For many U.S. M/E/P engineering firms designing industrial facilities, the world is getting both bigger and smaller. What's growing is the number of international industrial projects that U.S. firms are involved in. What's shrinking are the borders and barriers to designing factories abroad—both real and psychological.
For many U.S. M/E/P engineering firms designing industrial facilities, the world is getting both bigger and smaller. What’s growing is the number of international industrial projects that U.S. firms are involved in. What’s shrinking are the borders and barriers to designing factories abroad—both real and psychological.
In the hot markets of Asia and Latin America, there has been a paradigm shift over the last decade in how U.S. A/E firms operate. There are two key factors operating here. First, rather than designing facilities for the manufacture of export goods that come back to the United States, A/E firms report an increasing focus on industrial facilities that supply the domestic markets within those countries. With consumer demand on the rise—especially in China, which has the fastest growing economy in the world—the U.S. and foreign multinational clients that American A/Es serve are building factories abroad to break into local markets.
“Its about the domestic market; you’ve got to have a local operation for domestic consumption,” says Michal Gilzenrat, vice president of international, Lockwood Greene (LG), Spartanburg, S.C.
This, of course, is not to say that the shift of manufacturing overseas no longer plays a role (see “Shifting Abroad,” p. 38). But gone are the days when this was the standard reason for building a factory abroad.
The second factor in the new paradigm is that American design firms are no longer trying to manage foreign projects from the home office—or from satellite locations.
“We started our operations in Asia through our Singapore office. But now, you have to operate locally. You can’t just send a manager over there,” says Gilzenrat. A decade ago, American firms were still managing their projects in China from their Hong Kong or Singapore offices. Now, the offices are located where the action is. For China, this means in Shanghai—not only because it offers a cosmopolitan environment for American expatriates, but also because it’s the engineering center of the country with an enormous pool of recruits.
In fact, by some accounts, Chinese schools are producing more than 300,000 engineers per year. Gilzenrat suggests that both in China and Latin America, setting up local offices that are largely staffed by natives has become quite a bit easier. “We are amazed at the high level of education and training in these developing countries.” says Gilzenrat, “Their hunger for advanced technical knowledge is phenomenal.”
Locals take control
No matter what the relationship is between a U.S. design firm and its foreign partner or office, the consensus appears to be that a greater willingness to turn the show over to locals is a positive development. Industrial projects, in particular, can involve complicated permitting. And local engineers understand the codes, vendors and end users.
“There are two basic categories of code,” explains Gar Hoplamazian, P.E., vice president with Detroit-based Albert Kahn Assocs. (AKA). “There are material codes and building codes. Most foreign countries have adopted U.S. material codes, but building codes are a different story. These have to be specific to local conditions; they may be modeled after U.S. codes, but still, we rely on local partners to do the design.”
Whether working with foreign partners or with an A/E firm’s own foreign employees, Hoplamazian stresses the importance of being attuned to local custom. “Language is always a challenge. But there’s the bigger issue of local practice,” he says. “They do things differently in other countries. What we think is strange, to them may be as common as can be. You’ve got to deal with issues and resolve them in a way that is sensitive to local needs.”
Hoplamazian makes another interesting point about cross-cultural exchange. In a global economy, it’s not so different from what one might encounter on a project in the United States. “We had to learn to do the same thing with the Japanese when they came to the U.S. to set up plants,” he observes.
Communication is the key. It isn’t just about whether American engineers or their foreign counterparts call the shots on these projects abroad. Both sides work closely together to determine what the best course of action is for the particular locale and project.
The issue of equipment suppliers is a good example. “Dealing with vendors for an international project is always a complicated issue,” says LG’s Gilzenrat. “One might depend on international vendors with a global reach, but it depends on the scope of what is being supplied, pricing, the time available to furnish it, local supplier alternatives and whether they have global delivery capabilities in the locations that you need.”
Gilzenrat goes on to explain that some U.S. suppliers are adaptable and can provide what is needed while adhering to local codes and regulations. Others cannot. Pricing also affects whether you use the same suppliers.
“For example, some suppliers may be qualified to do the job, but the economics make them a cost-prohibitive choice for a project abroad,” he says. “Sometimes you find a local supplier who is the cost-effective alternative.”
But Gilzerat points out that they have run into situations where procuring equipment is difficult simply because what they needed at a particular location was not available from local suppliers. “In such cases, you have to consider the higher cost options. But one option is to explore the possibility where the government [of the country] grants you some exemptions or incentives for not being able to source locally,” he says.
In any case, whenever local suppliers are relied upon, local engineers have a better idea of local markets and suppliers. And the U.S. engineers cannot come in with an inflexible preconceived notion of what they want.
“We work hand-in-hand with our local teams to modify design activities to reflect compliance with local regulations and needs,” says LG’s Gilzenrat.
But how U.S. design firms are working abroad these days begs the question of how they got there in the first place.
U.S. engineers are designing manufacturing facilities everywhere outside the United States. But two particular areas of activity are Asia and Latin America. In both of these regions, U.S. A/E firms typically have made the leap abroad by following U.S. and foreign multinational clients.
“Our initial foray into any foreign country has generally been to go in with a U.S. client, hook up with a local partner and marry interests of locals and owners,” says AKA’s Hoplamazian. “Our hook has always been to take a U.S. client and protect their interests.”
LG’s experience has been similar. Like AKA, the firm has been involved in the design and building of several automotive industry plants for major clients that they followed abroad. In fact, all of LG’s projects in China in recent years have been for North American and European clients investing in manufacturing facilities and process plants.
According to David Rosamond, LG vice president and managing director for China, that country is the world’s fastest growing auto market, with every major auto maker represented there.
But automobiles aren’t the only commodity that Chinese consumers are craving. “There is an explosive growth in the manufacture of consumer products for domestic consumption,” says Rosamond. “With growing income in some sectors of the society, everything from shampoo to pharmaceuticals is in demand.”
And while China may be the hottest new market in the foreseeable future, LG has ventured into other markets in a similar way. “We followed a major U.S. client into Moscow and are now working on a tire plant for another,” says Gilzenrat. “But eventually, we evolved the office into a self-sustainable operation. It now serves a wide range of commercial, institutional, consumer goods and industrial clients, including Russian-based companies, though it isn’t the norm.”
In China, LG started as a joint venture with a regional firm. “We established a shared equity position with our partner and eventually acquired the totality of the operation. We now serve a wide range of industrial clients there,” says Gilzenrat.
Black & Veatch, Overland Park, Kan., is another U.S. firm that has figured out the formula for successful engineering in China. “As a result of recent new policies governing the provision of engineering design services by foreign engineering companies, [we are] now able to provide engineering design services in cooperation with a Chinese partner to Chinese clients,” said Steve Niles, Black & Veatch executive vice president and president of the Asia Region of the company’s Energy Engineering & Construction (EE&C) Division.
The People’s Republic of China’s acceptance into the World Trade Organization in 2001 has resulted in recent revisions to the regulations governing how foreign A/E firms operate there (see “Working in China,” p. 38). But some observers suggest that the situation is still not ideal. In a controlled society such as China, for example, there are administrative obstacles to be dealt with.
Obstacles to overcome
“For A/Es, in particular, legislative developments [in China] have not been as helpful as was hoped,” says Vivienne Bath, a partner with the Sydney, Australia office of Coudert Brothers, an international law firm that specializes both in Asia and A/E design. She explains that the recently promulgated regulations set up the framework for an A/E firm to create a foreign investment enterprise in China. In practice, however, the rules create a number of significant barriers.
“For example, the rules require that at least 12.5% of the required architects and engineers for the joint venture company must be foreign architects and/or engineers qualified in China in the case of a joint venture and at least 25% in the case of a wholly foreign owned enterprise,” she explains. “They must live in China for at least six months of every year. There is no information available at this stage as to how the foreign architects and engineers can qualify in China.”
In addition, recent rules issued in relation to construction and design projects, where the foreign construction and design firm is based outside China, are still quite restrictive. They require a foreign A/E firm to work in conjunction with a Chinese design firm. Any contract must be signed by the Chinese partner.
Moreover, foreigners cannot work on confidential projects, projects closed to foreigners and projects related to natural disasters. “The effect of the rules,” says Bath, “seems to be to restrict further the activities of foreign firms providing design services to Chinese companies, even from outside China, instead of increasing opportunities for cooperation.”
In the A/E design sector, therefore, despite WTO, steps forward are slow.
There are other challenges, as well, for the U.S. firms who would build overseas industrial facilities to exploit foreign domestic markets: Consumer markets are still fragmented and hampered by poor transportation; local competition, as it develops, is increasingly fierce; and intellectual property protection is still a problem.
And the engineers who design the facilities abroad are faced with their own challenges: safety and material; maintaining design standards; and issues of equipment logistics and schedules.
But the world today is a global village. As horizons expand for U.S. engineering firms, the world gets smaller.
The U.S.-China Economic and Security Review Commission, part of the U.S. Dept. of Commerce, was created four years ago. Its mission, in part, is to review the national security implications of trade and economic ties between the United States and China.
In 2000, the commission requested a study of the impact of economic globalization on U.S. industry. The study found significant shifts of U.S. manufacturing abroad. This year, the study’s authors, Dr. Kate Bronfenbrenner, director of labor education research, Cornell University, and Dr. Stephanie Luce, research director and assistant professor at the University of Massachusetts at Amherst, were asked to follow-up on their earlier study. In “The Changing Nature of Corporate Global Restructuring,” submitted just this October, the researchers found that the patterns they identified earlier are accelerating.
Their current report, which covers the period from January through March 2004, shows a major increase in production shifts out of the United States in the last three years, particularly to Mexico, China, India and other Asian countries. During this recent period, there were 69 shifts to Mexico and 58 shifts to China; in the authors’ study of three years earlier, there were only 30 shifts to Mexico and 29 shifts to China.
Moreover, the authors report, U.S. multinationals are the primary source of shifts into China. In fact, they account for 72% of the total.
There are two important discernible patterns in the updated information. In 2001, the majority of shifts were simple site-to-site shifts, with one company shifting production from the U.S. to a single destination country. However, 48% of the shifts in the recent study were simultaneous shifts to Latin America and to China and other countries in Asia.
The study also provides a look at how the global economy has evolved in other ways. In 2001, production shifts to China were concentrated in a few industries: electronics and electrical equipment, chemicals and petroleum, household goods, sporting goods and toys, textiles, wood and paper products. Today, say the researchers, production shifts from the U.S. to China represent virtually every industrial sector.
The downside, of course, is U.S. job loss. It goes without saying that the shift of operations means a transfer of jobs. In fact, the Bronfenbrenner and Luce data suggest that in 2004 as many as 406,000 jobs will be shifted from the United States to other countries, compared to 204,000 jobs in 2001.
(For the complete report go to the Management Practices community at
Working in China
When it joined the World Trade Organization in 2001, the People’s Republic of China agreed to make changes in its trade and investment practices as a condition of WTO membership. The intent, of course, was to open up various markets, including construction engineering and design.
An A/E firm that plans to participate in design work for projects in China, but that will be working from outside the country, must refer to the Provisional Rules on the Administration of Foreign Enterprises Engaging in Design Activities for Construction Projects within the People’s Republic of China , issued by the Ministry of Construction in May and effective since June 10, 2004. If, however, the A/E firm wants to establish a permanent operation in China, it must set up a foreign investment enterprise under the Regulations on the Administration of Foreign-Invested Construction and Engineering Design Enterprises . (For more information, go to the Management Practices community at
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