InFocus | Sweden
Rising tall
Swedish construction firms are emerging in the global arena in a remarkable way
- Published: 00:00 May 23, 2006
After a long slump in the 1990s, the Swedish construction industry has recovered and is in relatively good health after a more normal cyclical downturn in 2003 and 2004. Construction is a key economic sector in Sweden, today employing about 240,000 people.
Including other sectors dependent on the construction industry - portions of the transportation, building materials and consulting sectors, for example - it directly or indirectly supports nearly 500,000 jobs, or roughly eight to 10 per cent of Sweden's labour force.
Market conditions
Geographic conditions in Sweden - one of the largest countries in the European Union (EU) but one of the most thinly populated, with nine million inhabitants - were one contributing factor behind the emergence of the modern Swedish business. Another was a rapid, late industrialisation process during the first half of the 20th century. These factors helped create large nationwide contracting companies with broad expertise, as well as internationally competitive engineering consultant firms.
Today Sweden is well developed and, in international terms, highly industrialised. To a large extent, the industry uses prefabricated elements. Project management skills are advanced. The work force, both blue-collar and white-collar, is generally well educated and highly trained.
A few very large companies dominate commercial space and housing, and especially civil construction.
The Swedish building and civil industry is slightly unusual and perhaps a bit paradoxical. On the one hand, over the past decade, domestic investments have fallen from 10 to 15 per cent of Gross Domestic Product (GDP), which is normal in the countries of the Organisation for Economic Cooperation and Development (OECD) and was also true of Sweden during 1945-90, to three to six per cent of GDP. This has obviously affected employment in the industry, as well as the structure and strategies of companies.
There is one simple explanation: the decline in residential construction. During the international recession of the early 1990s, which in Sweden witnessed the bursting of a huge financial and real estate bubble, the whole residential financing system changed.
Housing subsidies were cut back as part of a large-scale tax reform. Rents on existing properties climbed rapidly. Meanwhile the percentage of Sweden?s housing stock that consisted of rental properties was very high in historical terms. The elimination of subsidies, which were primarily targeted at newly built housing, led to a dramatic decline in residential construction. Housing starts per year quickly dropped from 70,000 to 12,000. In recent years, the numbers have improved. However, residential construction still needs to be raised significantly, especially in the Stockholm region, to meet needs and demand.
International reach
Despite a domestic building crisis, the major Swedish building and civil companies have emerged in the international arena in a remarkable way. The largest such company, Skanska, is among the largest international companies in the world.
Skanska?s rapid growth can be explained primarily by its strong expansion in the US market over the past 10 or 15 years. The company entered the US market in the early 1970s with civil contracts in New York (subway expansion).
At first, its US operations grew slowly via cautious and carefully analysed acquisitions. During the 1990s Skanska?s US growth accelerated rapidly. Continued acquisitions and increased volume have turned the US into Skanska?s largest single national market. In second place is the Swedish market, where Skanska has around a 10 per cent share of total. This is high compared to the more segmented markets found elsewhere in the OECD (for example in other EU countries and in the US).
Skanska today derives more than one-third of its total sales from the US. Aside from the US and Sweden, the company is active in 50 other countries, in many cases via local subsidiaries.
The second largest Swedish construction company - also among the 20 largest internationally - is NCC. Like Skanska, NCC offers a comprehensive range of services in the construction and infrastructure field. It has annual sales of about 45 billion crowns (about Dh22 billion). Its strategy is to focus on the Nordic and Baltic Sea markets, where it has made a number of large acquisitions over the past decade.
The other large listed construction companies, Peab and JM, also have some international activities. Peab has nation-wide building and civil construction networks in Sweden and Norway, as well as a subsidiary in Finland. JM, Sweden?s largest residential builder, has subsidiaries in Norway and Denmark.
JM is different in its strategy from the other publicly traded Swedish construction companies. Especially in historical terms, Skanska, NCC and Peab all have their bases in building and civil construction contracting. JM plays a more active developer role, especially in residential construction, but it also develops office building projects. Focusing only on expansive regional markets, JM locates and buys land, develops, builds and then sells projects. In this market, JM has been something of a pacesetter. Properly handled, project development for a company?s own account generates significantly better profit margins than a tender-based contracting business.
Project development requires a solid capital base, of course. But both Skanska and NCC, and to some extent also Peab, have strong financial muscles and in recent years the three largest Swedish-based construction groups have shifted from contracting to a larger degree of project development for their own account - both in Sweden and abroad. In Nordic commercial construction, both Skanska and NCC are leading market players in their role as developers, with investments that focus on the capitals of Stockholm, Helsinki (Finland), Oslo (Norway) and Copenhagen (Denmark).
Project management
The role change from pure contracting toward an increasing element of property development is strengthening the trend among major construction companies toward a greater focus on project management. Instead of employing their own cadres of construction workers in various crafts, they increasingly outsource work to subcontractors and concentrate to a greater extent on running the projects.
Skanska and NCC have also invested their own funds in Build-Own/Operate-Transfer (BOT) and Private Public Partnership (PPP) projects with a global perspective. Among other contracts, Skanska has built highways in Finland, Norway and Chile as BOT projects and hospitals in Great Britain as PPP projects. In Sweden, only one major BOT project has been completed: the Arlanda Link - a high-speed rail route between downtown Stockholm and the city?s international airport (Stockholm-Arlanda). The railroad was built by NCC, which also helped finance A-Train, the company that has the concession to operate the service.
Private investments
Private investments in major infrastructure projects have become an important element in the international construction arena, as governments have run into constraints on their ability to finance such facilities from public sector budgets. Large construction companies like NCC and Skanska definitely have a role to play in these circumstances.
These are often major water, road, rail or energy projects. Private consortiums take over the projects, then finance, build and operate them for predetermined periods. The private concession company is paid either by consumer fees or a government agency, based on how the facility issued (with the government agency buying the facility on installment, so to speak). The latter solution may take the form of -shadow tolls,- which have perhaps most notably been applied in various British PPP projects.
For example, a concession company that operates a newly built highway is paid on the basis of how many motorists use the freeway-not by the motorists themselves but by the appropriate highway agency. BOT and PPP are expanding rapidly and are a niche that virtually all multinational construction companies are involved in.
The internationalisation of Sweden?s construction industry is actually not a new phenomenon. Swedish engineering skills had achieved a strong international reputation by 1900, when the country was in the process of rapid industrialisation. Swedish construction companies and engineering consultants exported know-how and services to other European countries, especially in civil construction, with one key market among others in Eastern Europe being St. Petersburg, Russia.
Among the young engineers who travelled abroad, for example, was Ivar Kreuger, who later gained fame as the -Swedish match king- and a leading international financier. In the US after World War I, Kreuger learned how to build prefabricated concrete skyscrapers. He introduced this method in Sweden through his construction company Kreuger & Toll, which rapidly became one of Sweden?s largest builders, until Kreuger?s interests shifted increasingly toward the international financial arena.
During the 1960s, Swedish engineers and builders became heavily involved in publicly financed development aid projects in the Third World. Late in the same decade, a new international market began to open up behind the Iron Curtain, especially in East Germany and the Soviet Union, and Swedish companies such as Siab, JCC and ABV (all now part of the NCC Group) were among the pioneers.
In the Middle East, too, new markets opened up for Swedish and other Western construction companies in the newly wealthy oil-producing countries; Skanska was especially active in the region starting in the 1970s.
Polarisation and concentration
Viewed in an international perspective, the Swedish construction market is highly concentrated among a few large nationwide companies (the four with stock market listings) and numerous locally based builders. Medium-sized construction companies have largely disappeared from the market, though such companies are now cautiously re-emerging in the early 21st century. This development occurred quickly. In the late 1980s there were still 15 to 20 listed Swedish construction companies, plus large unlisted regional market players. But the construction and real estate crisis of the early 1990s changed the structure of the industry almost overnight, because many companies had large real estate portfolios, often heavily mortgaged.
The 1990s seemed to begin well, although amid occasional whispers about a -speculative bubble- in the real estate market. On January 17, 1991 the UN alliance against Iraq?s invasion and conquest of Kuwait began Operation Desert Storm by bombing Baghdad. One side effect of this first Gulf War was rapidly growing instability in the global economy. In Sweden, interest rate hikes squeezed the liquidity of highly geared Swedish companies. The banks became nervous. Real estate prices began to drop and everything happened very fast.
In the financial service and real estate sectors, it largely resembled a free fall. Bankruptcies among construction and real estate companies quickly ensued. Virtually all the medium-sized construction companies in Sweden disappeared, either through bankruptcies or by being bought up in a situation of imminent insolvency. Highly mortgaged property portfolios and in some cases foreign exchange losses from projects and loans abroad proved to be death traps.
Within a few years, the 15 to 20 listed construction companies of the late 1980s had been reduced to a handful. The surviving companies took over much of the construction operations of the firms that went bankrupt. This was especially true of Peab, which grew very rapidly in this way. Peab also bought the trade union-owned BPA, which for many years had been the country?s largest construction company after Skånska Cementgjuteriet (now Skanska).
Most building materials used in the Swedish market are supplied by Swedish manufacturers. But although these companies are Swedish-domiciled, the element of multinational foreign owners is tending to increase. For example, the previously Swedish-Norwegian owned Scancem, which dominates the market for cement and concrete products, is now owned by the German-based cement giant Heidelberg. About 25 per cent of building materials are direct imports.
This material was originally published on Sweden.se - the official gateway to Sweden.
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