Export capable industry?
By Inese Timuka .
07.12.2009
As recently as 2007, the construction sector in Latvia was still going strong. Almost 85% of managers at the largest Latvian construction companies viewed the situation in the sector positively and provided optimistic assessments of the ongoing market climate.
The number of companies was growing by the day. However, an adverse change in the ongoing cycle of the construction sector has become increasingly evident since 2008.
The number of projects fell sharply, construction outputs dropped, the expectations of uninterrupted price increases began to be corrected
and financing opportunities came to a sharp halt. The negative effects of the global financial crisis are being felt across the entire spectrum of the construction industry. Frozen or postponed projects, where developers had originally hoped to have construction underway but had their plans scrambled by the fallout in the housing market, are becoming a familiar part of the landscape.
Dramatic changes
The keywords for the first nine months of
2009 were deteriorating economic conditions, unemployment increasing sharply, tumbling domestic consumption and the public sector having to deal with a budgetary deficit. As volumes decreased and competition became stiffer, construction prices fell to the levels of 2005.
To win new contracts, contractors often submit tenders with prices below the direct costs and hope to compensate for the difference with a fall in prices in the future. This approach is definitely not sustainable; it entails increased business risks for tender submissions, execution risks for customers, and credit risks for potential suppliers.
However, there are companies that are looking for projects outside the confines of Latvia. “There are approximately 6,000 officially registered
construction companies in Latvia, but the strongest have united in a strategic partnership to look for ways into other markets, to the west and to the east,” said Valdis Birkavs, chairman of the board of the Latvian Builders Startegic Partnership, which unites the country’s eight biggest companies in the sector. “The local construction industry has basically stopped. New projects are extremely rare.
At the moment, we are building a new National Library of Latvia, the so-called Castle of Light,” Birkavs explained. He continued by saying that even though the recession is virtually everywhere, other governments in Europe as well as in the United States are using traditional techniques of crisis management – investing in national infrastructure; not only giving work to their builders but also developing the country.
Andris Asaris Asarovskis, head of the board of LEC Construction, considered a leading company in the field of electric power supply, communications building and construction, said that the economic downturn has not affected his company directly. But he added that as the market became very tight many companies that previously worked in specific fields such as building private houses have now changed their profiles and are trying to offer construction services in other fields too.
“I’m sure that next year local demand will be lower and the local market is already too small for every builder. So it’s logical to search for projects abroad. But I can say for sure that electricity demand will grow in the long term and our work will be needed,” he said. “Many companies are still full of optimism, hoping that the crisis will end soon, and looking at the tenders available and what projects are being undertaken I see reason for optimism,” he concluded.
Search for demand outside
“We have been exploring business opportunities and creating business contacts in several countries in Europe and the Middle East since last year,” said Guntis Ravis, co-owner and founder of the construction company Skonto Buve, considered one of the top players in the local market. He said that it takes a long time to verify a company’s work abroad, and unfortunately Latvian construction companies are not well known. “We started exploring abroad last year, as I foresaw that the local construction market would be down. Only after a year did the company start to feel a positive outcome, signing contracts in Europe. We are taking part in exhibitions and we have representation in four countries – Norway, Sweden, the UK and Ireland.”
Asarovskis agreed: “Our goal is to find a strong starting point on which to base further growth. Let’s not be naïve. Initially, we should prove ourselves and gain the knowledge of foreign markets and their state requirements.” LEC is prepared to take part as a subcontractor in large-scale projects or as a general constructor in medium-sized projects.
All of the experts we spoke to said that these days they meet most of their clients at specialized industry exhibitions as well as through
tenders. Asarovskis mentioned that it is not always necessary to win in these competitions; participation is also a kind of promotion for the company. “But I am concerned that once we become better known and gain trust abroad, that’s when the local construction market will finally be reborn.”
Eastern market
Latvian builders are also looking to the east, but they meet with difficulties there too.
“There the system is so different we need to work a lot more to prove our abilities. It’s difficult to present ourselves, since they comprehend us with a high level of uncertainty because of the country we represent,” said Guntis Ravis, the millionaire co-owner of Skonto Buve.
“For example, we have a brand new factory, with state-of-art equipment where we produce aluminum facades, windows, double- glazed windows and metal constructions. Only after the clients have actually seen it do they start to see us as a serious partner.
“We feel deeply that proprietors don’t know what they can purchase here. Foreigners don’t believe in the quality of Latvian companies’ services until they experience it. We try to break these stereotypes by pressing ahead with our work.”
Birkavs said that the National Association of Construction Companies is focusing on offers in Saudi Arabia where the crisis has not been so deep.
“We have completed market research and the registration of companies will be completed in the near future. We have found partners and have received offers from potential clients. Initially, we want to work on projects that are not too large to get some experience for both our engineers and administration.” The key to financial success is in providing a superior service for the price charged by competitors, never compromising in quality for short-term gain and focusing on long-term goals despite any temporary difficulties. All of our experts agreed that the key to success for Latvian construction companies were quality, accuracy and speed.
Building bridges
Ravis sees great potential in bridge construction too. Skonto Buve and five partner companies have been working together on building the Dienvidu Tilts (Southern Bridge) over the River Daugava in Riga, the biggest ongoing construction project in Latvia at the moment. Abroad, they can offer everything from design to installing the lights. “Our target is to start construction in other countries from 2010. We have excellent examples to show in Riga and we would like to work on similar projects in Arab countries, Belarus and Ukraine,” he said. To facilitate work abroad the company is preparing to change the name from Southern Bridge to Transport Systems. He added: “We are highly competitive. For example, the Southern Bridge is in fact the cheapest bridge built in Europe in the last five years.”
Overall the local construction market is down and nobody promises that it has touched bottom yet. Local builders can provide competitive offers not only in Latvia but abroad as well, with a good correlation between price and service. It seems that the only missing piece in the puzzle of success is the continuing lack of effective information about them beyond the Latvian borders. If locals know local construction companies by heart, it doesn’t mean that foreigners will ever have a clue who they are.
