Professional Documents
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HK1171
MARCUS SCHUETZ
ELLEN ORR
B+L GmbH (B+L) was the leading provider of market data for the construction material supply
industry. The company had developed unique forecast methods and planning tools to help
construction materials companies predict sales volumes and manage production in their highly
cyclical industry. Its market forecasts covered established as well as emerging economies,
though most of its clients were in Europe.
For years, B+L had researched and tracked China’s rapid economic development and
construction boom. Martin Langen, B+L’s Chief Executive Officer (CEO), paid close attention
to China’s progress, since its unprecedented pace of development was a key driver of worldwide
building activity.
When China’s Belt and Road Initiative (BRI), a set of major infrastructure projects, was
announced in 2013, Martin was immediately intrigued. The initiative sought to develop
transport, communications, trade, financial, and other links across western China and through
central and south Asia to east Africa and Europe. A BRI forum in May 2017 drew delegates
from 110 countries and received widespread attention and press coverage.
Martin surmised that the BRI would spur construction in the participating countries and beyond.
But the impact of BRI was far from clear. He wondered which countries would benefit most
1 Xinhua, “Quotable Quotes of World Leaders at Belt and Road Forum,” 14 May 2017, Beijing,
http://www.xinhuanet.com/english/2017-05/14/c_136282929.htm, accessed 24 May 2018.
Ellen Orr prepared this case under the supervision of Marcus Schuetz for class discussion. This case is not intended to show
effective or ineffective handling of decision or business processes. The authors might have disguised certain information to protect
confidentiality. Cases are written in the past tense, this is not meant to imply that all practices, organizations, people, places or
fact mentioned in the case no longer occur, exist or apply.
© 2019 by The Asia Case Research Centre, The University of Hong Kong. No part of this publication may be digitized, photocopied
or otherwise reproduced, posted or transmitted in any form or by any means without the permission of The University of Hong
Kong.
Ref. 19/628C
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19/628C Telling the Fortunes of One Belt, One Road: B+L Forecasts for the Construction Supply Industry
from the initiative and meet the conditions for economic development and a construction boom.
Would there be more Chinese-style economies emerging, with sudden and rapid development?
What would become the industry drivers in a world that sometimes defied the logic of supply
and demand?
Martin thought back to his time as a young consultant in Moscow in the early 1990s. He sensed
that again the world was changing in big and unforeseeable ways. To predict the future
accurately, he decided to do what he always did in such times: rethink everything from the
bottom up. Rather than use the old forecast methodologies that had worked in established
European markets, he would start from the beginning and construct a new approach that would
suit the varied economies of the BRI.
Both residential and commercial construction followed cyclical patterns, with times of
expansion followed by periods of contraction. These cycles were driven by supply and demand
for space, as well as by availability and cost of funding. Supply of space changed only slowly,
owing to the time needed to commission, design, and complete a building. When demand (and
thus prices) for space was high and funding available at attractive rates, builders would start
new projects. When all these projects were finished, months or years later, the sharp increase
in available property often resulted in an oversupply, thus depressing prices. The oversupply
was exacerbated if the economic cycle had meanwhile turned down, leading to a decrease in
demand for property. With the resulting decrease in prices and rents, it would become
unattractive to build new projects, so few would begin, eventually leading to undersupply,
higher prices, and a new cycle. [See Exhibit 1 for the growth of the UK construction and
materials industry, relative to GDP.]
Developers and builders purchased construction materials such as cement, insulation, and
roofing from specialty building materials suppliers. These suppliers were therefore subject to
the same cyclical forces as their customers, the builders. To effectively run their businesses,
the building materials companies needed reliable forecasts of demand for their products. B+L
provided this forecast service.
Building materials companies’ calculations were complicated by the nature of their products.
Most building materials had relatively high weight-to-value ratios, making it uneconomical to
transport them long distances. For example, it did not make sense to transport cement or other
cheap but heavy materials more than about 300 kilometers, so ideally the production location
would be less than that distance from the construction site. On this basis, the economics implied
a need to build factories near where the materials would be used.
At the same time, making construction materials was capital intensive, thus reliant on
economies of scale. A factory might cost more than EUR100mn and achieve a positive return
only after 10 years. From this perspective, for a given level of output, a few large production
facilities were preferable to many small facilities. Thus, there was tension between the desire
for larger manufacturing facilities and the need for these facilities to be close to construction
sites.
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19/628C Telling the Fortunes of One Belt, One Road: B+L Forecasts for the Construction Supply Industry
There was no official list of BRI countries. China’s leaders stated that the initiative was open
to all interested countries, regions, and organizations. [See Exhibit 3 for a list of 75 countries
that were likely to participate, based on a list hosted by China’s State Information Center.] By
one measure, BRI was to encompass more than half the world’s population and nearly two-
thirds of global GDP.2
The BRI set five priorities: policy coordination, facilities connectivity, unimpeded trade,
financial integration, and bonds between people. Within these broad goals, countries and
developers planned specific infrastructure projects such as roads, railways, ports, commercial
facilities, and other building projects. In 2017, projects valued at about USD900bn were
planned or underway.3 Rail and energy investments constituted around 80% of likely projects.
[See Exhibit 4 for a breakdown of BRI investments by industry, and Exhibit 5 for locations of
planned projects.]
With total BRI spending estimates ranging from USD4trn to USD8trn, 4 the scope of the
initiative was enormous, and significant funding would be needed. In 2017, most funding was
from Chinese banks [see Exhibit 6].
In order to forecast construction activity, B+L assessed three factors. First, it considered
demand for housing and other buildings. Second, it examined the availability of funding (cash).
Third, it evaluated the level of confidence in the market. For construction to begin, it was
2 European Bank for Reconstruction and Development, “Belt and Road Initiative,” https://www.ebrd.com/what-we-do/belt-and-
road/overview.html, accessed 12 July 2018.
3 Ibid.
4 “Cost of funding ‘Belt and Road Initiative’ is Daunting Task,” South China Morning Post, 27 September 2017,
http://www.scmp.com/special-reports/business/topics/special-report-belt-and-road/article/2112978/cost-funding-belt-and,
accessed 24 May 2018.
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19/628C Telling the Fortunes of One Belt, One Road: B+L Forecasts for the Construction Supply Industry
necessary for all three factors to be positive. For example, if demand and confidence were high
but funding was tight, then building could not occur. If the situation changed and cash became
more readily available, then there would be a turning point where contraction turned to
expansion. Similarly, if all three factors were present and construction activity was high, but
then confidence dropped suddenly, construction activity would decline. B+L’s forecasts aimed
to predict these turning points so that its clients could plan accordingly.
To measure the three factors, B+L would examine publicly available data such as housing starts,
economic confidence, and other statistics, which were widely available for Europe. In addition,
it would interview industry players such as architects to understand the building preferences
and regulations in each geographical and product segment (such as insulation in the Netherlands,
roofing in Russia, and so forth). B+L combined the public data with the deep local knowledge
gained from its interviews to produce forecasts that were comparable across very different
markets. Thus, its forecasts were standard and easy to compare. By contrast, national economic
data were not always compiled the same way in every country, and therefore were not strictly
comparable. For example, a new garage might be counted as a housing start in one country but
not another, making it hard to use data on housing starts alone to compare activity in different
countries. B+L’s forecasts corrected for such differences in national statistics.
Martin’s clients placed a high value on these comparable figures, which could not be obtained
anywhere else. Since construction activity was not always highly correlated with wider
economic conditions, it was not easy to forecast demand for construction materials. No other
market data provider offered forecasts for the construction industry at the same level of detail
as B+L’s. Clients used the forecasts to allocate resources, plan targets, optimize sales force
regions, craft expansion plans, and generally enhance their understanding of the market
situation.
By 2017, B+L was producing forecasts covering more than 80 countries, covering 80% of world
construction activity. These subscription-based products were quarterly, rolling three-year
forecasts of worldwide construction activity, broken down by location and by type of product.
B+L also produced in-depth reports on particular materials. [See Exhibit 7 for examples of
B+L forecasts.]
B+L’s revenue came from subscription payments for the standard forecasts and fees for the
custom projects. By 2017, most of the business was in the custom projects. However, future
growth was uncertain. The custom project business was hard to scale up, since each report was
produced for a single client. The standard forecasts were more scalable, but they were already
very comprehensive. To be sure, there were countries not covered by B+L, but many of those
were small and not traditional construction industry targets. To fill these country gaps, B+L
needed a story that would link these countries together, spark client interest in the countries,
and boost demand for B+L’s forecasts on their construction activity.
The New BRI Forecast Product: Forecasting the New Silk Road
Martin decided to create a new forecast product that would forecast construction activity related
to BRI. Clients had not yet asked for such a product, but Martin recognized that the BRI would
provide significant opportunities for the construction industry. By anticipating these
opportunities and producing forecasts for the BRI countries, B+L could enhance its standard
subscription product offering for existing clients and expand its client base.
Like B+L’s existing forecast products, the new BRI product would be presented country by
country and show projected market size for construction materials. However, the product
This document is authorized for use only by Utsava Sharma in Emerging Markets in the Global Economy Summer 2023 taught by MOHSIN HABIB, University of Massachusetts - Boston from
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19/628C Telling the Fortunes of One Belt, One Road: B+L Forecasts for the Construction Supply Industry
would differ in many ways from existing forecast products. There was a high degree of
uncertainty around the pace, location, and nature of much of the BRI construction. Therefore,
the new product would present yearly, 5- to 10-year rolling forecasts rather than the quarterly,
3-year forecasts of existing products. The information would also be in less depth than the
existing products, providing an overview of construction activity for each country rather than
detailed forecasts for each type of building material in each country.
The new product would be priced somewhat lower than B+L’s existing forecast products. First,
the marginal cost to produce the new product would be lower than the average cost of existing
products. It would provide less depth and could use existing formats and processes. Second,
B+L planned to use the new product to attract new clients from the developing countries near
the BRI routes. B+L interviewed makers of construction materials in some of these countries
when collecting information for its existing industry reports. Most of these companies did not
currently use B+L’s services, but might find an affordable BRI forecast product useful as they
developed plans for the nearby BRI projects.
Creating a BRI-linked forecast would not be easy. The BRI concept was clear, but details of
specific projects had been slow to emerge, and the types, locations, and timings of future
building programs were uncertain. For many of the BRI countries, official data sources on
building requirements were patchy, and detailed building regulations and local preferences did
not necessarily exist. Therefore, B+L’s existing forecasting methodology was unlikely to be
suitable for the BRI countries.
The participating countries were diverse, ranging from wealthy, politically stable nations to
underdeveloped countries with little existing infrastructure. Some countries, such as Turkey,
already had broad-based and expanding economies before BRI was announced, so would not
depend on BRI to grow. Other countries, though located along the BRI routes, were primarily
transit countries. These might have structures such as gas pipelines running through them,
which would contribute to BRI development but not spur much additional local construction.
Still other countries would potentially be transformed by BRI. For example, Kazakhstan before
BRI was a post-Soviet state with an oil-dependent economy. The BRI announcement brought
new importance to Kazakhstan because of its key location between China and western Russia,
making it well positioned to benefit from the initiative. In particular, its city of Khorgos on the
border with China was to become a transportation hub, requiring large numbers of building and
extensive infrastructure. Some even predicted that Khorgos would become “the new Dubai,”
with the new transport links acting as a catalyst for rapid development.5
In sum, there was undoubtedly large scope for new construction resulting from the BRI, but
creating useful country-specific forecasts would need new thinking. Martin and his colleagues
at B+L had to develop a framework for crafting a relevant and practical BRI-linked forecast in
this untested environment.
5 “Khorgos: The New Silk Road’s Central Station Comes To Life,” Forbes.com, 20 February 2017,
https://www.forbes.com/sites/wadeshepard/2017/02/20/khorgos-the-new-silk-roads-central-station-comes-to-
life/#f27c50cc22ee, accessed 28 July 2018.
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For the exclusive use of U. Sharma, 2023.
19/628C Telling the Fortunes of One Belt, One Road: B+L Forecasts for the Construction Supply Industry
20%
15%
10%
5%
Construction & materials
sector growth
0%
UK GDP growth
Year
1970
1973
1976
1979
1982
1985
1988
1991
1994
1997
2000
2003
2006
2009
-5%
-10%
-15%
-20%
Source: A. Bhattacharjee, C. Higson, and S. Holly, “Operating Leverage over the Business
Cycle,” Cambridge Working Papers in Economics, 24 November 2015,
http://www.econ.cam.ac.uk/research-files/repec/cam/pdf/cwpe1535.pdf, accessed
22 January 2019.
This document is authorized for use only by Utsava Sharma in Emerging Markets in the Global Economy Summer 2023 taught by MOHSIN HABIB, University of Massachusetts - Boston from
Jul 2023 to Jul 2023.
For the exclusive use of U. Sharma, 2023.
19/628C Telling the Fortunes of One Belt, One Road: B+L Forecasts for the Construction Supply Industry
This document is authorized for use only by Utsava Sharma in Emerging Markets in the Global Economy Summer 2023 taught by MOHSIN HABIB, University of Massachusetts - Boston from
Jul 2023 to Jul 2023.
For the exclusive use of U. Sharma, 2023.
19/628C Telling the Fortunes of One Belt, One Road: B+L Forecasts for the Construction Supply Industry
This document is authorized for use only by Utsava Sharma in Emerging Markets in the Global Economy Summer 2023 taught by MOHSIN HABIB, University of Massachusetts - Boston from
Jul 2023 to Jul 2023.
For the exclusive use of U. Sharma, 2023.
19/628C Telling the Fortunes of One Belt, One Road: B+L Forecasts for the Construction Supply Industry
Energy
43%
Rail
41%
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10
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19/628C Telling the Fortunes of One Belt, One Road: B+L Forecasts for the Construction Supply Industry
China
Development Big 4 Chinese
Bank banks
38% 51%
Source: Deloitte Insights, “Embracing the BRI ecosystem in 2018,” 12 February 2018,
https://www2.deloitte.com/insights/us/en/economy/asia-pacific/china-belt-and-
road-initiative.html, accessed 11 July 2018.
11
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12
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