Tuesday, 10 February 2009

Malaysian Economic Recession - do we really have the right strategy?

Over the last 6 months, credit crisis headlines have dominated the industry press in the UK. There is no doubt the current global economic recession has been challenging the industry and this had pressed most of the businesses particularly the contracting companies to re-visit or re-thinking their strategy to ensure it is in good shape to ride out these conditions. Whatever it is, this strategy must protect their business and its future growth with healthy pipeline of work and commission over the next few years.

Let me share my view of the current downturn climate in the UK and how it is affecting its construction and property industry which can be summarised as follows;

1. The residential market has been hit hard but high-end residential and social housing markets haven't been too badly affected;

2. The retail sector had turned the tap off several months ago but schemes and capital are now starting to be released once more;

3. The commercial sector is just about holding up because there are several major schemes backed by sovereign wealth funds, financed by emerging markets or oil rich nations;

4. There are pockets of specialised activity that are thriving including data centre business, utilities ector and waste management.

One thing I learned from some of the businesses in the UK and also in Malaysia is that through their own diversification strategy implemented for almost 20 years ago, they have provided a broader service offer, across more sectors and geographical locations than ever before. We can easily see their dominance around the world and surely their global growth strategy has ensured they are not overly exposed or dependant on one particular area or market.

I have no surprise if some of the contracting companies in the UK have developed their strategy in line with my views above as they are currently putting more effort on securing government and public sector projects for both consultancy and construction works. There is a wealth of education spending through Learning Skills Council UK, across the Building School for the Future UK programme, in the higher education, academies and colleges sectors and in government-funded infrastructure projects such as Crossrail UK and Network Rail UK.

Assuming the UK Treasury doesn't pull the plug on government spending, the public sector work should help to support the inevitable fall in private sector work. My forecast is that the commercial sector work tailing off over the next three years and picking up slowly in 2012.

I would advise the contracting companies in Malaysia to consider the consolidation strategy within the construction and property industry. This can be done either as a result of competitors being bought out or general consolidation. There will be inevitably be opportunities for those contracting companies that have cash in the bank. I believe a more consolidated and better business with a clear vision to be the best at everything we do would place us in a strong position in the volatile and uncertain marketplace.

In addition to that, they should focus in meeting the needs of both Client and End User and take a brave decision to implement some structural changes to the fixed price subsidiary businesses in response to Client feedback.

From a supply chain perspective, although there are still a lot of projects around today, most of them do expect to work with tighter margins as the market hardens and highly competitive. I can see some material costs flattening off and even reducing in some areas if, for example, the emerging markets appetite for growth and raw materials slows down. However, it is interesting to see the steel, concrete, material and labour prices are still going up, albeit the rate of increase has slowed down.

The Malaysian Government need to re-emphasis that as our economic grows, it is good to invest in the emerging and resource led markets within the construction and property industry. We should continue our focus on service delivery, sustainability, quality products, iconic projects and partnering relationship in order to protect our industry. Hopefully, a step change in the growth and expansion of our economic portfolio can ultimately helps the Malaysian Government to achieve its objective.

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