Navigating a Stormy Economy
Many dot-com companies—the sector that drove quite a construction boom during the past couple of years—can now be described as the “dot-wents.” Telecom work, in general, has hit a big slump and the struggling manufacturing sector has yet to make a comeback.
But wonderously, amidst it all, a large percentage of mechanical and electrical engineering firms have reacted by diversifying their portfolios.
“Our high-tech, telecom and commercial work has dropped off significantly, however, our government and institutional work has picked up significantly,” explains Steven Strauss, P.E., president of Glumac International, Portland, Ore. “Although we’re down a bit from last year, overall, it’s balanced out.”
Similarly, Herndon, Va.-based KTA Associates, so far, has been able to pick up new institutional projects to compensate for the dot-com crash. “We’ve been marketing like crazy to replace this [telecom] work, which is down at least 75 percent this year,” notes CEO Mark Koblos, P.E.
Koblos is also hopeful that the dot-com industry will rejuvenate itself, perhaps as early as first quarter 2002. “We still have the staff in case the projects start coming in again.”
While current economic conditions have forced a number of firms like Glumac and KTA to do some extra hustling, other M/E outfits have virtually been untouched by the volatile economy. “They [economists] are saying that things are going to slow down, but we haven’t seen it yet,” claims Henry Hudson, an executive vice president with Bala Consulting, Philadelphia. With plenty of commercial office work, health-care projects and pharmaceutical work, Hudson claims, “Believe it or not, we are beating last year, and last year was a record year.”
Also banking on pharmaceutical and institutional projects, van Zelm Heywood & Shadford, West Hartford, Conn., is actually looking to increase staffing and office space, according to President and CEO Bob Hickey, P.E. “Things are going strong; the K-12 market is big in Connecticut and in New England,” says Hickey. “And the college/university market is going to grow even stronger because they have been deferring maintenance for years and it’s catching up to them.” Hickey also predicts that West Coast power problems will soon make their way east, creating a greater need for demand-side load management and ultimately more work for electrical engineers.
Also expanding is the Madison, Wis.-based Affiliated Engineers with a new branch in Washington, D.C. and plans to open an office in Stanford, Conn., later this year. While CEO John Nelson, P.E., admits that this type of growth is a bit risky right now, he is relying on the firm’s strong billings and a backlog of projects to carry them through.
At the same time, Nelson noted that his firm has opted not to engage in merger or acquisition activity. “In the last five years, the trend in the design firm industry has been consolidation, acqusitions and mergers,” observes Nelson. “Butconsolidating at the end of a big [economic] drive is ill-advised.”
Nelson explains that as it is, the success rate of business mergers and acquisitions is way below 50 percent. Therefore, if a firm endeavors to integrate multiple corporate cultures coupled with a tough economy, “it’s darn near impossible.”
Although confidence levels seem to have remained relatively high among M/E engineers in recent months, some firms have been exercising a bit more caution.
According to Roger Wozny, P.E., president of The Schemmer Associates, Omaha, Neb., his clients, particularly retailers, have been somewhat hesitant to move forward with new construction and retrofits. “It seems that some folks are waiting on projects and taking more of a wait-and-see approach,” he says.
Consequently, Wozny’s firm is only budgeting for 75 percent of anticipated projects to come through this year.
“It’s inevitable that sooner or later we would be hit by the downturn,” admits Yorgos Papatheodorou, manager of strategic planning and market development for Lockwood Greene, Spartansburg, S.C. “And we haven’t seen the worst of it yet.”
Even though industrial construction was still increasing in the first quarter of this year, the manufacturing industry, as a whole, has been in decline for the past nine to 10 months, and the building and construction industry usually trails an economic wave by an average of five months, explains Papatheodorou.
At the same time, the economist notes that since the industrial sector was the first to be hit by this recession of sorts, it will likely be the first to come out of it. “This year, we’re expecting it to be a flat year, but early next year, we expect revenues to start turning around.”
Nonresidential construction continued to post surprisingly strong numbers through the first third of this year. However, Cahners Economics is forecasting slower growth the remainder of this year and in 2002.
At the same time, the downturn should be much shallower than during the server market correction of the laste 1980s and early 1990s since there’s no evidence that any particular building sector is severely overbuilt this time around.
For more on nonresidential construction statistics and forecasts, go to