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Japan's construction
shaky
Japan's four top
general contractors enjoyed revenue growth for the
April-December period, but six second-ranking
companies are still struggling for survival and
their need for greater debt renunciation is
putting pressure on Japan's banking system as a
whole and dragging down the speed of the nation's
economic recovery.
The four largest
general contractors combined had 11.8% more orders
in terms of value during the nine months through
December than on the same period a year ago. These
big firms are able to take full advantage of their
technological superiority, connections with top
supervisory authorities and readily available
credit from major banks in securing orders for
construction of high rises, shopping malls,
airports and bullet train lines.
Among the
four, Taisei Corp and Obayashi Corp have won large
orders for engineering projects in foreign
countries. Kajima Corp has been faring well in the
field of urban redevelopment projects, selling two
buildings it constructed in Tokyo to a Singapore
state investment corporation. Shimizu Corp, which
has strong business ties with electronics makers,
raised its earnings forecast for fiscal 2004
through March 31. The company now expects a 20%
year-on-year growth in group pretax profit to 38.5
billion yen (US$385 million) for the year. The
parent-only gross profit ratio for the completed
construction projects is forecast at 7.7%, up 0.5
percentage points from the previous year.
In contrast, for second-tier general
contractors, especially the six firms that are
still trying to crawl out of their financial
holes, things do not look so rosy. These six are
Sumitomo Mitsui Construction Co, Kumagai Gumi Co,
Hazama Corp, Haseko Corp, Tobishima Corp and
Fujita Corp. In the process of reorganizing their
debts, these firms have received financial
assistance totaling more than 2.5 trillion yen and
had their interest bearing debts reduced from more
than 4.5 trillion yen to less than 800 billion
yen. Still, they have not fully recovered from
their past financial woes.
In early March,
Sumitomo Mitsui Banking Corp (SMBC), the core bank
of Sumitomo Mitsui Financial Group Inc (SMFG),
decided to extend a third round of financial
assistance totaling 80 billion yen to Fujita. SMBC
is Fujita's largest creditor, with lending
totaling about 100 billion yen. As of September 31
last year, Fujita's interest bearing debts were
assessed at 181.6 billion yen.
In the fall
of 2002, Fujita was split into AC Real Estate
Corp, which took over the money-losing real estate
business, and the current Fujita, which took over
more profitable construction businesses. But
Fujita was still unable to meet earnings targets
set at the time of the breakup. Its orders
received between April and December 2004 did not
even reach 60% of the projected amount.
In
addition to Fujita, SMBC is busy defusing two more
time bombs in the construction industry - Kumagai
Gumi and Mitsui Sumitomo Construction - and the
costs for tuning around these three firms are
swelling. On March 1, SMFG announced it expects a
net loss of 240 billion yen for the fiscal year
through March 31 this year, altering the earlier
forecast of a 180 billion yen net profit. The
financial group blamed the loss on additional
charges from the disposal of bad loans to these
general contractors and other troubled borrowers.
The downward revision of the earnings
forecast came in the wake of the Financial
Services Agency's demand that the group increase
its loan loss reserves. As a result of allocating
more financial resources for the financially weak
borrowers, the group will cut dividend payouts by
1,000 yen to 3,000 yen per share for fiscal 2004.
The continuing financial difficulties at
these six second-tier construction firms is
casting a dark shadow over Japan's financial
system, because the turnaround of the these
heavily indebted companies has now become more
difficult, due to the downtrend in orders from the
public and private sectors. According to a survey
of the Research Institute of Construction and
Economy (RICE), the national and local
governments' spending on public works projects
will decrease to 15.3-18.5 trillion yen by fiscal
2010, about half the 35.2 trillion yen recorded in
fiscal 1995.
Investment in housing
construction in the private sector should contract
to 17.4 trillion yen for fiscal 2010, and to
14.3-14.8 trillion yen for fiscal 2020, from
fiscal 2003's 18.4 trillion yen. The only bright
spot is the outlay for repair and maintenance of
the existing social infrastructure, which is
projected to increase from fiscal 2003's 22.4
trillion yen to 23.8-24.2 trillion yen for fiscal
2010 and to 26.1-27.9 trillion yen for fiscal
2020.
These predictions of the RICE
suggest Japan's construction industry has already
entered a shakeout phase that will allow only the
fittest to survive. Even with the financial might
of SMFG, it will become extremely difficult to
keep three medium-sized general contractors with
huge debts worth hundreds of billions of yen
staying afloat for a long time.
Construction orders received by 58
major firms
(billions of yen)
| Year |
Order amount |
% change
(y-o-y) |
| 1990 |
26,138 |
+26.8 |
| 1991 |
26,421 |
+1.1 |
| 2000 |
16,075 |
+3.2 |
| 2001 |
14,514 |
-9.7 |
| 2002 |
13,330 |
-8.2 |
| 2003 |
12,703 |
-4.7 |
| 2004 |
13,164 |
+3.6 | Source:
Japan Federation of Construction Contractors
(Asia Pulse) |
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