Construction & Building Materials Industry: Change for Better

The prospects for construction & building materials industry are not optimistic this year; however, this is considered the correction period for a better future. In other words, the market will get rid of inappropriate factors to develop more transparently and professionally, and enterprises in this sector need to have specific and flexible business strategies.

More challenging

Having enjoyed very fast growth in 2017-2018, the real estate market suddenly leveled off in 2019, leading to a decrease in construction materials supplies, illustrated by fewer approved projects. According to data of the Vietnam Real Estate Association, only five projects were qualified for commencement in Hanoi in the past year. According to a recent survey by Vietnam Report, 91.4% of construction contractors and M&E contractors said that the reduction in approved projects was their toughest difficulty in the past year besides persistent issues such as legal procedures, execution process, bidding, site clearance and material price fluctuations.

According to Vietnam Report, a majority of businesses (73.9%) said that business in 2020 will be more difficult; only 13% were optimistic about the positive growth of the construction material industry; and 4.3% said that the construction material industry will maintain stable growth as in 2019. Notably, about 8.7% of respondent companies said that the market will be quiet in the first six months and will be active again in the last six months of the year after the epidemic ends and the government-backed stimulus packages will be effective. According to FiinPro, in the first quarter of 2020, the construction & building materials industry witnessed a 9.5% decline in revenue and a 10.2% drop of profit after tax. A survey conducted by the General Statistics Office (GSO) in the first quarter of 2020 showed that up to 47.5% of businesses are in more difficulty, 33.7% kept stable operations and 18.8% had better performance.

Before the pandemic outbreak, the construction industry also revealed its weaknesses as compared to other industries. Stalled productivity, low digitization, and low profitability are typical examples, let alone industry-specific fragmented ecosystem and high rate of unskilled workers in construction. In recent years, a range of pressures, such as the scarcity of highly skilled labor, high technical requirements, new building materials, production methods and technologies, are forcing businesses in the construction & building materials industry to keep innovative.

Six focused strategies

According to the survey, construction material companies will focus on six main strategies this year: Improving the quality of human resources; ensuring the quality and progress of existing projects and constructions; strengthening financial management; promoting investment and technology application; developing brands; and researching new products and improving product quality and design. Their strategic priorities are quite similar to McKinsey's 5Rs (Resolve, Resilience, Return, Reimagination and Reform) action model that helps businesses deal with the Covid-19 crisis.

The construction industry employs about 4.3 million workers aged over 15 years, mostly seasonal workers. Only 13.1% of them are trained. Labor only accounts for 20% of construction costs but it is a determinant to competence and construction quality of enterprises. Therefore, their first priority is improving personnel quality.

Furthermore, the Covid-19 pandemic in early 2020 is considered a ‘reagent’ for companies in general and construction - material enterprises in particular. Large-scale financially viable companies can maintain their market share and seize development opportunities. In contrast, small and medium-sized enterprises (SMEs) with weaker competitiveness faced market shrinkage and some have to shut down because they cannot find work or personnel. Thus, their next priority this year is keeping the market share by ensuring good efficiency, quality and progress of existing construction projects.

Amidst the global economic downturn caused by the Covid-19 epidemic, most businesses chose to increase their resilience to crisis by strengthening their financial management capacity. When the supply chain is disrupted and consumers tighten spending, they need to give priority to maximizing cash reserves, assessing liquidity and developing scenarios to cope with the epidemic evolutions with corresponding trigger points, as well as business stabilization plans and preparations for recovery phase.

Moreover, priority is given to investment, technology applications to business, and technical equipment improvement. Technology helps them approach projects more effectively, design products more appropriately, and manage and operate projects more effectively, especially those employing a large workforce and working in many localities for a long time. While the whole world has shifted to Fourth Industrial Revolution with BIM (Building Information Modeling), VR (Virtual Reality) and ECM (Enterprise Content Management), Vietnamese companies cannot keep outdated construction technology like 10-15 years ago.

Notably, before the double impact of the market slowdown in 2020 and adverse Covid-19 impacts, construction and material companies need to firmly make important decisions to overcome difficulties and create momentum for the later stage. The key to turning risk into opportunity is brand development and reputation building. In order to improve communication image and protect reputation, the research team of Vietnam Report recommends businesses to pay attention to three issues: Further raising the voice of enterprises; expanding the range of topics in the media, and improving customer care.

By Quynh Chi, Vietnam Business Forum