A survey of construction industry trends in Germany

• The slump is bottoming out: sales decline slowing down
• Construction companies relying more on growth strategies
• Key success factors are strategic risk management and employee development

The slump in the construction industry is coming to an end, according to Germany's largest construction companies. Most companies expect more favorable market conditions in the next few years, particularly due to increasing investment by the private sector. These are the key findings of the survey conducted by Roland Berger Strategy Consultants on success factors in the German construction industry in 2004. The survey reveals that many companies are currently developing more strategic methods, such as innovations, to sustainably increase earnings. In addition, the companies surveyed intend to expand risk management and employee development.

The industry survey was conducted from February to March 2004 among Germany's 30 largest construction companies in terms of sales. Fourteen firms took part in the written survey, including ten of Germany's top 15 construction companies.

Downturn in the construction industry is getting slower

The German construction industry has seen incoming orders fall for the past nine years by an annual average of 6.7 percent. Sales are also on a downward path: 2000 to 2001 alone, the German construction business shrank by 13.3 percent. Since then, however, the downturn has become slower. From 2002 to 2003 for example, sales fell by 5.8 percent (source: Hauptverband der deutschen Bauindustrie). From 2004 to 2006, construction volume in Germany is even forecast to grow by an average of 1.8 percent p.a. (Euroconstruct, November 2003).

Slightly more favorable conditions

The companies surveyed expect slightly better conditions for the construction industry. They have high hopes of increased investment by the private sector. By contrast, they expect little demand from the public sector. Even economic policy measures and new regulations are not thought likely to revive the markets.

As the survey shows, large German construction companies are currently expanding strongly into areas of future growth. Strategic repositioning is becoming more and more important, as in the past mainly cost programs were implemented. "Successful construction companies manage to maintain competitive cost positions in the long term while at the same time sustainably increasing earnings," says Dr. Reinhard Geissbauer, Partner in the Engineered Products & High Tech Competence Center at Roland Berger Strategy Consultants.

Success factors widely known and to some extent implemented

The basic success factors of construction operations are already adequately fulfilled, according to the companies. These include long-term collaboration with materials suppliers, lean organizational structures and closing down unprofitable regional businesses. To grow sustainably, the companies surveyed want to pursue strategic approaches such as innovation. In addition, they mention the establishment of operator models as a business segment, long-term partnerships with clients, expansion into new countries (Eastern Europe) and the ability to renovate, modernize or convert existing buildings.

In particular, the construction industry views strategic risk management and comprehensive employee development as key success factors for the future.

Expanding strategic risk management

Although 90 percent of the companies have operational risk management, many see room for improvement in strategic risk management: 40 percent of the companies surveyed do not currently compile a report on strategic risks. 30 percent of the companies have so far avoided comparing strategic risks. 80 percent intend to systematically develop risk management into an integrated management tool. To do so, they need to attach figures to possible risks more consistently and observe risk trends continuously.

More systematic employee development

German construction companies currently list comprehensive employee development as the most important success factor. All companies surveyed consider the regular, systematic appraisal of employees to be very important. Around 90 percent of operational and some 80 percent of administrative employees are appraised according to a specific process. All the companies surveyed had also introduced variable forms of pay. More than twice as many operational employees (71 percent) have a variable element in their salary as administrative employees (29 percent). The key criteria for determining the variable salary elements are earnings (50 percent), performance (29 percent) and qualitative agreements (17 percent). The construction companies identify room for improvement especially in comprehensive individual employee training and motivation.