Construction companies look for high-technology projects to build

For South Korean construction companies, the Middle East boom continues. But the competition is getting stiffer as Korea's cheap wage advantage disappear. Structural changes in the market are putting greater emphasis on high technology rather than the labor-intensive projects in which the Koreans have long excelled.

Since they first began tendering for Middle East construction projects in 1974, the Koreans have built a good, reliable reputation for building roads, port and airport facilities, housing blocks, and government buidings.

Now they want to try to break into high- technology projects such as petrochemical plants, steel mills, and telecommunications. But it is precisely in these fields where, at present, they have little or no advantage against technologically advanced American, European, and Japanese competitors.

Could this, then, spell the end of the construction boom?

Not at all, says Young C. Park, research director at the Korea International Economic Institute, who has made a detailed study of Korea's overseas construction activities and their impact on the domestic economy.

"Undoubtedly the emphasis in the Middle East now is away from the basic infrastructure, where we have excelled, into high technology areas. But we are already taking steps to cope with this switch in strategy and I really don't think we are going to lose our strong position."

In 1975 Korean construction firms successfully tendered for building contracts worth $800 million. In 1978 the total reached $8 billion, and despite (or because of) domestic economic difficulties, this held firm at $8.3 billion last year.

The Koreans, in fact, have carved themselves out a handy 8 to 10 percent share of the regional construction market, second only to the United States (an estimated 17 percent). The Korean share, surprisingly, surpasses even the mighty Japanese, who last year saw their share of contracts halved from 15 to 7. 3 percent.

There are now 97 construction companies strictly licensed by the government to compete for overseas contracts. The Koreans are active in 34 countries, but the bulk of the work is in the Middle East, and primarily in Saudi Arabia.

The Saudis, however, have just about completed their basic infrastructure buildup and are leading the way in switching to more ambitious industrial projects to make better use of their vast oil wealth.

Even before this, though, the Koreans were beginning to consider their heavy dependence on one country not necessarily in their best interests -- even if it was a prime supplier of crude oil.

According to Young C. Park: "Over 75 percent of construction work undertaken by Korean firms was in Saudi Arabia in 1979. That was reduced to 64 percent last year, and Kuwait and Libya have now emerged as important areas for diversification."

A second stage will be to diversify further, into Africa, Southeast Asia, and Latin America, especially when domestic construction firms in the Middle East become capable of replacing the foreigners.

But that move will require the sort of financing that the Koreans admit they simply are not capable of at present. So, for now, it's better to concentrate on the oil producers where money is no problem.

In trying to carve out a profitable niche in high technology plant construction, however, the Koreans readily admit they can't go it alone.

"Our present technology is simply not competitive enough," concedes Mr. Park. "So what we are proposing is joing ventures, say with American, British, or French companies, in plant construction.

"In the civil engineering phase, we have a definite advantage on costs that developed countries simply cannot match. So we would primarily undertake construction of the plant itself, while the other partner would provide the machinery to go inside."

Korean firms have already received such a proposal from West Germany for a petrochemical project in Saudi Arabia, he disclosed, adding: "I see no reason wmy American firms shouldn't follow suit."

Such joint ventures already exist with Middle East companies, and last year these accounted for almost half the Korean total contract amount.

Choo Sang Kook, senior vice-president of Hanyang Corporation, a leader in both domestic and overseas construction, recalls that "in 1975 when we tried to compete in the Middle East we approached the European companies who were very strong there then and asked to be involved. They refused. It was like the prewar situation between Japan and the West.

"Finding to such opportunities, we decided to compete with them flat out. But in order to break into the market we had to sacrifice most of profits. I thing if we could have got the cooperation we sought from the Europeans we could both have made larger profits from the start.

"Now we have proved ourselves. Last year I was part of a construction industry mission to Europe which again proposed the idea of cooperation. This time they were ready to listen.

"It makes sense. We spread the business and political risks while playing complementary roles."

Big wage increases averaging around 30 percent in recent years have somewhat eroded the Korean price advantage on labor intensive projects.

But, asks one industrialist proudly: "There may be other countries who can provide labor cheaper than we can; yet, who call match our strong position in respect of good management and diligent workers?"

In fact, at the bottom end of the labor market, Korean firms in the Middle East have begun hiring a few Indian, Pakistani, and Indonesian workers at lower wages for unskilled work.

There are more than 100,000 Korean workers in the Middle East at present, and that number is unlikely to shrink drastically in the foreseeable future.

The only factor that might change this would be a sudden acute shortage of skilled construction workers at home, forcing up wages and narrowing the advantage the overseas workers now enjoy. This conceivably could happen as the government is planning to boost the economy through expanded public works projects and a great many more housing starts than normal this year.

Construction workers are sent on a one- year contract, office staff on two. The former are required to return home after their contract expires, but there is nothing to stop them changing planes at Seoul Airport and flying right back to the Middle East. In fact, many workers in the region are now on their second or third tours.

The "perks" are high. Wages are double domestic rates, and the tax exemption level is set at around $500 a month, against the ordinary rate of $250. The average skilled wage in Korea is $300 a month.

The tax concession is a government acknowledgement of the important role the overseas construction boom has played in keeping the country's balance-of-payments deficit within manageable bounds.

Out of last year's contracts worth $8.3 bilion, the net foreign exchange gain was $2.2 billion -- to be set against a balance-of-payments deficit of $5.4 billion (which could have been far worse in view of the nation's domestic economic woes and soaring oil import bill).