Contax Dubai Forum Provides Expert Insight on Changing Middle East Construction Markets

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Written by Richard Finlayson, Senior International Editor for Industrial Info Resources (Sugar Land, Texas). Opening a Forum on Personal Development and Leadership in the current Middle Eastern industrial development environment, Tony Bury, CEO of the strategic consultants, Contax Group (Dubai, United Arab Emirates), said that the region’s business models had, in the past, been based on relationships, but they were now becoming fact-based and driven by market insights. Speaking in Dubai, he added that at the same time Middle East markets were open and transparent, and it was under these conditions that leading executives in the energy, industrial and financial sectors had been invited to discuss ways to develop a forward vision and the ability to support growth.

One of the central themes addressed at the forum and analyzed by leading speakers was how to lead and strategize under the new and changing conditions. Among the elements to be handled in this new environment are an unparalleled demand for capex projects (capital), the push for compliance to harmonize with the modes of global regulatory bodies, the ability of new entrants in the Middle Eastern market to self-finance one stop products and service companies, and soaring labor, materials and facility costs. Other key focus elements were supervision and shortages in quality resources and the greater need to deal directly with customers along with the need to understand risk as well as reward of opportunities.

A recurrent concern coming through during the discussions was the shift from the conditions of high growth, which had been the norm, to the potential maturity and, in some cases, overcapacity, of sectors in the region. It was said that growth is very forgiving and slack management can still make a profit, but a maturing business environment is much more demanding as customers are more sophisticated, differentiation is more difficult, competitive intensity escalates and efficiency is at a premium. The shake-out hits as the growth curve flattens into the mature plateau.

Growth has its own significant challenges as businesses flock to high-growth, high-profit areas. This is being experienced in the region by airlines, financial service centers, such as Qatar and Dubai, and in the proliferation of local banking services. Some doubts were expressed as to whether traffic growth would support airport capacity targeted at 320 million passengers per year in the region by 2012.

Many of the problems exposed at the forum highlighted challenges faced by energy executives around the world. Cost escalation in capital project equipment and services was profiled with results from Contax Market Insights. In the period 2000 – 2006, the increase in instrumentation has soared by 87% and bulk material handling equipment by 86%. Logistics and shipping have gone up 80% and electrical products 76%, static equipment by 65% and rotating equipment by 37%. In the 2005 – 2006 period, most sectors calmed down to 10% escalation or lower for the year with bulk material handling equipment still leading the pack at 20%.

Parallel with the cost escalation the Contax Market Insights report showed that 2005 saw dramatic budget overruns. Approximately, 37% of projects with a budgeted investment of under $100 million overran; 35% of projects in the $250 -$500 million range overran and 35% and at $500 million 22% overran. The critical $100 -250 million division saw overruns at the challenging level of 65%.

The advice given to deal with cost escalation was to quantify the effect of these factors on suppliers’ costs, and in particular on the supply, demand balance, to re-examine the nature of contractual relationships with customers, distinguish between controllable and non-controllable costs, review long versus short, and partnership versus arm’s length sourcing strategies with customers. Hedging benefits should also be brought into play.

Over investment was seen as a potential problem in coming years and it was said that the solutions to today’s bottlenecks could become tomorrow’s over-capacity problem. The work should be put in planning for the long term. Priorities for managing the capacity challenge were the use of fact-based market intelligence to develop and test robust scenarios, investment in flexibility in assets and people (i.e. where it matters), sharing risk with customers and others, and staying engaged in the market, changing strategy if necessary.

Alignment emerged as a major proposition in the forum in relation to both the shaping company’s vision and set-up and for corporate leadership style. The base model presented, adapted from Robert Burgelman’s Strategy is Destiny, sees the alignment function in an interchange with winning capacity, continual contact with external reality, and core competencies and strategy. All these elements are seen feeding each other in a virtuous circle.

Companies mentioned as having ‘alignment’ were ExxonMobil where the strategy for LNG is to control the whole supply chain including receiving and distributing to the interconnector and selling LNG like a retail product, thereby eliminating upside limiting contracts and providing end market flexibility. The company’s external reality includes long-term contracts with sub-optimal returns, but downside protection, no spot market, high-cost infrastructure to ship and receive LNG, and project financing dependent on secure purchase contracts. Air Liquide was given as an example of a company moving strategically from being a seller of an industrial product with a ceiling on per transaction profit to a company offering a total service, producing a long-term profit stream and a long-term customer relationship.

The well established SWAT (strengths, weaknesses and threats) analysis technique was debunked as being dangerous and prone to confirm preconceptions. A ‘new value curve’ was proposed to deliver value to customers by developing ‘benefit bundles’ where some factors in the chain could be reduced below industry standards and others raised well above those standards. Factors that the industry takes for granted should be eliminated and other factors created, which the industry has never offered. These development attitudes would come from constant external orientation and could deliver unique value in a customer’s value chain.

In a region where the local companies are working to embrace the globally-tuned, open-shop management practices without throwing out the long-term homogenous values of family and cultural identity, the cross roads of the energy world create a cosmopolitan market environment. The established global companies and newcomers into the market have learned is that they must build relationships with countries in the GCC (Gulf Cooperation Council) as the growth that continues to be available in the region will come through the company/country partnership. There was some sense at the forum that the ‘short termism’ of western companies, driven by the need for quick returns on capital and pressured by high executive turnover, might benefit from working within the horizons of the Middle East style.

Dubai-based Contax Group is the leading strategic advisor in the Middle East focused on identifying and delivering client growth through market insights, strategy development, major project acquisition and business acquisition.

Industrial Info Resources (IIR) is a Marketing Information Service company that has been doing business for over 23 years. IIR is respected as the leader in providing comprehensive market intelligence pertaining to the industrial processing, heavy manufacturing, and energy-related industries throughout the world.