Editor's Comment: The industry has bright prospects but dull profits

One of the interesting facts to come out of the launch of the Global Construction 2025 report (see this month’s lead news story, page 6) is the estimated size of the worldwide construction industry. The authors – Global Construction Perspectives and Oxford Economics – put the current size of the world market at US$ 8.7 trillion, and forecast that it will rise to US$ 15 billion in real terms by 2025, by which time it will account for 13.5% of global economic activity.

The first thing to strike me was that US$ 8.7 trillion is one of the largest estimates I have heard for the size of the global construction market. Other economists I have spoken to would put it between
US$ 7 trillion and US$ 8 trillion. Having said that, the Global Construction 2025 estimate is close to 10% of global GDP, which I have found to be a pretty good rule of thumb for estimating the size of individual and regional construction markets.

The second striking thing about the Global Construction 2025 report is the rate of growth that is forecast for the industry. The underlying dynamic is that while global GDP is expected to grow by an average of +3.5% per year for the next 12 years, construction output will increase by some +4.3% per year. Hence the industry coming to represent a much bigger slice of the global economy by 2025.

The reasons given for this include population growth and increasing urbanisation, particularly in developing countries. This will mean the need for infrastructure of all kinds, as well as affordable housing, will rise much faster than other parts of the economy.

Trying to think what the world will be like in a decade’s time can be a mind-boggling exercise, and trying to work out the implications for the industry of the Global Construction 2025 report’s findings is a challenge. There will be opportunities of course, but they will be in new markets offering a range of risks and rewards.

Having just compiled our annual study of the world’s 200 largest construction companies (see page 18) I was struck by what this might mean for contractors. I am always taken aback by how fragmented the industry is, and always seems to have been. The largest contractor in the world, CSCEC had revenues of US$ 88 billion last year. As big as this company is, that only has a 1% global market share – show me another industry where you can be market leader with a 1% share!

But is bigger necessarily better in this industry? The other point that the Top 200 study bears out is that despite an apparently strong and growing global market, construction is a business that struggles to make a decent profit. The average operating margin across the Top 200 is a meagre 4.3% and the best it has been in the last decade is 6.2%. That is far from impressive, and implies an industry with heavy competition and one which struggles to sell higher margin added-value services to its clients.

So maybe the way to capitalise on the good outlook for construction is not to get bigger and hope for economies of scale. History shows that they are hard to find in what is traditionally a labour-intensive business driven by low-cost tendering.

A more attractive plan would seem to be to find the technical niches and markets where a specialist can flourish.