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International perspectives for Japanese construction firms

Thomas LE DIOURON, Managing Partner, IMPULSE PARTNERS

1. Introduction
As a long-time observer of Japanese civil
engineering, I have always been wondering why
Japanese construction firms do not play a larger role on
the international stage.
After studying in France, I came to the University
of Tokyo to research civil engineering and learn the
specifics of earthquake engineering, seismic design and
wind engineering. During the six years of my stay in
Japan (working for French construction group Vinci), I
have been experiencing Japanese firms in their
domestic market. After leaving Japan I continued
working with Japanese contractors and consultants
overseas in America, China, Vietnam and Europe.
Today I have founded a strategy consulting firm based
in Paris. We are advising international contractors,
engineering firms and building materials suppliers to
develop innovations and competitive solutions that
address the challenges of sustainable construction,
energy efficiency in buildings and affordable housing.
It is somehow surprising to observe that Japanese
construction firms with all their capabilities,
technology excellence and domestic-market cash do
not outperform European or Korean firms in
international markets. And how is the Japanese civil
engineering industry prepared for the coming
challenges?
1. Japanese domestic market
The recent construction of the Tokyo Sky Tree, one
of the world's tallest at 634m, is a clear demonstration
of the gigantic scale of Japanese domestic market and
of the capabilities of local firms to match that
excessiveness.
The Construction industry, accounting for about 10
percent of both GDP and all employed persons, has a
much larger role than it has in other countries.

Figure 1: global construction spending 2010 (source IHS)

The Japanese domestic construction market $650


billion in 2010 is among the largest in the world,
only comparable in size to China or the USA.
The general contractor system, similar to France,
has lead to predominance of mega large contractors:
Kajima, Shimizu, Taisei, Obayashi and Takenaka are
among the top 25 largest contractors in the world.
Rank Company

1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25

Country

CHINA RAILWAY CONSTRUCTION CORP. LTD.


China
CHINA RAILWAY GROUP LTD.
China
VINCI
France
BOUYGUES
France
CHINA COMMUNICATIONS CONSTRUCTION GRP. China
CHINA STATE CONSTRUCTION ENGG CORP.
China
HOCHTIEF AG
Germany
CHINA METALLURGICAL GROUP CORP.
China
BECHTEL
U.S.A.
GRUPO ACS
Spain
STRABAG SE
Austria
LEIGHTON HOLDINGS LTD.
Australia
FCC, FOMENTO DE CONSTR. Y CONTRATAS SA
Spain
FLUOR CORP.
U.S.A.
SKANSKA AB
Sweden
EIFFAGE
France
KAJIMA CORP.
Japan
SHIMIZU CORP.
Japan
BALFOUR BEATTY PLC
U.K.
BILFINGER BERGER AG
Germany
TAISEI CORP.
Japan
OBAYASHI CORP.
Japan
TAKENAKA CORP.
Japan
SAIPEM
Italy
ROYAL BAM GROUP NV
NL

Figure
Sources: McGrawHill
ENR2:
2010top

Sales
Intl sales
($M)

53,990
52,870
45,247
34,271
33,463
33,196
26,069
25,532
22,637
22,496
18,706
18,276
17,713
17,236
16,322
16,209
16,154
15,571
15,109
14,503
13,863
13,510
12,037
11,710
11,335

international construction firms

(source: company financial reports 2010)

Japans construction technology reputation


Japan civil engineering technological leadership
rose to prominence in the late 1980s and early 1990s
with its developments in construction robotics and
automated high-rise construction systems such as
Taiseis T-UpTM system, Obayashis ABCTM system,
and Shimizus SMARTTM system. Japanese
contractors lead the way towards the complete
automation and integration of processes and technology,
including modularization, just-in-time delivery, use of
robotics, supply chain management, and innovations in
connections and assembly methods.
Japanese contractors are pioneers in the
development of novel structural systems and the
advancement in construction materials: eccentric
external tendons, extradosed bridges, corrugated steel
web, ultra high strength concrete, underwater
construction methods, advanced earthquake-resistant
designs,
health
monitoring
of
structures,
high-performance steel, intelligent buildings and
systems
Japanese specificities:
Compared with the rest of the world, Japans
construction sites are largely above standards in terms
of cleanliness, safety and respect for environment.
Ahead of its time, the Japanese construction
industry pioneered sustainable construction approach:
largely because they were heavily constrained in
property asset value, access and space, Japanese
engineers developed environment-friendly construction
sites, adapted sustainable building usage through
deconstruction / reconstruction, recycled building
materials, life cycle analysis and pushed the use of
standardized and prefabricated components
Investment in Research & Development:
The Japan civil engineering industry is keen to find
innovative technologies: I observed that our innovative
products developed quicker in Japan than elsewhere in
the world. Japanese clients were not as risk-adverse as
French clients, and were willing to get the best from
new technology developments across the world.
Whereas in Europe public authorities are more
risk-adverse, I have noted a strong interest from
Japanese public clients to identify and help develop

new techniques. Moreover, Japanese firms, public


authorities and research institutions have a good
practice to visit foreign markets and distribute key
findings to the industry.
Most construction technology and management
research in Japan occurs in the laboratories of its
largest construction firms, which dominate the
domestic market, and is mandated to some extent by
the government as an investment of part of these firms
income. The contractors also support financially
university research programs, as well as demonstration
projects to test foreign technologies and see whether
they are applicable in Japanese context.
These R&D and deployment efforts represent a
level of effort that is unmatched internationally: with a
ratio R&D / sales of 0,6%, Japanese contractors are
well above Bouygues, Vinci, Strabag, Hochtief or
Skanska (where it varies between 0% and 0,2%).
Specific design & construction modes:
The Japanese civil engineering industry has been
very good at integrating foreign techniques, adapting
them to the Japanese context and in many cases even
improving those techniques: one of the best example is
the usage of prestressed concrete, a technique
originally developed by Freyssinet in France, which
has seen an important development in the 50s-60s in
America and a boom in Japan in the 1960s.
However, the large size of the domestic market and
the significant developments of Japanese R&D have
led Japanese firms to focus on specific Japanese
designs and construction modes. Sticking to Japanese
specific construction modes can prove dangerous, as
the value-chain gets used to it and rejects potentially
more efficient or cheaper techniques: during my time
in Japan working with engineering consultants on
stay-cable bridges techniques, my colleagues and I had
to fight to promote the strand stay cable systems that
has demonstrated internationally superior performance
in terms of construction costs, corrosion protection and
ease of replacement. Individually Japanese engineers
recognized the superiority of strand stay cable systems,
but they could not afford to change the contracting
ways and face the strong lobby of Japanese steel
producers who were backing the conventional parallel
wire cable technique.

2. International
Surprisingly, and despite of the advantages that
Japanese contractors can acquire from a strong
domestic market, the influence of Japanese
construction firms overseas is rather limited. Japanese
top contractors have indeed a relative low reliance on
overseas contracts: Shimizu, Taisei, Obayashi and
Kajima have only 10% to 15% of their sales outside of
Japan. And in many instances, those contracts are
financed by Japan international aid.

NIKKEI 500
CONSTRUCTION
index
+29%

NIKKEI
index
+6%

2010

2011

2012

Figure 4: relative performance of Japanese construction


stocks (source: Bloomberg)

Figure 3: Japanese construction firms in overseas markets


(source: ENR 2011)

In contrast, other international construction firms of


similar size have a much larger influence out of their
domestic markets: international sales represent 40% to
50% for Vinci, Bouygues, Balfour Beatty or Hyundai
Engineering & Construction, and more than 80% for
Skanska, Hochtief or Strabag.
Japanese contractors are neither strongly present nor
competitive in other mature markets. Japanese
domestic contracting schemes, construction designs
and high standards of quality are not competitive
internationally. From a business point of view, the
leadership developed in Japan on new technologies
(energy efficiency, new materials, life cycle approach,
quality...) is not a source of competitive advantage. In
the same way, only a very limited part of Japanese
research publications are available in English, and
many innovative projects remain known only in Japan.
3. Upcoming challenges
Following the earthquake and Tsunami that struck
the Tohoku region in 2011, Japans massive
reconstruction effort will provide an ample market for
Japanese contractors. Not surprisingly, Japanese
construction stocks have outperformed the Nikkei
index by more than 20% since March 2011.

To address the challenges of reconstruction,


Japanese contractors will naturally focus on domestic
growth opportunities. This will drive them even more
dependent on their domestic market, and less likely to
improve their competitiveness on the international
stage.
The risk for Japanese contractors is that they do not
look for growth areas out of Japan, and will let others,
such as Korean and Chinese contractors, capture the
international opportunities in emerging markets in Asia,
Middle East & Africa market.
While addressing strong short-term market growth
in their domestic market, Japanese contractors
absolutely need to develop a longer term international
strategy.