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Industry predictions: Engineering, Construction and Infrastructure

2019 will see a digital leap forward as many construction companies explore implementing integrated business software into projects for the very first time.

Tighter margins, global skills shortages and new industry entrants are all ramping up the pressure on traditional construction businesses to deliver greater productivity and more integrated, cost-efficient projects, on time, every time.

1. Prediction

50% of all construction projects worldwide will include modular content by 2022, driven by the growing global skills shortage.

In March 2018, a new factory opened outside Liverpool, England employing 150 people 24 hours a day. What does it manufacture? Homes—starting with a first order of 81 homes and 58 apartments, as part of a first-year target of 450 homes. And it’s just one among many. At IFS, in 2018 we had four times greater customer activity around modular construction than in any previous year.

From schools in Ireland to prisons and hospitals in the United States; from sustainable luxury apartments to vast workers’ dormitories, 2018 has seen modular construction go well beyond hype. In 2019 it will get even stronger, with housing shortages a key driver. The UN estimates that over 2 billion new homes will need to be built over the next two years. Modular manufacturing enables affordable houses to be built faster and at higher volume. Driven by a worldwide shortage in skills and housing, increased modular construction will impact the construction industry massively in 2019.

New entrants will make agility even more essential.

For a start, we’re already seeing a wave of new entrants coming into the industry. Take that modular housing factory in Liverpool. Neither of the two founders came from the construction industry. One, Luke Barnes, was a design engineer, his partner a software engineer. Barnes told reporters: “I found there was a big gap in the market as there were no constructors that offered the quality, deliverability and competitive pricing I was searching for.”

2019 will see growing numbers of traditional construction companies begin opening modular factories to stay competitive. And more new players enter the industry—from manufacturing, supply chain and logistics, to local governments, banks and insurance companies. Many will be able to offer flexible finance and service packages too.

The pressure on incumbent building firms to adapt will be huge. They’ll need tighter control and more adaptability over every aspect of their projects. Proving they can, if necessary, partner up with larger networks of suppliers, offer services and maintenance on assets once built, include equipment hire, and yes, even offer or manufacture some modular units or components. It all adds up to an urgent need for better, more integrated digital management of complex, demanding projects. That need is driving my second industry prediction.

2. Prediction

In 2019 more construction companies than ever before will start trying out integrated business software – for the very first time.

10% of traditional construction firms could go out of business over the next 5 years. Competition around delivery and productivity will be fierce. Many companies will find themselves balanced on a knife-edge of opportunity: On the one hand growing urban populations and housing shortages will mean more demand and higher order intake. On the other, shrinking profit margins and increased competition will mean unprecedented pressure on productivity and delivery.

As a result, 2019 will see more firms moving from being document-driven to data-driven. Many will take their first steps into digital and make their first investments in integrated business systems like Enterprise Resource Planning, or ERP. Two main drivers will turn integrated business systems like ERP from a nice-to-have into a need-to-have.

When less is more: Growing pressure on margins.

With profit margins as tight as they are, many construction firms feel as if the more business they bring in—the less money they make. A recent Deloitte report found that construction companies’ profit margins are under pressure in several European submarkets, with Western Europe particularly vulnerable. In the UK, Belgium, the Netherlands and Ireland profit margins are so narrow they may not even be offset by higher order intake. 31% of the UK’s largest contractors reported a fall in margins in November 2017, with the country’s largest 10 contractors having a negative average margin of -0.5%.

New entrants: China, Korea… and Amazon?

Global competition is growing powerfully, impacting European construction companies hard. The Engineering News Record’s Top 100 Global Contractors In for 2017 found that European firms made up only 23% of the world’s Top 100 Global Contractors in 2017.

In 2010, 44% had been European. Compare that to Asia, which rose from 41% in 2010 to 51% in 2017, and the big picture is clear. Most analysts predict that China, India and the US will all be winners in the forecasted 8 trillion USD growth expected in construction by 2030—but not Europe.

Companies like China Communications Construction, Hyundai Engineering & Construction and Samsung C&T represent a serious threat to large European incumbents. Taken by revenue alone, even by 2017 the Top Four and seven out of the world’s Top Ten largest construction companies were all Chinese.

With many able to offer highly competitive and flexible financing packages. As we’ve seen, the rise in modular is bringing in new entrants from the manufacturing, supply chain and software engineering sectors. And given all this, who knows, could even digital giants like Amazon or Uber one day see construction as a sector ripe for disruption? If so, who’d put money on the industry in its present state surviving the challenge?

The bottom line is that many construction companies are highly exposed. In 2018, we saw huge ongoing efforts to drive efficiencies, increase productivity and establish repeatable delivery. In 2019, the pressure will be even more intense. The need for adaptability has never been more urgent. 2019 will be the year when many companies finally start considering systems like ERP not as isolated back-office finance functions essential, joined-up systems that provide urgent coherence, speed and efficiency throughout a project or business. 2019 could be the year when construction takes a giant leap forward, embracing digital adoption.

3. Prediction

Digital asset life cycle management, integrating both BIM and ERP, will emerge as a future need-to-have.

The collapse of Carillion, one of the UK’s largest construction giants, sent shockwaves through the construction industry. The company built and maintained major assets such as schools, prisons, hospitals and power stations across the UK—before collapsing 1.7 billion euros in debt, overnight, in January 2018. While analysts have endlessly debated how and why, insiders point to many systemic faults.

Certainly, in a company that size, spread over that many projects, it seems fair to say that without a central, integrated business system it would be all too easy for senior management to get a full picture of the truth. For the truth to be hidden. And for projects to be kept separate and siloed, financially and operationally.

Central to ERP’s power for construction companies is its ability to connect and integrate all functions in a project—from finance to operations to design—enabling maximum adaptability. I’ve always argued that Building Information Modelling (BIM) will be a driver of digital asset life cycle management and integration. BIM is an integral part of moving from a document-driven to data-driven world. In 2019, I believe we’ll see the first construction companies take their first steps into discussing how to merge and build on the strengths of combining the two systems: BIM and ERP.

Many firms have now started to integrate BIM models into their business. But building BIM on its own without an integrated business system, is only a small part of the picture. As a business system, ERP takes all the functions of the business and provides it with one set of data, enabling it to flow through a project’s life cycle all the way from inception to disposal, and enabling any combination of service or asset management in between.

For manufacturers, integrating ERP as a whole business system, rather than a single financial tool, is old news. They’ve been successfully integrating CAD with ERP for years. However, for many companies in the construction industry, that journey remains to be made. But 2019 will see many taking their first, vital steps.

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The case for regulatory-driven diversification in Ship Finance

A decade ago, we all knew of at least one shipping company that felt safe receiving its debt financing from a single source (a behaviour that was, unfortunately, encouraged by some bankers), and eventually experienced immense pain when some key-lenders abruptly withdrew from ship financing.

Back at that time, sourcing finance from a handful of different – typically European – banks (as opposed to, from a single one), was considered a sound approach to funding diversification, since the key driver for a Bank’s approach to lending was its own business policies and individual circumstances.

That was then. Next, the banking crisis happened. And then the shipping one followed… Both led to (a) an increased regulatory attention to bank-lending towards the shipping industry; and (b) the regulatory framework being the dominant parameter shaping each Bank’s business activity.

One unsurprising consequence of the above was that (European) bank lending, when it came to shipping, became much less abundant. A second, and initially less anticipated, change was that the approach of lenders, regulated by the same regulator, became significantly more homogeneous. A shipowner friend recently confided to me – half-seriously, half-jokingly – that “if I remove the bank logos from the term sheets I receive, I cannot really tell which-one sent me which.” This is mostly the result of the tighter regulatory framework under which European banks are operating and, jokes aside, highlights the need for regulatory diversification.

Given the importance that debt capital has for an industry as capital-intensive as shipping is, no shipping company can afford all of its lenders to operate under the same regulatory framework. Were it to do so, the result might be that next time something important happened, its lenders would be highly likely to change their views about their shipping exposure at the same time and in the same way. It is like operating a VLCC in high-seas, with no internal bulkheads limiting cargo shifting around: you don’t want to be on it when the wind starts blowing hard…

Thankfully, the alternative financiers, who flocked-in during the last few years, are a crowd made-up by highly different animals. We can hence observe “blocks” of lenders, each defined by the main regulator they operate under, with their respective members behaving in a correlated way. European banks are such a block, with a couple of sub-blocks, defined by the risk-rating model each bank uses to rate its obligors.

Another block are the Chinese financial institutions, another are the Japanese, each having different local regulatory frameworks and/or adopting global ones (like Basel IV) at a different speed than their European counterparts. An additional regulatory diversification bonus comes from the different local central banks’ monetary policies and the impact these have on respective lenders’ balance sheets and capacity to lend.

There is, of course, the block of lenders that are completely untouched by lending regulatory frameworks, such as the various credit funds: their activity is, of course, also contingent on market realities, views, models and limitations but – and this is the key issue here – these are different from the ones traditional financiers have.

The optimal mix of funding sources is a moving target, given the constantly changing finance scene, and also it differs from company to company, depending on parameters such as fleet size, corporate structure, or employment profile (but also some more nuanced ones like specific industrial relationships). A ship-finance specialist, whether internal or external to the company, can be the key for keeping this mix as-close-as-possible to optimal at all times.

Some might argue that the above approach is an expensive one: “I have a financier who provides me with a very competitively priced product, and I feel comfortable with him” or “Why start a new relationship with a geographically/culturally distant and/or more expensive lender?” are comments sometimes made.

In a nutshell, the answer is that diversification, even at some cost, works like an insurance policy. For an industry that has grown up having insurance at its heart (who can imagine shipping without it…) the concept of paying what could appear to be a ‘premium’ to hedge against a known and accepted risk (that of lack of financing), but which could pay-off in multiples later on, should not be that strange.

The ship financing scene is trying to find again its balance, while overall volatility in the finance world is increasing. Seeking regulatory diversification of funding sources might prove to be an efficient way to avoid “déjà vu all over again” as dear old Yogi Berra would have put it…

Dimitri G. Vassilacos is a Partner at Ship Finance Solutions (SFS), a boutique financial consulting firm specializing in the shipping sector. Prior to that he had assumed a variety of positions during a 20-year-long career in the banking sector, including Head of Greek Shipping at Citibank and Manager of the Shipping Division at National Bank of Greece.

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Griffith Business alumnus becomes Trade & Investment commissioner

Griffith Business School alumnus Julie-Anne Nichols has been announced as Queensland’s new Trade and Investment Commissioner for China.

Premier Annastacia Palaszczuk said Ms Nichols, who holds a Bachelor of International Business and a Graduate Diploma in Mandarin Chinese Language from the University, has exceptional experience as a leader and stakeholder liaison with the Asian business landscape that will serve her well in the key role.

“Ms Nichols has been the Queensland Trade and Investment Commissioner in Hong Kong since February 2017 and was previously the Senior Trade Commissioner for Austrade in Guangzhou and in Singapore, so her experience across Asia is outstanding,” Ms Palaszczuk said.

“She is well placed to represent Queensland’s interests in trade and investment across all industries and has an extensive knowledge of the Chinese market.”

Acting Pro Vice Chancellor (Business) Professor Fabrizio Carmignani congratulated Ms Nichols on her appointment, which will see her work to improve trade and investment ties between Queensland and China.

“We are proud to hear that one of our remarkable Griffith Business School alumni has climbed to such tremendous heights in the international trade and investment sector,” Professor Carmignani said.

“As a university with historically strong ties to the Asia region, it is deeply rewarding to see Julie-Anne living the Griffith value of engaging with our northern neighbours to achieve meaningful outcomes and impacts for the state of Queensland at large.

“We wish Julie-Anne all the best in her new and exciting role, and will be watching eagerly as she continues to move from strength to strength in her career.”

Ms Nichols has been a resident of China for a decade, during which time she has overseen several teams working across eastern China and north-east Asia.

One of her first duties, according to the state government, will be to oversee the 30th anniversary of the Queensland Government Sister-State Agreement with Shanghai Municipal Government, being commemorated this year.

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Vote Now: 2018 Awards of Excellence Ballot

Welcome to our Annual Awards of Excellence. These are Luxury Travel Advisor’s “readers’ choice awards,” where suppliers and top executives are honoured for their superb performances throughout the year.

The nominees you’ll see by clicking on the link below have been selected by our advisory board; these are the luxury travel advisors who have graced the covers of our magazine over the past 13 years. As we add new cover profiles, the advisory board grows, creating a diverse array of opinion from year to year.

Next steps? The ballot now goes out to our general readership (advisors only, please) to cast the final vote for who deserves top honours for the best in luxury travel. Please do voice your opinion, for as you know, every vote makes a difference. Voting ends Friday, March 29, 2019. The winners will be announced at the 2019 ULTRA Summit, which will take place May 21-23 at Reunion, A Salamander Resort in Kissimmee, FL.

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Assets worth $1tn to shift from UK to EU due to Brexit

Assets worth nearly £800 billion ($1 trillion) are being moved from Britain to new financial hubs in the European Union ahead of Brexit, consultancy EY said on Monday.

Britain, which is due to leave the bloc in March, has yet to approve a deal to avoid an abrupt severing of ties with the EU. Although the British parliament is due to vote on a proposed settlement next week, it is unclear if it will be approved.

“The closer we get to March 29th without a deal, the more assets will be transferred and headcount hired locally or relocated,” Omar Ali, UK financial services leader at EY, said.

EY has been tracking the Brexit plans of 222 financial firms since Britain voted in June 2016 to leave the EU. In its latest update to the end of November 2018, it said that 80 firms are considering or have confirmed relocating assets and staff.

The latest estimate from EY says that £800 billion in assets would move, a fraction of Britain’s £8 trillion banking sector.

Frankfurt Main Finance, which promotes the German financial centre, has said it expects €750 to 800 billion of assets to transfer there alone, largely during this quarter.

Around 2,000 new European roles have been created by financial services companies in response to Brexit, with Dublin, Luxembourg, Frankfurt and Paris the most popular locations, EY said.

Forecasts of hundreds of thousands of UK financial jobs moving to the EU have not materialised, and the Bank of England expects about 4,000 jobs to have moved by March 29.

“Whilst roles will no doubt move from the UK, many firms are only moving those employees deemed essential and are hiring locally given the expense of relocation,” Ali said.

Moves so far would be only the “tip of the iceberg” if there is a no-deal Brexit, EY said.