Protracted weak yen raises alert for Korean construction firms

The Korean consortium had a competitive edge over other contenders in the nuclear power plant construction bid by Finnish nuclear power company TVO in early 2013, but it is struggling due to an unexpected obstacle: the weakening yen. Three countries, namely Korea, Japan and France, are competing to win this project to build four units of 1.5 million kW nuclear power plants in Olkiluoto, Finland.

Entering the bid, Korea aimed to establish a bridgehead in Europe, which accounts for 40 percent of the global nuclear power market. However, the weak yen is dealing a blow to Korea by paralyzing Korea’s price competitiveness over others. This reminds Korea of last year`s nightmare. The country lost over Japan in a bid to build a nuclear power plant in Turkey because the Japanese consortium suggested a measure to secure project funds through a Japanese financing institution, thanks to the weak yen.

As the trend of weak yen is protracted, Korean construction firms competing with their Japanese counterparts in the global construction market are in jeopardy.

The won value against the yen has appreciated since late June last year by almost 50 percent from 1,510 won per 100 yen to 1,010 won on Sunday. Concerns are mounting as the Japanese government implements various financial measures to help its construction firms win bids in the global market.

○ Competition is inevitable in the emerging Asian market

The Japanese government aims to increase domestic firms` achievements in winning overseas infrastructure contracts from the current 100 billion U.S. dollars to 300 billion dollars by 2020. Especially, the country focuses on preempting the developing Asian market, which is emerging as the largest market in the infrastructure construction. This is where Korea has been putting significant efforts for several years.

According to Engineering News-Record, U.S.-based weekly journal, Japanese construction firms won about 14.12 billion dollars in the Asian market in 2013, a twofold increase from 2009 (about 6.9 billion dollars). In addition, the Asian market took up 67.2 percent of the total contracts won by Japanese firms in 2012 (about 2.1 billion dollars). This is a considerable increase from 39.2 percent in 2009.

The problem is that the Asian market is where Korea is targeting, too. Last year, Korea won more construction contracts in Asia (27.5 billion dollars) than in the Middle East (26.1 billion dollars), based on the contracted amount, for the first time since 2000. The International Contractors Association of Korea estimates that the ASEAN market will award contracts related to the construction of large-scale transportation infrastructure worth 600 billion dollars for the next decade.

An official from a large construction company in Korea said, “The population growth in emerging countries in Asia entails an increasing demand for infrastructure,” adding, “Though (Asia) is a very important market for Korean companies, Japanese competitors are chasing so fast thanks to the weak yen that competition will get fiercer.”

○ Korean government should bolster its support for Korean construction firms

Experts point out that the trend of weak yen is not strong enough to reverse the overseas bid results, but the risk to Korean construction firms is likely to be realized if the Japanese government reinforces its supports for Japanese construction firms.

They advise that the Korean government should also develop measures to help Korean construction firms win bids overseas. For overseas bids, the Japanese government and Japanese construction firms, state-run organizations and finance institutions join hands to form a strategic package. For example, 11 Japanese firms work together for the execution of the Jakarta metropolitan development program in Indonesia, which is composed of 45 projects worth 28.6 billion dollars. They are scheduled to finish the program by 2020.

The Japanese government agreed to provide Indonesia with 9.5 billion dollars as a development loan for this program. The country is expanding its official development assistance (ODA) funds to win more construction bids in Asia.