Construction&Logistics: Specialized companies seek competitiveness through networks

Labor-intensive production is being transferred to cheap labor countries and this is having a major effect on the construction and logistics sectors. Developing countries are building new infrastructures using foreign investments. It has already been estimated that modernizing and expand the basic infrastructure such as the electricity network, water supply and highways will cost billions and billions euros.

As the world is urbanizing and becoming wealthier, the volume of transportation is increasing too. Along with the developing infrastructure, new logistics centers are being established. The increased complexity of supply chains is also opening up business opportunities for new technologies as well as
service concepts.

Business is increasing as a consequence of the structural changes. This does not, however, make it easier to succeed.

- The globalization of logistics increases costs. Cheap labor is only one side of the coin when transferring manufacturing to cheap labor countries. Apart from increasing transportation costs, the whole supply chain management becomes more complex and it thus takes time to reach a satisfactory quality level, says Heikki Kekäläinen at Logistra Consulting Oy.

For several years, the costs relative to retail sale prices have exhibited a downward trend but are now increasing again. In China, the cost of logistics accounts for 40 percent of the retail sales price, but in Finland it is 10 percent and in Central Europe about 5-6 percent.

Increasing energy costs also have an impact on the manufacturing location.

- Our vision for the technology roadmap of ELO was that when the fuel price reached a high level, manufacturing would be retransferred closer to the market. The Finnish brewing industry used to have a distribution distance of 20-40 kilometers and the production site was located within this area, laughs Kekäläinen.

Network Economy

Cost savings are especially important to Finnish exporters. Recent European research has shown the two main logistic challenges faced on the market are reducing of logistic costs as a whole and the actual cost of having goods in storage.

The outsourcing of logistic services continues as the complexity of the supply chain operations increases thus forcing companies to specialize.

- Globally, know-how is following the principal that 'everyone should do what they know best', and thus be more competitive, Kekäläinen describes.

Supply chain management is becoming more challenging, for instance the costs of the JIT policy are expected to increase. Both the political and environmental risks linked to this business are increasing. At the same time fulfilling the basic logistic aims is increasing in importance, in other words getting the correct product and volume at the right time and place. And the most efficient supply chain wins.

- In the future, the competition will be more about getting the best partners or more precisely the perfect 'partner solutions', says general manager Markku Henttinen at Transpoint Oy.

Transpoint has established it own network comprising affiliated companies in the Baltics and Eastern Europe and partners in Western Europe and across the world.

- We have our own companies in Poland, the Baltics and Czech Republic. The business arena has not yet been divided between the big operators thus giving small and dynamic companies the opportunity to build up their network there, he says.

These networks also enable small Finnish companies with a special niche to enter the global market. The prospects for companies cooperating in the Tekes and Finpro international strategic business project have been analyzed within the construction services technology sector.

- Finnish technology companies in the construction sector operate within a relatively narrow field. If these companies would cooperate and work together, they could play a bigger role in the value system. However, it is advisable that logical combinations are pursued such as air conditioning with automation or, from an energy efficiency standpoint lighting and air conditioning, explains Professor Tomi Laamanen at Helsinki University of Technology, Department of Strategic Management.

According to Professor Laamanen, the key issue is for the building sector as a whole to understand the system of values which gathers all kind of indicators from the market, such as energy efficiency, ease of use or consumer well-being.

- Companies should try to understand how their customers' customers think and optimize their products to meet consumer needs. For instance, if a real estate investor values durable development, we can provide an energy saving system in order to satisfy his needs.

Increasing transportation volumes

- The Asian economy is shifting more and more into the spotlight, but it is good to see that apart from the markets in China, India and Russia or Latin America, the EU, Japan and Africa are showing economic growth," says Marc Borremans, Head of Infrastructure and Logistics at Finpro.

- If volume, growth and close market proximity are the criteria then, from a Finnish point of view, Russia offers today and for years to come the biggest business opportunities, while the whole EU area is a natural home market. Recently the markets in Central and Eastern Europe have been expanding and the next economies to grow will be in the Baltics, he says.

Heikki Kekäläinen also finds the Russian development interesting from the logistic companies' point of view.

- At the moment we are very busy looking into freight traffic in Russia. Harbors are also recruiting staff. Today there is a huge and a quite unique need for logistic services, he says.

According to Kekäläinen demand for storage and terminals is high as well. Russian political authorities have even promised government funding for logistical projects.

Trade between Finland and Russia has been estimated to triple by the year 2030. This would naturally increase the transport traffic in Finland. However, Russia's other neighboring countries want their share of freight transport. In Poland, 31 billion euros will be invested in freight transport and harbors by the year 2013. The investments in Sweden total similar amounts. Finland is developing freight services at a cost of two and a half billion euros.

- Location is the strength of Finnish companies. Furthermore, we offer first class logistical services and have stable political and economic conditions, says Markku Henttinen.

According to him the lack of employees in the freight sector will inhibit the sector's growth.

- At the moment, the Finnish freight sector is short of 3,000 employees and this situation is worsening as the economy continues to boom. Not just anybody can take to the wheel, because better and better professional skills are required of the drivers, he says.

How about railway freight?

- Well, already ten years ago the EU freight policy stated that railway freight should be increased and road transports decreased, however, the result has been just the opposite. The railway has a strong position in our business group, yet with these distances and volumes it can be used only to transport huge volumes of freight in order to be profitable, Henttinen says.

High living standards boost construction markets

Interesting new markets were surveyed as part of the international strategic business project Construction Services Technology Program CUBE. The conclusion was that the Middle East and California are indeed potential construction markets. However, the most interesting for this line of business is the Moscow - St. Petersburg area - actually a not very well-known neighboring market.

At Finpro's export centers in St. Petersburg and Moscow, the areas' construction markets were analyzed. It became evident that demand is still focused on constructing the basic infrastructure. There is a major need for reconstruction, but sources of funding are still being identified. Increasing living standards are expected to change the situation as well as increase the demand of high quality apartments.

- Russia is such a vast market and there are high-end projects already in progress, such as sport arenas. Finns have a good reputation for delivering quality which makes it possible to participate in competitive biddings for high-class projects, says Laamanen.

Some high-end projects are already demanding durable development solutions. Energy efficiency is not yet a matter of concern in Russia as energy prices are still at quite a low level.

- However, it is wise to take this into consideration at this point as the importance of this issue is increasing in Russia too. Now is the time to build on our strengths and have the competitive edge on the markets, Laamanen says.

Credibility requires presence

Finnish companies consider Russian markets to be difficult. The practical challenges foreign investors face as a consequence of the raising protectionism is of course increasing the companies' uncertainty.

Russia wants to have a firmer grip on strategically important sectors of business. Foreign companies are faced with of choice of either adjusting to the situation on the market or not investing in the country at all. In order to have credibility the investor needs to be present on the Russian market.

- It is not a requirement; in Russia companies can act through a partner, but from a cost perspective some sort of local presence is necessary. Even if we are competitive where quality is concerned, our levels of costs must match local market levels as closely as possible, Laamanen says.

- On the other hand, the lower the product standard is, the higher the pressure on the costs, he adds.

In addition, especially where construction technology companies are concerned, business is rarely only about sale and distribution, as they are frequently more comprehensively involved in the construction projects. This requires cooperating closely with the builder.

Mental blocks

- Finnish companies have a lot of deeply held beliefs and fears about Russia, such as how difficult and bureaucratic it is to run a business there, Laamanen says.

The professor thinks that the mental blocks relating to the Russian market are twice as high as the actual difficulties would be.

- We can help companies by providing them with facts and a better insight into the Russian market. St. Petersburg is very close to our eastern border. It should actually be a kind of domestic market to us.

According to Laamanen the presence of large companies, such as YIT, Lemminkäinen or SRV in Russia makes the market psychologically a more secure place for small and middle-sized companies to establish.

- And not only to deliver components, but to integrate into the market as a local operator. Big construction companies are shaping the market structure.

He takes his vision a little further:

- We should actually develop our know-how in order to automate the complex bureaucracy to some extent. There could be instances to take care of this on behalf of the company. 'You want to establish a company in Russia - we deal with everything, you go there to construct houses'. There will be a need for this type of service concept.

High time to globalize

Tomi Laamanen urges Finnish companies to speed up their globalization efforts. The construction sector's order books are currently full so companies are not pursuing contracts outside the domestic markets. Given the current work situation, labor is also hard to find.

- The economic boom is bound to pass its peak. Now is the time to bring strategies in line with future economic fluctuations. Economic decline can be leveled up by export, but the foundations have to be laid in advance, he reminds.

It always takes several years to establish a business on a new market.

- The benefits would only show years later, but raising interest rates or an oil crisis would not affect business for instance in Russia. Even if we would have an economic recession, there is always oil money, says Laamanen.

In logistics, funding is often an obstacle blocking the way to global markets.

- Innovations and technology development get technology funding, but when the idea should be made commercially viable, the funding ends. External funding, such as business angel investments, is rare in Finland. In contrast, mediocre American products succeed on the global markets as they get funding and resources, says Kekäläinen.

- We have many good logistic companies that have developed high-class products even by global standards. The problem is that these companies lack both human resources and money.

The latest news from Tekes is that it is restructuring its funding products in line with Kekäläinen's visions, albeit moderately. Tekes' aim is to increase the efficiency of their support for making research results commercially viable as well as during the first globalization steps of growing companies. More and more focus is being put on the development of business activities instead of only supporting technology developments.

Heikki Kekäläinen says that it is truly important to support the development of business administration as well.

- I recently visited a company that develops logistic technologies. They have very innovative and first-class ideas, but they said that 'we should probably draw up some kind of a business plan in order to seek funding'. Sometimes we start like this, from the basics.

- It is not possible to succeed globally if you cannot sell your product, no matter how good it is. These innovators are not that interested in sales, only in techniques, smiles Kekäläinen.