’s successful commercial relationship with China by securing markets and providing even better access to China across a range of our key business interests, including goods, services and investment. Trade and investment with China are central to Australia’s future prosperity. ChAFTA is not part of the Trans-Pacific Partnership.

regional trade

And then there is India, where two-way trade in goods and services has grown in value from $6.8 billion in 2003-04 to $14.8 billion in 2013-14. India is the world’s largest democracy and is a market of 1.2 billion people. Its youthful population, diversified economy and growth trajectory present significant opportunity for Australian business, especially in the agriculture, energy, manufacturing, mining and services sectors.

The Indonesia-Australia Comprehensive Economic Partnership Agreement (IA-CEPA) negotiations commenced in Jakarta in September 2012. IA-CEPA aims to strengthen and expand the trade, investment and economic cooperation relationship between Australia and Indonesia. Indonesia is a significant economic and regional partner for Australia. Two-way trade in goods and services reached $14.9 billion in the 2013 calendar year, making Indonesia our 12th largest trading partner and 11th largest export market. Austrade estimates that there are more than 400 Australian companies operating in Indonesia, in sectors including mining, agriculture, construction, infrastructure, finance, health care, food and beverage and transport. Indonesia is expected to be the 11th largest global construction market by 2025.

Many Australian construction companies have attempted entry into these markets in the past and have come away claiming their experience was a ‘train wreck.’ Most have gone there in the belief that our way of managing and constructing projects is a sustainable competitive advantage. What most failed to realise is how fast developing countries learn and how quickly what seemed like a viable value proposition fades. Its time to take another look at what Australian construction could be doing in a post-domestic mining boom and – not too far down the track – a slowing domestic construction market. This time, there must be serious value propositions.

One company carving out a value added niche in these markets is the KEF-TAHPI Design Studio. TAHPI has an Australian base but most of its work is done in the Middle East, Singapore, India and Malaysia. It is now partnering with the KEF group to deliver modularized hospitals. TAHPI specialises in health care, where the company believes a real opportunity awaits. According to CEO Aladin Niazmand, it’s fundamental to understand the metrics of the target market and what you can add before embarking on any strategy.

Niazmand makes the point that health care costs can bankrupt countries. He points to the annual per capita costs of delivering services in the US ($9,416), the UK ($3,598), Singapore ($2,507) and Australia ($5,827). There would be no value in exporting Australia’s health care model to developing Asia-Pacific neighbours. We are having enough trouble with costs at home, and if construction is to have a hand in the region, Australia’s construction cost track record does not all bode well. The New Royal Adelaide Hospital (RAH) is listed by architectural data company Emporis as Australia’s most expensive project. Website Gizmodo ranks the RAH and the Gold Coast University Hospital respectively as the third and seventh most expensive construction projects in the world today.

This should be salutary news for Treasurer Scott Morrison and Health Minister Sussan Ley.

Australian construction costs for hospitals are completely out of whack with our regional counterparts. This should be enough to drive a domestic inquiry let alone send those thinking of regional construction back to their drawing boards. Australia once had hopes of being a leader in regional health service delivery, but that reality appears far-fetched.

Australian Construction Costs For Hospitals

Construction does not get a mention in the federal government’s Cooperative Research Centres (CRCs) growth centres strategy. The strategy is aimed at making selected industries more internationally competitive. New Industry, Innovation and Science Minister Christopher Pyne has committed to bringing Australia’s $225 million CRC program in line with the government’s Growth Centres goals. Industries mentioned were advanced manufacturing, energy and resources, medical technology and pharmaceuticals, agriculture, mining equipment and technology, but not construction.

Why would any self-respecting Minister put his or her hand up for construction? They would be plagued with complaints about industrial lawlessness, construction insolvencies, compliance regulation and consumer complaints. But it is time for construction to turn this around and urgently. QLD Master Builder Association’s Paul Bidwell said the group’s research revealed a lack of urgency among builders to embrace innovation. Bidwell said “there are many barriers, not the least of which is the conservative culture of the industry.”

The Victorian Government has established a Ministerial Advisory Council to help direct a Future Industries Fund Initiative. Construction gets a look in, bracketed with Transport and Defence. There are six groups, including Medical Technologies and Pharmaceuticals, New Energy Technologies, Food and Fibre (meaning wood), International Education, and Professional Services. Construction could have a big role to play in a number of these sectors, but it first needs to define what metrics should direct the industry’s efforts. Its no good if these are self-facing. They need to have a client and regional-focused outlook. They need to understand that it’s the sum of the parts that make up construction, not just the pieces.

In a joint submission with Dr Mary Hardie of Western Sydney University and associate professor Willy Sher of Newcastle University to the Advisory Council on Construction Technologies, the Victorian Government has been urged to:

  • Establish clear and simple measures which set out pre-competitive objectives that establish the criteria for Construction Technology funding
  • Undertake a detailed analysis of where the systemic embedded costs of construction exist and publish details of the findings
  • Commit to introducing public works pre-qualification criteria from 2019 that incorporates the need for demonstrable productivity and construction effectiveness and value for money achievements
  • Ensure the initiative is one of multi-jurisdiction (regional) leadership.

The submission stressed that the government must accept it will need to make a credible long term commitment to implementation of the Construction Technologies Initiative. This commitment must be real and well-targeted. It must overcome the chronic public and private under-investment in construction innovation. It must overcome past skepticism as an excuse for doing nothing. It must motivate more than a smart few who are happy to take a cash grab to support agendas that fail to show how the sum of the parts benefit.

There is a lot going on in the global construction world that can serve as pointers to a more engaging construction future in our region, but it needs to be understood that our market has different dynamics to its northern hemisphere counterparts. There is a lot of opportunity in the mass customization space, not just in mass production. The European kitchens and bathrooms industry is one to learn from. That industry’s end-to-end customer focused strategies started in the mid 90s, and it now defines how this sector works globally. Firms like Rothoblass make and export world class construction assembly components that point to how buildings will be organized in a digital, industrialized and global future.

The future of global construction is at its inventive beginning. John Von Neumann worked on what he called the universal constructor, a self-replicating machine that would operate in a cellular automata environment. Essentially, the concept is about a self replicating machine, a type of robot that is capable of autonomously remaking itself using raw materials found in the local environment. It’s not as far-fetched a concept as readers may imagine. Put 3D printing aside and look at more practical modern-day applications. Just look at Sweden’s Elematic company. Elematic is the leading supplier of precast concrete technology worldwide. It works in over 100 countries on six continents, supplying anything from a single machine to a production line to a complete precast plant.

Elematic precast systems are being used in the Middle East and India. Massive investments in precast manufacturing in these markets align with the challenges of needing to get more from less in markets which lack the skill base, but are exposed to rapidly rising labour and material costs. This need is prevalent in developed countries such as Australia, but Australia is held back by the barriers of status quo and an oligopolistic construction market that is happy just to pass its costs on to customers and the community for as long as possible. In the free trade world now taking shape, however, these barriers will soon start to be pulled down. They must.

I know the Von Neumann example will sound anathema to the CFMEU and will seem like a fantasy for others, but another interesting example of disruptive construction is China’s Broad Sustainable Building Company. Most will be familiar with the company’s YouTube videos of 30-storey buildings being erected in just 15 days, but that’s not the main story. Broad has moved from being an air conditioning manufacturing company to a world leader in construction manufacturing and assembly in only 10 years. Visionary founder Zhang Yue has used this time for proof of concept to specialize and lead in the organization and delivery of buildings of more than 40 storeys. Broad is now selling downstream franchises of the company’s procurement and delivery model for sustainable high rise.

The Broad franchises are not cheap; word has it that more than six have been sold so far at US $100 million each. Beyond China, Yue has turned his business model to the 100 cities that India has on the drawing board. But keep your eye on Cambodia and Vietnam. India just happens to be where the KEP-TAHPI venture is focused. There will be a lot of buildings under 40 storeys, so there are wide pastures. But there will need to systemic nurturing of the business models required to exploit these. I estimate that over 100,000 construction enterprises will start up in the new FTA space each year, so there is no need for old construction businesses to change if they don’t wish to. These new construction enterprises will have no sentimentality for old construction practices or costs.

Construction is moving toward a customer focused future. Don’t worry about businesses just focused on achieving minimum standard compliance for their parts. Unless construction embraces the customer end game, it’s a wasted effort. I attended the recent series of Export Council of Australia presentations on trading in the Middle East and South East Asia and sadly, there were no constructors present. Australia’s Senior Trade Commissioner to Singapore, Chris Rees stood out. But so to did the Mulwarra Meats and the Servcorp presentations on their experiences and what they have learned about trading in these markets. And a month earlier Sangar Meats Nick Thompson shared his insights into building Middle East markets.

There were a lot of take-home messages that could apply to construction businesses in Australia and across the region. What’s clear is that sitting at home doing nothing is not a plan. More importantly, if you do not focus on a competitive sustainable customer proposition, then the future is bleak. The common themes are that the concepts of better, smarter, faster, safer and cheaper are just as applicable to construction as they are to other industries going through transformation.

And finally, here is an important insight for construction academics and Australia’s new Education Minister Senator, Simon Birmingham. Unless we start teaching about modern construction enterprises and construction practices, we will not be growing Australia’s next cohort of construction entrepreneurs. I have canvassed many senior construction academics over the last year and asked them to name a single game-changing constructor that they may have graduated over the last five years. They typically fail to be able to name a single one.

This need not – and should not – be the case. It’s time to make Australia’s construction industry deliver on Andrew Robb’s hard work.

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