Foreign builders target the United States: implications and trends – executive summary of International Trade Administration report
Patrick H. MacAuley
FOREIGN BUILDERS TARGET THE UNITED STATES: Implications and Trends
EDITORS NOTE:
Earlier this year, the International Trade Administration of the Department of Commerce released the study, “Foreign Builders Target the United States: Implications and Trends.” The study was prepared by Pat MacAuley of the Building Materials and Construction Division (the Construction Review staff). The purpose of this short article is to inform Construction Review readers about the scope of the report and how it can be obtained.
The Executive Summary section from the report follows this brief description. Part I of the study provides information on the scope, method of entry, and type of participation by foreign construction contractors in the United States for both nonresidential and residential construction. Part II discusses the causes of the foreign incursion including attractions of the U.S. market, and competitive advantages and disadvantages. Part III looks at the effects on the U.S. economy and Part IV looks ahead to 1990 and the foreign contractors share in to the 1990’s. Appendix A provides a listing of U.S. restrictions on foreign contractors working in the United States. Appendix B provides a listing of foreign construction companies operating in the United States.
The 60 page document is available from the National Technical Information Service (NTIS), 5285 Port Royal Road, Springfield, Virginia 22361. Sales desk telephone orders can be made by calling (703) 487-4800. The NTIS Order number is PB 88172457 and the price per copy is $14.95.
EXECUTIVE SUMMARY
Foreign contractors have been a small factor in the U.S. construction market for decades. Even though their participation in our market increased sharply in the 1980s, by 1985 foreign contractors still accounted for only about 3 percent of the value of all U.S. construction contracts, worth about $7.3 billion. Nearly all their activity was in nonresidential construction. They accounted for almost 4 percent of that market in 1985, most of it the building of hotels, factories, and office buildings. Foreign contractors have also won several competitively bid public works projects, notably tunneling work. Foreign homebuilders have sent some prefabricated homes into the United States and have also built conventional housing here, but so far they account for only a tiny share of the U.S. housing market.
Until 1982, most of the foreign participants in the domestic market were European and Canadian firms whose participation usually resulted from their acquisition of existing U.S. construction companies rather than from their competitiveness in winning U.S. construction contracts. Since 1982 European firms have continued their interest in the U.S. market, but most of the growth has come from Japanese construction companies. So far these Japanese firms have preferred to establish branch offices here rather than to acquire American companies. They have used U.S. subcontractors to do the actual construction, relying on their home offices for much of the engineering and overhead services. Of the $7.3 billion in U.S. construction contracts awarded to foreign-based firms in 1985, about 70 percent went to acquired U.S. companies and 30 percent to branch operations or newly-established subsidiaries.
The foreign entrants to the U.S. market are among the largest construction companies in the world, dwarfing all but a handful of U.S. companies. Most were attracted to the large and growing U.S. market after the construction boom in the Middle East and other Third World countries ended in the early 1980’s. Most of these firms possess competitive advantages that have helped them penetrate the U.S. market, such as financial strength, technological expertise, or underutilized staff. Japanese construction companies have a special advantage–close relationships with Japanese manufacturers and real estate investors who have relied heavily on Japanese contractors to build their facilities in the United States. Another important factor bringing foreign contractors here is their desire to be global corporations.
Foreign involvement in U.S. construction is affecting the U.S. economy, and the construction sector, in several ways. The most obvious direct effect is on U.S. general contractors, who are facing increased competitive pressure and are losing some jobs. These contractors are further distressed by the lack of opportunity to compete on an equal basis in the home markets of many of the foreign contractors operating in the United States. The effects on most of the rest of the construction industry have been minor so far, because foreign contractors are relying chiefly on U.S. subcontractors and suppliers. They also appear to rely slightly more on imported building materials than do domestic contractors, but the bulk of the materials used have been of U.S. origin. One of the most important effects of foreign involvement on the U.S. economy has been to facilitate Japanese investment in U.S. buildings and industrial facilities by reducing investor uncertainty and often by providing direct equity investment in projects. In some cases this has resulted in technology transfer as American contractors copy foreign techniques after they have been demonstrated in the United States. The foreign share of U.S. construction contracts will probably increase over the next 5 years, as foreign contractors and foreign real estate investors gain experience in the United States. However, increases in foreign market share will be due more to acquisitions of U.S. contractors than to internal growth of existing operations. Acquisitions are especially attractive to foreign contractors because many U.S. companies can be purchased relatively cheaply, and because established U.S. companies appear to be more successful in winning competitively-bid projects. Most of the foreign contractors expected to enter the U.S. market have already done so, and acquisitions are often the most effective way to strengthen their foothold here.
Foreign gains in the U.S. housing market are likely because of foreign advantages in financing and in factory-built housing. Several Scandinavian firms are successfully importing small numbers of prefabricated homes to the Northeastern U.S. Imports of Scandinavian-built homes may continue to increase, but the total number will be constrained by their limited capacity and by the high price of these units. Japanese builders of prefabricated housing have considerable production capacity, advanced technology, and close relationships with pwerful financial institutions and real estate developers. A major barrier to Japanese housing exports to the United States is that most, though not all, Japanese homes are too small and too different to sell in the American mass market. The recent increase in the currency exchange value of the yen has eliminated much, if not all, of the price advantage that Japanese exporters might have had in the first half of the 1980s. However, the relative financial strength of Japanese builders has increased since 1985, potentially making these firms more competitive as developers of site-built housing in the United States.
The competitive challenge from foreign general contractors will almost certainly intensify during the 1990s. Most of the foreign entrants are well capitalized and are willing to give their investments a decade to prove their worth. As foreign contractors become better established in the United States they will probably become more efficient competitors. The largest market niche for foreign contractors, Japanese direct investment, will remain high for years, and will probably increase during the next two years. The financial advantages enjoyed by foreign contractors are likely to persist for years, while foreign technological expertise will probably gain relative to the U.S. contractors.
It is too early to predict how much foreign contractors will increase their U.S. market share during the 1990s, although it is probable that the foreign share will remain below 10 percent. In the aggregate, foreign contractors have incurred heavy losses on their operations, and a sustained increase in foreigners’ market share is unlikely unless these operations become profitable. Foreign contractors do not yet possess overwhelming technological advantages in any major market niches, nor do they yet possess the ability to export modular structures which could capture major U.S. markets. Foreign acquisitions of large U.S. companies are likely, but this approach will not have dramatic effects because the U.S. construction sector is so unconcentrated.
In large part, the foreign market share will be determined by the actions of the U.S. construction industry. The U.S. construction market is one of the most competitive markets in the world, and the U.S. construction industry is populated by the survivors of that competition. U.S. contractors can remain competitive with foreign entrants by remaining low-cost producers, by maintaining technological superiority, by quickly adopting successful new foreign technology, by delivering the kind of service that customers want, and by aggressively seeking business from foreign investors in the United States. In particular, if U.S. general contractors can win construction contracts from Japanese direct investors, who currently rely primarily on Japanese contractors, then foreign penetration of the U.S. construction markets will probably remain at moderate levels for the rest of the 20th century.
COPYRIGHT 1988 U.S. Department of Commerce
COPYRIGHT 2004 Gale Group
