Engineering more business

The SmartCompany Dun & Bradstreet Industry Growth List for the engineering sector reveals an industry powering through a volatile period, with companies evolving to offer a broad range of services to attract more lucrative, long-term contracts.

But there is still trouble ahead, with firms in the commercial construction industry basically receiving no work, large companies struggling to find skilled staff and finance still difficult to come by.

Many of the companies service the mining sector, which has provided a steady stream of revenue during an otherwise volatile period, with many others focussing on marine-based work and surveying.

The total revenue of the 50 companies on the list comes to $34.3 billion in 2009, compared to the $14.4 billion of the 50 companies on the list in 2008. The average revenue comes to $686 million, compared to last year’s $417 million, while the average growth rate is a solid 448%.

The engineering industry is incredibly diverse, with the top 50 companies working in various fields including civil, electrical and construction engineering. While some areas, mainly electrical engineering, have fallen away due to the downturn, those servicing the mining sector have been able to hang on and deliver fairly solid results.

Companies offering constructing and surveying services have been able to whether the past 18 months better than most, but analysts say there will still be problems, particularly for bigger firms suffering a chronic skills shortage.

Diversity pays

Megan Motto, chief executive of engineering lobby group Consult Australia, says the industry has been able to survive on the back of the mining industry, but also because of the billions thrown at infrastructure work by the Government.

“The industry has indeed been led by mining, but you also have to keep in mind that our members do a lot of pre-feasibility studies for infrastructure work. So we’ve had a lot of members being thrown into work because of the Government’s investments, but certainly the mining has helped members along as well.”

The biggest benefactors, she says, are those companies that have been “multi-disciplinary” in their strategy.

“There are many firms performing well, particularly those that are servicing multi-disciplined markets and those that are able to keep doing a variety of different services.”

“These are the companies that are able to divert staff from one sector to another because of their strength in different areas.”

But there are still big problems. The Government’s infrastructure stimulus is winding up, credit is incredibly hard to come by and the mining sector isn’t able to save everyone. So who’s hurting the most?

“Commercial buildings. Simply no one is building them, and particularly in Sydney where you’ve had high office vacancy rates, there simply hasn’t been any need to build. Commercial building is always led by the private sector, and the freeing up of capital has been thin.”

“Given the end of the year is not that far away, a recovery should be within the next six to eight months. However, there are still firms struggling as the Government infrastructure funding winds up as well.”

“Skills shortages are a big problem, without a doubt. Particularly those companies in sectors like rail, civil and construction. Also in oil and gas, and there’s a shortage of skilled environmental engineers which is hurting a number of different companies and preventing them from going forward.”

While engineering remains strong, Motto says there are definitely problems. In order to survive the next year, companies must “ensure they are equipped to deal with many different disciplines”.

Shining through the gloom

Austral Construction managing director Craig Allen says providing this type of multi-discipline approach is essential to surviving.

“We’ve had back-to-back record profits during the two years. I would say our market’s going to be quite strong for the year to come, particularly with the mining sector performing so well and the inland and coastal areas also doing extremely well.”

The company ranked 13th on this year’s list, with 2009 revenue of $34.1 million on a 64% growth rate, with Allen saying he expects revenue of between $40-50 million for the 2010 financial year.

Rather than focus on one aspect of the construction service, such as concrete mixture, or earthworks, the company instead does it all.

“With our ability to have multidiscipline sheet piling, earthworks, construction work and marine works, we can do the whole service rather than just one part of the project. We’re able, in theory, to do a project beginning to end along with ongoing maintenance.”

Allen says this provides good value for companies wanting to sign up a single provider, rather than have to deal with a number of different companies which can spread risk too thin. And while the amount of work has declined, Allen says the company has been able to strike up some good relationships with its all-in approach.

“Our turnover is down, but we feel we’ve been able to hold on to all of these contracts and that will keep us going in the longer term. It works of us, it works for them, and we’ve kept that relationship going because we knew we can provide a full package.”

But like other companies servicing the mining sector, the Government’s proposed resources tax certainly affected how Austral viewed the industry. Many companies grew uncertain about how they would proceed, and considered delaying projects.

But Allen says while the company was concerned, its services are far enough down the production line that whatever the outcome, any impact wouldn’t be felt for a few years.

“Obviously we were naturally concerned it would affect us, but we typically operate in maintenance construction and not major expansion projects, so we operate in the headline project area and not much else. So when the miners said they would pull some of their projects, these things take years to get to our level anyway so we weren’t too worried.”

Nevertheless, Allen says the tax issue reinforced a key strategy for the company – diversity.

“I’m conscious of being completely diversified. The big miners have been good to us, but we’re working for a number of other smaller firms and I feel like we need to diversify ourselves that way going forward.”

A new strategy

Adam Keats, managing director of LogiComms, says he too recognised the need for engineering companies to reinvent themselves – so he transformed his company’s entire strategy to survive.

“We’ve completely repositioned our strategy, from a single discipline company into multidiscipline, we’ve complete two acquisitions to accomplish that and we’ve seen our revenue growth stay pretty solid despite a pretty choppy environment.”

The company offers specialised engineering services to the mining industry, particularly oil and gas manufacturers. It offers a range of services including concept through to execution and maintenance, project management, asset management and full maintenance.

Its revenue grew by 63% from $31.2 million in 2008 to $51 million in 2009, and Keats says the company is still on track for steady growth in 2010.

Although seeing through a client from project design to execution and maintenance is rare, Keats says the company needs to offer that service simply to stay competitive.

But offering a multidiscipline approach isn’t the only challenge. Keats says the company’s exposure to the mining sector, which provided a place of refuge during 2009, also became a curse when discussions over the mining tax began.

“I think the uncertainty around the taxation legislation was a big pressure point, along with the tightness in equity markets which impacts a lot of decision-making in the engineering sector. That’s the biggest external challenge.”

“The largest internal challenges have been around transform from a single to multi-discipline company. We would have liked our markets to be a bit stronger during that time, but we’re doing very well.”

Keats also echoes Motton’s warnings of the industry, saying many companies are suffering a skills shortage and well-trained professionals are becoming even harder to come by, especially in niche areas like marine work.

But by moving into multidiscipline, Keats says the company has been able to provide more services to its existing customers, and then move on to gain new clients as well. But it’s a move he wishes he could have made earlier.

“We were working with some companies who were keen to work with us on a deeper basis, but we weren’t able to provide that sort of capacity for them.”

And despite LogiCamms strong position, Keats says the negotiations over the mining tax would have impacted the company had it been only performing in a single discipline. Several companies decided to delay negotiations, which negatively impacted some smaller, more niche firms.

“Oil and gas have been performing fairly well, but in other companies decisions have been delayed, and pushed around, and so on. It depends where you are in the cycle, but certainly many companies have been affected because of it.”

“In our example we rode through pretty well because the projects we have been working on were decided on two years ago, but there are a number of other companies in the cycle that aren’t doing very well in that area.”

Moving ahead, it’s all about multi-discipline work, offering different types of services for a single project as companies struggle with skills shortages and a lack of work. Keats says clients need to feel reassured they can get all they need from one provider.

“Moving forward we have a positive outlook, we’re investing in our infrastructure and we’ll be focussing on larger, more multi-discipline projects.”