The nation’s largest engineering firms
diversify their market segments to position themselves
for the economic recovery
American-based electrical design firms ventured into overseas markets and explored new business opportunities to stay competitive in a challenging economy. Many companies turned to diversification to survive the sharp economic downturn, slowdown in the construction industry, and delay or cancellation of projects. Revenues dropped for nearly half of the firms in 2003, but more than 60% expect their sales to increase in 2004, according to EC&M’s second annual Top 40 survey.
“We have certainly bottomed out, but things are looking brighter in 2004 versus 2003,” says Joe Umberto, vice president of business development for the power and energy division for Burns and Roe Group, which ranked 20th on this year’s listing. “We believe there will be a rebound in the industry, but it won’t be a steep recovery.”
The top players in the electrical design market are listed in the Table on the facing page. Each of these firms (with the exception of one) provided EC&M with its 2003 design revenue, which determined its ranking on the list. The firm that didn’t supply us with this figure was ranked by data from Dun and Bradstreet’s Million Dollar Database. The table also includes these firms’ rankings from last year and the location of their headquarters.
For the 2004 listing, EC&M added some new firms and dropped others that didn’t do a significant percentage of their work in the electrical design market. During 2003, some companies were also bought or sold, formed new operating divisions, or changed their operating names. For example, two acquisitions affected three of the companies on our list—The Sear-Brown Group, CH2M Hill, and Lockwood Greene. To expand its reach into the Northeast and break into the pharmaceutical industry, Stantec, Inc., an Alberta, Canada-based firm, acquired Rochester, N.Y.-based Sear-Brown Group in April 2004. Stantec, which has more than 50 offices and 4,000 employees throughout North America and the Caribbean, will add more than 10 office locations and 400 employees through the Sear-Brown acquisition. Denver-based CH2M Hill also expanded its engineering and construction capabilities by acquiring Spartanburg, S.C.-based Lockwood Greene for $95.5 million in December 2003.
To learn more about these as well as the other Top 40 electrical design firms, turn to page 48 to read the capsule summaries, which identify the companies’ percentage of sales related to electrical design, the factors leading to an increase or decrease in their 2003 sales figure, their areas of expertise, and their Web site. This article will explain how these power players stay at the top of their game through working in diverse geographic markets and business segments. It will also discuss current trends in electrical design such as design/build and include some firms’ predictions for the electrical design industry in 2004 and beyond.
Working overseas. To stay on top, it’s no longer possible for electrical design firms to specialize in just one market or operate in a limited geographic region. Today’s firms are designing electrical systems for power plants, industrial facilities, and commercial buildings worldwide. Many of the companies in EC&M’s Top 40 listing are helping to rebuild Iraq, providing power to China, or working on oil and gas projects in South America or Eastern Europe. To capture the growing overseas power market, engineering firms are opening up branch offices abroad and establishing international joint ventures. By working abroad, an American-based engineering firm can take advantage of a wider range of opportunities, says Roger Smith, director of corporate strategy development for Fluor Corp.
“When the U.S. markets go through a recession, you have the opportunity to work in other areas to offset the slowdown,” Smith says. “Most of our clients are international companies, so we can create global alliances.”
Aliso, Viejo, Calif.-based Fluor Corp., which ranked fourth on the 2004 listing, was awarded a $102-million contract by the U.S. Army Corps of Engineers in October 2003 to support ongoing efforts to repair Iraq’s electrical infrastructure. About 100 British and American Fluor employees are working alongside Iraqi engineers to repair, replace, or supplement generating, transmission, and distribution systems that are out of service, damaged, or operating at reduced capacity or efficiency within central Iraq. Fluor Corp. has been working in Iraq since last June and plans to establish a permanent presence in Iraq by opening up a branch office and launching a training program for the local workers.
“Fluor has the philosophy of helping the local communities that we work in and training the people to operate the facility once we are finished with it,” Smith says. “We bring in the local people and train them in labor skills so we can give them a better life. Since we have a long-term commitment to Iraq, we hope to be in the country for a long time and train Iraqis to execute work there.”
Power Engineers, a Hailey, Idaho-based engineering firm with 2003 sales of $70 million, also had a contract to restore electricity to Iraq. The company restored 360 kilometers of 400kV transmission line that was damaged by a storm at the beginning of the war and then further damaged by vandalism and looting following the occupation of Iraq by coalition forces. The firm also provided plant design, field engineering, and fuel system engineering for two diesel power plants in Afghanistan and is providing the design and engineering for a 50-mile-long 230kV transmission line in Puerto Rico.
While more engineering firms are performing work overseas, these companies are challenged by global instability in many regions. Major geopolitical issues in multiple international markets have caused operators to delay decisionmaking and postpone capital spending on major projects. For example, Fluor’s sales dropped 12% in 2003 due to the delay of international projects in the upstream offshore market. For the firms that work on the development of oil reserves, the fluctuating price of oil can have a significant effect on whether or not the projects are viable. As a result, the starting date of a project may be delayed.
“Some clients are waiting to see what happens in the Middle East before they make their decision to move ahead with a project,” Smith says. “The current feeling now is that the oil prices will maintain their high levels.”
Diversifying market segments. In addition to working abroad, American engineering firms are also shifting their focus to thriving markets at home. Both government and private agencies have reduced the amount of spending on new projects. Since the competition has remained relatively the same, engineering and construction firms are now facing the challenge of marketing themselves in new areas of business.
Oradell, N.J.-based Burns and Roe experienced a slight increase in 2003 sales, but the soft power market prevented substantial growth. The overbuilding of gas turbine plants and high natural gas prices led to a decrease in the demand for natural-gas fired power plants and a resurgence of coal-fired generating stations. About 70 to 100 coal-fired power plants are being proposed throughout the United States, but Donald Flood, director of proposals and marketing for Burns and Roe, says he expects fewer plants to actually be built.
To compensate for the lull in power plant construction, Burns and Roe is involved in the waste-to-energy market. As the nation’s landfills are filling up and closing down, more developers are building plants that convert garbage into usable energy. The waste-to-energy plants usually only produce about 50MW to 100MW of power as compared to 300MW to 1,000MW for natural gas-fired power plants. While the waste-to-energy plants are relatively small, Umberto says they provide a social service by getting rid of garbage.
“We think waste-to-energy and renewable resources is going to be a revived market because it’s becoming very expensive to landfill,” Umberto says. “To prevent a parade of trucks from going through their states, some states are applying a $5-per-ton tax on each of the trucks.”
Burns and Roe is currently working on a waste-to-energy plant in Florida and has been awarded three other projects in the first quarter—two combustion turbine projects and another waste-to-energy project. The company is also looking forward to the future recovery of the power market. Umberto forecasts that a need for power in many areas will lead to a rebound in the engineering, design, and construction markets in late 2004.
“It takes two years to build natural gas plants and three years to build coal plants, so in 2007 or 2008, there will be a strong need for power again,” Umberto says. “Coming out of 2004 into 2005, the power market will be on its way up.”
Not only did the power market get hit hard in recent years, the telecommunications industry all but disappeared. During the dot-com boom, Edwards and Kelcey, which ranked 23rd on this year’s listing, designed cell sites and data centers. The downturn of the economy and the collapse of the high-tech market led to a saturation in the marketplace.
“We were putting fiber all over and doing all kinds of installations, and no one knew if this fiber would be used or not,” says Jeremiah Muncaciu, an electrical engineer who specializes in the electrical design of highways, airports, and rail systems for Edwards and Kelcey. “In the end, we found out that some clients may have overbuilt fiber by as much as 90%.”
The collapse of some of the high-tech firms that Edwards and Kelcey was closely associated with in the Northeast drove the firm to look at new markets like education. After experiencing a dip in sales in 2003, the firm forecasts a 6% to 10% increase in sales for 2004 (Chart above) due in part to New Jersey’s $16 billion state-wide school bond issue.
Before the bond issue, only one or two new schools would be under construction, and Morristown, N.J.-based Edwards and Kelcey would be fortunate to have a handful of renovation projects come their way. In 2004, however, six new schools are already under construction and more than a dozen aging facilities are being renovated. The average New Jersey school is 30 to 40 years old and generally in need of data and power improvements and other upgrades. Edwards and Kelcey is working on pre-K, childcare, elementary, middle and high school facilities in the northern part of the state, predominately in Jersey City and Newark, N.J.
“This bond issue has kept every contractor and designer in the state of New Jersey busy, and a few in Pennsylvania and New York are helping us out,” says Howard Kraus, an electrical engineer who specializes in schools, libraries, and other public buildings for Edwards and Kelcey. “It has been a big boost for us.”
Trends in electrical design. More electrical design firms are boosting their profitability through diversifying market segments. Companies are also improving the communication on construction projects through a design/build relationship. The Design-Build Institute of America projects that by 2005 most of the commercial work in the United States will use the design/build method. For the 2004 EC&M Top 40 survey, 14 companies answered the question, “What percentage of your work is design/build?” Overall, the respondents perform an average of 14% of their work using the design/build method of project delivery. While some firms reported that a mere 1% to 2% of their work was completed via this method, other companies, like the Fluor Corp., do a significant part of their work with design/build (54%). Smith says the company prefers to do design/build work because it’s an integrated approach that delivers a better project at a better price.
“When the opportunity is there, we push our client to go for the design-build opportunity,” Smith says. “However, I think many clients want to have a design and then get a competitive bid to make sure that the EPC contractor is not overcharging them. If we had our preference, we would be 100% design/build, but that is not the reality in the marketplace.”
Other trends in electrical design cited by the respondents include the need to meet clients’ demands for power quality and reliability. For example, Burns and Roe is designing combined heat and power systems for petrochemical and other industrial facilities that are looking for higher reliability following the Aug. 14 blackout, which cut off power to 50 milion people in the northeastern United States and Canada.
Charles Ballinger, director of communications for Edwards and Kelcey, says it’s getting more challenging to meet clients’ power quality demands. New Jersey’s schools are starting to mandate the installation of emergency generators, and even toll plazas are requesting emergency backup power.
“The great Northeast blackout of last summer has made everyone sit up and take notice,” Ballinger says. “Our clients can’t afford another loss like they had in the last blackout. Some recent media reports were saying it could happen again, so redundancy in a lot of systems has become more and more important.”
What’s in store for 2004? While the nation’s largest electrical design firms endured a severe downturn in the market, they’re now starting to see a light at the end of the tunnel. Construction economists don’t forecast a recovery until 2005, but electrical design firms are already starting to see signs that the market may finally be turning around.
“There’s more confidence out there right now in terms of companies willing to make investments to cover their needs,” Ballinger says. “I think the economy is inching back, but it’s been a slow and unusual recovery.”
Carter & Burgess, a national firm based in Fort Worth, Texas, says its most daunting challenge for 2004 is managing its time and resources to handle all of the projects. With the possible recovery of the economy just around the corner, other firms may soon feel the same way.