Up the scaffolding: how to improve on overseas contracts

The South Korean construction industry surprised even itself last year by securing a record $13 billion worth of new overseas contracts.

Foreseeing the end of the Middle East construction boom, from which they have done so well, the Koreans were forecasting only $7 billion originally.

But the success is going to no one's head. There are no illusions - the overseas market is definitely going to get tougher in the years ahead.

When Korean companies began bidding aggressively for overseas jobs in the mid-1970s, they had no track record, but with skilled workers getting the job done faster than anyone else, they now operate in more than 30 countries, gaining the biggest market share in some (such as Saudi Arabia, where an estimated 100,000 Koreans currently work).

But the competition is getting keener in the Middle East, and the Korean edge in labor-intensive projects is being eroded as wages increase in line with inflation at home.

And in some countries, foreign firms are being forced to take contracts from more expensive local companies and to hire up to 50 percent from local labor. This narrows the Korean firms' profits and interferes with the smooth operation of an all-Korean workforce.

In addition, other Asian countries like Indonesia and the Philippines - with wage rates well below Korea's - are beginning to bid for labor-intensive projects. One way to cope is for the Koreans to hire workers from other parts of Asia to do basic manual work. There have been unconfirmed reports that China, despite its support for North Korea, could provide the South with up to 100,000 construction site workers for Middle East projects.

But everyone is Seoul concedes that this is really only a stopgap measure. The long-term answer: Move up to high-technology construction projects now dominated by American, Japanese, and European companies.

According to Byong Chu Lee, executive vice-president of the Overseas Construction Association of Korea: ''Korean companies have been viewed in the past as vacuum cleaners - there to pick up the leftovers. . . the basic jobs in the sun, like building houses, highways, and treatment plants. . . but not really equal to more technical projects.''

This is an image the Koreans are working hard to dispel. One way is to team up with more knowledgeable American and European contractors. The two sides could share equipment and the Koreans would provide the labor.

The government has also stepped in. The Construction Ministry runs a strict licensing system, allowing only a certain number of companies to compete in each country so as to avoid self-defeating price wars.

The Koreans are very concerned about their image. Typical was their reaction when a company building houses in Kuwait got into financial trouble and couldn't continue. Government and industry got together and decided that the industry leader, Hyundai, should complete the project, even though it would end up taking a loss.

To avoid such embarrassments, the Construction Ministry now classifies only 34 of an estimated 500 construction firms in the country as eligible to be prime contractors or subcontractors, based on their having secured minimum orders of $ 150 million overseas in the last three years. Another 70 or so companies licensed to operate overseas can only work as subcontractors to the class ''A'' companies. This classification will be reviewed every two years.

Korean construction has concentrated up to now on the Middle East. The region last year contributed almost $8 billion of the total orders for goods and services.

Industry analysts foresee a gradual decline in the years ahead, although Iraq is expected eventually to be an important new source of construction income, once its war with Iran is brought to an end.

But South Korea's future lies in diversification. Libya is its new boom spot. One company privately predicts that it alone will be able to win Libyan orders, worth up to $6 billion within a year or two.

Some Korean companies are already looking beyond the Libyan boom. Daewoo, which has $2 billion worth of work on hand in the North African nation, has begun branching out southward into Nigeria and the Sudan. Hyundai, Daelim, and Ssyangyong are active in Singapore and Malaysia.

But as far as Korea is concerned, the world is a big place and there is still plenty of room for a hardworking nation like it to make money - as long as it gets out of labor-intensive, thin-profit-margin projects and into the big-paying high-technology ones.