07/03/2014

Construction Industry Analysis

Stefano di Fabio

Christopher Anderson

Daniel Mujica

GEOGRAPHIC AREA:

Cooley Group assigned us to research the Latin American market and find business opportunities for their roofing products in this specific region. Therefore, we began our study by analyzing all 20 countries in Latin America. At first, we narrowed our selection by evaluating political risks. Due to recent political turmoil in Venezuela and Argentina, we decided to eliminate these nations from our selection. At the same time, countries with high economic-trade dependency with either Venezuela or Argentina were removed from our consideration set. These nations were Uruguay, Paraguay, and Bolivia.

After we identified the countries with the highest political risk, we conducted a macro economic analysis of the remaining nations. By doing this, we were able to estimate future economic performance between the selected countries and narrow the constricted consideration set. Moreover, the economic indicators used for this analysis were the following: foreign direct investment (helps predict investors’ confidence level), manufacturing export (positively correlated with commercial construction), Real GDP growth (overall representation of an economic growth), GDP per capita using purchasing power parity (representative indicator of consumer purchasing power), currency fluctuation (significant for trade credit), and corruption level (important for analyzing perceived levels of public sector corruption). Based on the macro economic analysis, the top three promising economies were Peru, Ecuador and Panama- all the economic data used for the macro economic analysis was obtained from the World Bank Database.

Once we obtained the top three nations, we conducted a thorough analysis of each country’s infrastructure investment levels to identify where the most promising market was for Cooley. As a result, the research showed that the most prominent nation was Peru- followed by Panama and Ecuador respectively. By conducting this research, we were able to realize the vast market opportunity that Cooley has in Peru. According to Business Monitor, Peru is planning to oversee more than $20.5 billion USD in infrastructure between 2011 and 2016. (Peru Infrastructure Report, 5)

INDUSTRY:

For the Peruvian market, we decided to focus in the infrastructure industry. Total investment for this industry in Peru is expected to grow at a 12% year-to-year rate from 2011 until 2016. At the same time, construction investment is estimated to increase at an 8.2% rate between 2013- 2017. (Peru Infrastrucutre Report, 5) Hence, most of the construction growth over the next years will be derived from strong demand for infrastructure due to economic development in the next decade. Ultimately, this will generate investors’ confidence in the Peruvian market and will increase foreign direct investment. Thus, we believe that infrastructure development has been one of the key factors in recent FDI growth- this can be supported by the results obtained from the previously mentioned macro-economic analysis, please refer to Appendix A for more information.

Furthermore, government incentives have become crucial for the country’s recent economic growth. The central bank approved a $3.5 billion USD stimulus plan in late 2011. (Peru Infrastructure Report, 9) The effects can now be seeing in public works projects- construction of hospitals, roads, and schools. In 2012 the government also invested $758 million USD in infrastructure, increasing infrastructure growth rates from 8.1% to 9.8% in 2013. Similarly, the government has been creating long –term growth plans. The most relevant during 2012/2013 period was the concession program of ProInversion valued at $10.4 billion USD. Also, the government is expected to launch more concessions during the upcoming years- the most anticipated ones are the PanAmericanHighway and several electric projects.

Product:

The global construction industry envelopes many different smaller industries that all contribute to construction as a whole. The industry that pertains to CooleyGroup is commercial building products. Within commercial building products, Cooley works mainly in roofing products, most notably the “single-ply roofing” niche market.

1. Single-ply roofing

This particular type of roofing has come into its own as the foremost selection for roofing products for heavy industrial, manufacturing, and infrastructural roofing such as airports. The idea is simple; these types of buildings need a strong solid roof that is going to last a long time (typically 20-25 years at least) and will stand up the harshest conditions. Single-ply roofing is a membrane made of very tensile fabric that is coated with either thermoplastic olefin (TPO) or polyvinyl chloride (PVC) to create a flexible membrane that is then welded together on top of insulation to the roof of a heavy industrial building. These materials are especially important because they are the most resistant to all sorts of contaminants such as UV, water, chemical, and salt. (Cooley Building Products)

2. Advantages

CooleyGroup has perfected this style of single-ply roofing materials by utilizing the best quality chemicals through their partnership with DuPont, but they have also left their own mark on a truly unique product. Cooley has established a patented technology that gives them a competitive advantage in the market where their C3 Plus membrane has a Kevlar edge in the seam that helps prevent the material from ripping out from the fastener and it can stand up to high winds and storms. Not only has Cooley patented a truly revolutionary addition to the product, they are also ISO 14001 certified meeting the highest environmental quality standards for their products in the industry. (Cooley Building Products)

Another key advantage to why single-ply roofing is such a big industry is because of temperature regulation. A white roof will reflect the sun and thus keep excess heat off the building. This allows the temperature inside the building to be better regulated. In addition, having the single-ply membrane on the roof is much easier to install. For example, Cooley’s product is welded to the each other and to the roof using only hot air, which greatly reduces the labor needed and expensive machinery.

3. Cost

Cooley is positioned uniquely in the market since it is a luxury provider of top quality single-ply roofing products. To get an idea of how much one square foot of roofing would cost, we used a roofing calculator and input some arbitrary conditions on a roof using TPO quality roofing. This estimate came out to be $2050 but this number will vary depending on the contractor but also the quality of the product used, which would put Cooley’s estimate closer to $3000 per sq/ft. (Roofing Calculator)

Buyers:

1. Target Customers

For the singe-ply roofing industry, heavy industrial and manufacturing are the primary targets for this product since they represent industries that require buildings that are well structured; they have large square foot roofs and need a long lasting roof. A key indicator of the viability of these customers is the level of construction in the target market. With construction means the need for all components to construction which includes roofing.

In our target market of Peru, private investment is fueling the growth of key industries for construction. Exhibit B shows that construction and infrastructure are receiving $2.3 million in private investment in 2010 which is very promising for our plan to enter. What is more promising is the fact that manufacturing received $1.5 million in investment while Mining and Hydrocarbons received $5.3 million. These numbers correlate with the amount of infrastructure investment is currently happening in Peru; with investments in infrastructure comes the need for construction and many aspects of infrastructure will be developing for years to come.

The Peruvian government will also play a major role in the growth of construction in Peru, and ultimately, what opportunities are available for Cooley going forward. The government has been very proactive in encouraging growth in construction primarily for infrastructure through agencies like ProInversion, which award concessions to major projects in Peru. The agency is seeking to encourage more investments in sectors like power, water, and transport. In 2013, the government award infrastructure contracts valued around $10 billion which included projects for airports, natural gas, and pipelines. (Peru Infrastructure Report 2013)

In the past, Cooley has had much success doing commercial roofing work for projects like the Bankers Life Fieldhouse in Indianapolis and the Mumbai International Airport in Mumbai, India so seeing such strong investment numbers is encouraging for Cooley’s success in finding buyers in the region.

Regulatory Environment:

Throughout these years President’s Humala administration has focused on streamlining investment procedures and limiting state agencies timing to review infrastructure permits, reforming capital markets, and modifying laws from the tax point of view. Since 2011 Peru has been a founding member of “Alianza del Pacifico” together with Colombia, Mexico, and Chile. Through this alliance, involved nations hope to eliminate 90% of tariffs involved in trade. Likewise, through newly established Free-Trae Agreements – with the United States, Canada, Singapore, China, and other Latin American countries like Venezuela and Guatemala – Perú aims to reduce trade barriers and allow for a flexible regulatory environment to attract investment. (Peru Country Report, 13)

As of specific industries that have especially benefitted from these reforms, the oil & energy together with the infrastructure sector have continuously been under the government’s attention. Petroperú, the state-owned oil Company, is in the plan of selling 20% stake in previously owned oil blocks which licenses will be expiring by 2015, without the need of bidding. (Peru Oil & Gas Report, 9) Moreover, laws have been implemented to promote the construction of a petrochemical plant in the southern coast where Petroperú will also have the biggest stake and of a thermal-generating plant to increase Electroperu’s energy capacity. With the intent of further promoting investment, the government’s owned agency, ProInversión, will be awarding concessions for 28 projects throughout 2014 largely in the infrastructure and energy sectors. (Peru Country Report, 55)

Another field which has greatly improved since the liberalization of the Peruvian economy in 1990s is foreign direct investment; Exhibit C shows how FDI has ranked over the past few years. Since then, governments have aimed the attraction of investors and treating them with the same benefits that locals have. As a matter of fact, ProInversión has registered total FDI in 2012 at $22.67bn, up from $22bn in 2011. Sectors contributing the most to such growth have been mining accounting for 24% of total FDI, and industry and energy sectors with 13.7% and 13.2% respectively. In terms of most countries investing, Spain leads with $4.81bn of which some comprised in energy, the US in industry and mining with $3bn, as well as South Africa and Chile both focusing on mining and energy. (Peru Country Report, 12)

All these reforms undertaken by Humala’s administration suggest how nowadays Perú is strongly coming up as a major player in the Latin American market where barriers and regulations are being reduced at a minimum necessary in order for the country to attract potential investors, especially in the industry infrastructure and oil / gas and mining sectors.

Company Information:

Cooley Group is a premiere manufacturer of high end singly-ply roofing membranes. It differentiates itself from the rest of the companies in the industry through the reliability and duration of its products, particularly aiming businesses in which high quality and safety are the main concerns. Through strategic partnerships with worldwide known chemical companies like Dow and DuPont, Cooley seeks to innovate its products offering maximum reliability and consistence to its customers for 20+ years.

By positioning itself in such a position in the roofing industry, Cooley allows itself to be recognized as the innovative and leading company combining chemical knowledge with building products. In support of this is the fact that it has developed a patented Kevlar technology with DuPont to guarantee ultra-high strength along the edges of the roof and allow for edges to be fully gripped in order to prevent any natural disasters that could compromise the roof’s validity.

In terms of competitors, Cooley faces the bargaining power of cheaper and least quality products from companies like GAF, Carlisle Syntec, and especially Firestone building products. All these have in common the fact that such strategy has allowed them to enter the Latin American market where price sensitivity is very high. In particular, Firestone BP enjoys the significant advantage of having corporate offices in almost every country across the LATAM region; hence facilitating contacts with contractors to bid for projects in almost every industry, from commercial and residential industry to tourism and education complexes. (Firestone BP Latin America)

For this reason identifying a particular industry sector – such as petrochemical, energy and oil & gas – would be crucial as it would allow Cooley to target those businesses willing to invest in a high end luxury product. Since these kinds of industries are required to meet certain standards of safety in order to be viable and are highly profitable as they are publicly owned by governments, Cooley could potentially find its way in LATAM markets and differentiate itself from the fields in which its competitors operate.

Bibliography

The Economist Group. Country Commerce Peru. Rep. New York: Economist Intelligence Unit, 2013. EBSCO. Web. 7 Mar. 2014

Peru Infrastructure Report 2013. Rep. no. 1750-5402. London: Business Monitor International, 2012. EBSCO. Web. 7 Mar. 2014

Peru Oil & Gas Report Q4 2013. Rep. no. 1748-4154. London: Business Monitor International, 2013. EBSCO. Web. 7 Mar. 2014

"Cooley Building Products | Cooley/Group." CooleyGroup. N.p., n.d. Web. 06 Mar. 2014. http://cooleygroup.com/building-products

"Roofing Calculator." Roofing Calculator Estimate Your Roof Costs. N.p., 2013. Web. 07 Mar. 2014. http://www.roofcalc.org/

"Firestone | Roofing Systems | Roofing Systems." Firestone | Roofing Systems | Roofing Systems. FIrestone, n.d. Web. 07 Mar. 2014. http://www.firestonebplac.com/index.php?roofing

Exhibits

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B.

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C.

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