Chief executives from some of the UK’s largest contractors have warned industry it needs to modernise and consolidate to boost profitability as Chinese businesses eye up potential acquisitions.
In a wide-ranging panel session at the Construction News Summit, CEOs from Carillion, Graham Construction, Laing O’Rourke and Murphy Group warned of the threat from overseas competitors and predicted that only an increase in M&A activity could force the necessary growth in profits.
“There is further consolidation to come, as profitability is not where it should be,” Murphy CEO Steve Hollingshead told host Andrew Neil.
“Construction is not an industry financers want to invest in; we are not an investment grade industry at the moment [and] we need to become investment grade to drive better performance.”
On the issue of mergers, Carillion CEO Richard Howson said: “I think it should have taken place 20 years ago, and the question is, why hasn’t it?”
Asked why consolidation would help contractors, he added: “It brings a greater diversity to the order book; we might accept some work we do as low-risk, low-margin [but] we need to mix that with a range of higher-earning opportunities.”
The comments echo a report from auditing firm EY, shared exclusively with Construction News, that predicted the number of tier one contractors in the UK would halve over the next five years, with profit margins among the elite group rising above 5 per cent.
The panel agreed that profitability was a major concern for the sector.
“For far too long the industry has been operating at margin levels that would be unacceptable elsewhere,” said Graham Construction CEO Michael Graham.
Mr Hollingshead said firms’ margins “should be hitting 10 per cent”, calling the current margins made by leading firms of between 1 and 2 per cent “not credible”, and that a minimum of 5 per cent should be the future benchmark.
Laing O’Rourke CEO Anna Stewart said: “The industry has struggled to modernise.”
She added that there were “opportunities to consolidate” and was also critical of contractors for not getting involved in the design phase of projects early enough.
Ms Stewart warned that domestic firms faced a challenge from overseas competitors bidding for projects, calling the UK “a very open market”, but adding: “Our opportunity to go to France or Germany [to bid for work] is zero.”
She also suggested that packages of work on projects such High Speed 2, on which Laing O’Rourke is bidding alongside Murphy and Spanish firm FCC Construccion, were not sufficiently large to necessitate joint ventures.
Commenting on European collaboration, she said: “[European firms] do not necessarily bring things we don’t have; they bring a balance sheet.”
On the same subject, Mr Howson said the government “should just buy British, from British contractors”.
He added: “We can bid in France, Germany or Spain but we wouldn’t win, so we wouldn’t waste our bidding budget.”
Mr Hollingshead said a further challenge could come from Chinese firms, in the wake of a number of them having won work on UK projects recently, either as main contractor or in JVs.
“There is a challenge to the UK industry, as their appetite for risk is very different from the appetite of tier one contractors in the UK,” he said, adding that they “take a long-term view”.
Mr Howson said it would be harder for Chinese firms to enter the market with their own labour force as some have in Africa and the Middle East.
“It’s more likely they will acquire a contractor or take a major stake,” the Carillion CEO suggested.
Ms Stewart said she believed the Chinese would enter the market “in a subtle way at an investment level”.
The panel also agreed that the industry was facing a “skills crisis”, but suggested that attitudes towards careers in construction were changing.
“I think sites and offices are better places to work now,” Ms Stewart said. “It’s not a diversity crisis - it’s an image crisis.”