The earning shock of the Overseas Plant Field

Until a few years ago, the improvement in actual exports of the EPC companies (which means Engineering, Procurement and Construction) like Samsung Engineering, GS Construction corp. DaewooENC corp. and Hyundai Engineering had a beneficial effect on the Overseas Plant field as a whole. Lots of the projects were performed by Korea EPC Company in the Middle East.

For example, Hout Project in Saudi Arabia for DaewooENC.

Designing section of this project is almost done. Completion of the construction will last for 3 years.

Another Project is TGAST Project in Malaysia for Samsung Engineering. They are construct the Gas facility.

 Many students graduated from engineering school wanted to work as an EPC engineer.

But, the companies said the loss from operations was tens of billion dollars. Samsung Engineering and GS Construction experienced a drop in prices last 2 years. We called this “Earning-Shock”.

Why have these companies recorded deficit financing for 2years?

What is the fundamental cause of the drop in stock prices?

Definitely, the recent company’s sales have been much better than past year’s sales. The number of the construction projects is rising in the Middle East, Southeast Asia, and Africa. Many clients, for example ARAMCO corp., are claiming projects to Korea EPC Company. At this point, the main problem arises. Client announces one project like construction of the gas-facility or LNG plant. Then many companies bid on this project. To company, having the construction experiences is very important to be awarded more contracts. So the bidders compete to offer lower prices to gain client’s attention. That’s why the sales decrease although the performances increase. We refer to this situation as ‘low-price booking’.

Then, how can we solve this problem? Are there solutions for this problem? I recommend that EPC Companies have to make a joint contract. A joint contract is a type of agreement in which two or more parties on one side of the agreement consent to be responsible for mega-project as a collective unit, rather than as individuals. It will reduce the risk involved in performing mega-project exclusively and prevent the below-cost tendering driven by cut-throat competition. 5 major EPC Companies made a joint contract on the CFP Project in the Kuwait on Sunday April 13^rd. KNPC divided the CFP Project into 3 packages (MAA, MAB1, MAB2) and ordered. SK Corp. and GS Corp. will conduct a MAA Package, and then Samsung Engineering will perform a MAB1 Package, finally, DaewooENC and Hyundai Corp. will be responsible for MAB2. It is possible to divide the CFP Project because of the large construction project scale ($12 billion).

Another possible solution to solve ‘low-price booking’ is developing original plant-process-technology. For example, DOOSAN HEAVY INDUSTRY has a Seawater Desalination Plant Technology. Because this company has an original technology, they don’t need to be crawling on clients who need that technology. But this is only rare case. Most of the Korea EPC Companies don’t have any original plant process technology especially LNG Liquefaction Technology. They must develop their own design technique.

Conclusion, there are two method to increase company’s sales, joint contract and developing own technique. To improve stature of the Korea EPC Company, they must consider these methods when they compete to win a contract.

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