Huge family fortunes have been made in construction. Just ask Riley Bechtel – the chief executive of the eponymous company his great-grandfather founded in 1898 and now he heads up. In 2009, the Bechtel Group had revenues of more than $30 billion, up from $27 billion in 2007.
Family businesses often thrive in construction, because, say the experts, the sector is built on reputations and relationships – two things families are often very good at. But the financial crisis and the economic malaise that followed in much of Europe and the US tested the sector hugely and damaged some prominent construction-based family businesses.
In the UK alone, there were 2,100 construction company insolvencies in 2008, a 40% increase on the number in 2007, according to PricewaterhouseCoopers. While 38% of all company insolvencies in Spain in 2008 were from companies in the construction industry.
Family-controlled Spanish construction and infrastructure company Ferrovial was hit hard by the virtual collapse of the construction sector in Spain. The Madrid-based firm has been selling off assets to reduce its massive debt, which stood at €20.5 billion when financial figures were last released at the end of 2010. Already it has sold Swissport International, Cintra Apartments, Gatwick Airport, APP and 60% of Cintra Chile.
Ferrovial is still attempting to sell a share in one of its most costly acquisitions, UK-based airport operator BAA, which it purchased for more than €10 billion in 2006. Aside from selling assets, the founding Del Pino family were forced to take some difficult decisions, including the approval of a merger with a subsidiary company Cintra in 2009 that saw the family’s shareholding diluted to 44% from 58%. Unsurprisingly, Ferrovial wouldn’t comment on how the downturn has affected the business – and the family.
But the last few years were not bad for everyone. Indeed, so far the downturn has proved pretty good for some construction companies. The UK-based Wates Group increased its revenue to £1 billion in 2010 from £700 million in 2005. “The momentum continues in constructions,” says Tim Wates, fourth-generation chairman of the Wates Group. “The beginning of a recession can be positive as prices are falling but we work on set costs and the supply chain tightens so you get better value for money.”
And the Bechtel Group hasn’t done badly in the last few years – notching up an increase of revenues of $12 billion between 2005 and 2009. A lot of the larger construction firms were able to offset the big slowdown in business in Europe and the US with orders from the emerging markets – many of which were much less affected by the economic troubles in the big developed countries.
“For the emerging markets to grow at our forecasted growth rates, they need to improve roads, ports, rail and airports,” says Scott Hazelton, director of construction services at consultancy IHG Global Insight. “The massive movement of population from rural areas to urban centres also poses transportation issues compounded by needs for water and sewer systems. As they continue to industrialise and see growing incomes, the demand for power will continue to escalate.”
Jonathan Hook, global engineering and construction leader at PWC, is even more adamant where the growth in the sector is happening. “Asia Pacific, Brazil, Saudi Arabia, Qatar, Abu Dhabi, not to mention India and China, are all boom areas for construction,” he says. “Some parts of the world are still going strong for the industry.” Despite the growth in emerging markets, some family businesses are concerned that even after all the fallout from the downturn in 2008/2009, problems for the industry might just be around the corner.
“In construction, projects are awarded a couple of years in advance so there is a lag time between when projects begin to dry up and the financial impact to the companies. They work on later cycles,” says Hook.
Even the most respectable and reputable businesses can’t stop a global financial crisis from impacting their businesses. “When we look ahead we are concerned,” Wates says. “But we have been for the last three years. I think 2012 will be the hardest year yet for the industry as the momentum will finally slow down and, although the private sector is coming back, it won’t make up for the drastic cuts in public spending.”
During difficult periods it pays to have a reputation and a name people trust, something families pride themselves on. At Wates, the reputation of the company is tied up with the values of the family, and the family understands that if the reputation of the company goes, business stops. “We proactively manage our relationship with our customers,” says Wates. “We focus on them and are ever vigilant about the importance of the brand, the name and the family perception. We make careful choices, so we grow in line with our family values and avoid the ‘train crashes’, making losses of £10/£15 million, which can happen.”
The reputation and strength of the family name is an asset family businesses in all industries should leverage, but particularly those in industries such as construction where it is so important, as Alex Sharpe, consultant at the family business advisory Peter Leach, points out.
“The reputation of a business very much hinges on the values it is perceived to have and family businesses can most certainly take advantage of this better than other business models,” she says. “A family’s ‘name’ can become synonymous with strong values like trust and loyalty and in an industry where reputation is vital and in a tough market, family businesses can gain the competitive edge.”
And while families may be good for construction, the industry is good for families too. It is one that is broadly cash positive and self funding, so can support a family that wishes to transition past the second into the third, fourth and even fifth generation while still remaining private.
The Wates Group remains privately owned and managed by the fourth generation of the family, and is just one of many examples of this in the global construction industry. Some of the largest private businesses in the US are family-owned construction companies. Bechtel Group is also in its fourth generation and remains family owned, as is Gilbane. The Day&Zimmermann Group is held by the third generation of the founding family and Hunt Construction is owned and managed by the third generation.
While in the Middle East, construction supports large and growing family businesses such as the Zamil Group (the Al Zamil family) in Saudi Arabia, The Kanoo Group in Bahrain and AlMulla family in Kuwait. “A key question that families in business have to ask themselves is: ‘Do we want to remain private and are we all committed to cohabiting a business together?’” says Sharpe. “This question tends to become particularly relevant once a family becomes larger because people start to wonder what’s in it for me? And would life be easier if I didn’t have all these family members to deal with?”
But issues such as these are lessened for families in cash generative industries such as construction. “The benefit of being in a relatively cash generative industry, like construction, is that a dividend policy based on the principle of regular dividends in the good times, is more likely to result in united and committed shareholders in the more difficult times.”
Successfully negotiating the relationship between family and non-family management is one of the most difficult challenges family businesses face – it is even more pertinent in construction where senior managers need a high level of technical expertise as well as business acumen.
“We are not under any illusions that within the family we have the monopoly on talent. Unjustly promoting family members alienates the best talent so we don’t do it,” says Abdullah Adib Al Zamil, third-generation of the family behind the Saudi Arabia-based Zamil Group. “Members of the family are a resource the business can tap into, but not vice versa.”
Wates has a similar approach. The family see themselves as governing owners who are more engaged than investors, but don’t get in the way of the management. “We want the best people in the industry to see they can progress to the top at Wates without any family stopping them,” says Wates, “We have an outstanding non-family chief executive and if the family were to interfere he would leave. So we set the framework based on our family values, and back the management to continue that.”
That is not to say both families don’t produce their own excellent candidates for the business. James Wates is deputy chairman of Wates and is regarded as a figurehead within the industry for his expertise. While Abdullah’s cousin, Abdulla Mohammed Al Zamil, CEO of Zamil Industrial, was ranked 18th on Construction Week’s Power 100 List in 2010.
In order to ensure the Zamil Group effectively uses the skills of its next generation members, the family employed a business consultancy to assess all the third and fourth generation, whether they were working in the business or not. “It was a very rigorous process,” says Abdullah Adib Al Zamil.
“But at the end of it the family was able to clearly understand the strengths and weaknesses of all in the third and fourth generation. From this they could then identify how it could benefit from this pool of talent to enhance business performance.”
Within the business, succession is very structured. “The middle management succession process is very clear and systematic and both family and non-family members are subject to it. But higher management levels are less structured because it depends on the quality of the talent there,” says Al Zamil.
Wates also invest in a next generation programme, which aims to slowly build the relationships of the fifth generation both with the business and one another. “We want them to see the business in a positive light and have good associations with it. They know the opportunities are there if they want them but it is their choice,” says Wates.
The construction sector can also look for new opportunities for the next generation around the green agenda, say many of the families in the industry. Fourth generation Jonny Wates began his own company developing a range of green business services and products to work alongside his family business.
The family invested their own capital into the business so it is separate to the main company, but works with it. “We recognised that a large corporate is not always the best place for next generation members to be entrepreneurial,” says Wates. “So we as a family back individual members who have a good idea and a solid business plan to pursue their own initiatives.” But finding this balance is not always easy.
“A particular challenge for senior family members is creating an environment for the next generation where they feel passionate about the business without feeling an obligation to join,” says Sharpe. “Allowing each generation the space to create their own vision for the business and find their own way of working together can address this, but continuous work is also needed, not just at the point of succession.”
For Wates, the process of helping his children prepare to become business owners starts very early. “I want them to go to a good school to ensure they have a platform to become the best people they can be, so they are confident and well educated. And in the back of my mind I also want my children to grow up to become owners of the Wates Group. I want to give them the grounding so they develop the passion and the gumption to take up their role as responsible owners,” he says.