Engineering growth in the gloom

The economy is spluttering, the commodity boom is over and the property section is doing it tough, yet Australia’s engineering sector is proving to be remarkably resilient.

While many of the companies on the SmartCompany Dun & Bradstreet Industry Growth list for the engineering sector have been hurt by the downturn, they have been able to grow by adopting two very different strategies: focusing on profitable niches and diversifying to avoid struggling sectors of the economy.

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The total revenue of the 50 companies on the Industry Growth List in the 2008 financial year increased 44% from $14.4 billion to $20.9 billion. The average revenue of the companies on the list was $417 million.

Top of the list is SWG Offshore, which increased revenue from $5.3 million to $48.2 million after winning a string of contracts overseas. Mid and small-sized firms including Thiess Kentz, STI-Global and Abesque Engineering, dominate the top 10.

Of course, the more recent performance of these firms has been affected by the global economic downturn and particularly the credit crisis, which has seen funding for major projects dry up, particularly in the mining and property sectors. Earlier this year, BIS Shrapnel estimated that engineering construction activity will fall by 20% by 2010-11, which equates to a fall of around $14 billion.

Megan Motto, chief executive of the Association of Consulting Engineers Australia says the pain felt by the engineering sector had been reduced because of two factors: the ability of firms and individual engineers to work across disciplines and sectors, which has allowed them to switch out of struggling sub-sectors and into more profitable ones; and the deep desire of firms not to lose their key staff.

“Firms appreciate the labour shortages that they were experiencing a year ago and they are determined not to put themselves in that position in three years time when the recovery is in full swing,” Motto says. “The firms have been very conscious of redeploying workers and looking for niches to exploit.”

Peter Taylor, chief executive of Engineers Australia, says while most members are holding onto staff, a few have deferred or cancelled graduate programs until things pick up. But he says he is still hearing of firms struggling to find skilled staff and estimates Australia‘s engineer shortage still stands at 10,000 to 20,000 (well down from 28,000 at this time last year).

Motto and Taylor agree that the efforts of the Federal and State government stimulus packages have helped to buffer the downturn. But governments can only fund so much, and both say the key ingredient to a recovery for the engineering sector is an easing of the credit squeeze.

“At the end of the day, what we really need to see is private sector financing come back into that sector.”

Picking the right niches

The engineering sector is suffering in Western Australia. Companies relying on contracts from natural resource giants such as Rio Tinto and BHP Billiton are hoping China will begin buying again, but are struggling to make up the difference in the meantime.

But managing director of Decmil Australia, Scott Criddle, says his business has survived most of the fallout by relying on a niche sector that will almost never be out of demand.

He says the company’s main work is in village construction (which involves constructing temporary residences for the workers in large mines), in concrete and in civil engineering. Given these areas are holding up well, Decmil is happy to focus on these areas for now.

Criddle says the company, which increased revenue by 232% to $127.6 million in 2008, hasn’t “really had a downturn”. In developing its business plan, Decmil decided to focus on commodities that would be in high demand for several years, such as gas, while discarding more volatile minerals such as nickel.

“Additionally, our work is not operations based, and we’re also not work focused on the commodities that are in less demand such as nickel or gold, we’re only involved in iron ore and gas. Iron ore hasn’t really slowed in its expansion.”

“We think the growth in those areas will be there for five to 10 years, so we’ve been focused on those areas from day one.”

“If you’re in an area of investment, say nickel or gold, if no more money is being spent then engineering firms don’t have any work, and therefore they will suffer.”

Nevertheless, Criddle admits there have been problems.

“I think the biggest issue is probably getting funding. While we’re pretty safe, there is a global financial crisis out there and the banks have a lot less money to give. While we don’t have any debt, we don’t have bank guarantees and I think this makes getting work difficult. We’re managing, but it’s holding us back from growing more.”

Criddle says the business will eventually benefit from some of the Government’s infrastructure programs announced in the Federal budget, but for now it is just focusing on its core businesses, which are providing the majority of its revenue.

“We’ve hired a heap of people in the last year – we’re in a stable workforce. We’re just the lucky company I suppose, and we’ll continue to focus on what we do best.”

Strength through diversity

While Decmil has tackled the downturn by focusing on specific niches, VDM Group has been protected by the wide range of areas it works across.

The company focuses on consultation and construction in a range of areas such as mechanical, environmental and acoustics engineering for mining companies, and also offers residential and commercial construction services. It grew revenue from $231.1 million revenue in 2007 to $407.2 million in 2008.

Chief executive and executive director Jim Van Der Meer says the company’s decision to enter a ride range of areas, opposed to focusing on a niche sector, exposed it to economic turmoil and it needs to offset as many losses as possible.

“Had we been in one sector you run the risk that you’re in the wrong sector. We’ve always tried to be relatively diverse.”