A Real High Wire Act with No Net : Online Exclusive

Credit crisis. Economic stimulus package. Housing slump. Infrastructure spending. Recession. There is both good and bad news on the horizon and unfortunately, 2009 will likely hold more bad than good for communications-related construction.

When the stock market and economy are bullish, few industries benefit more than construction. Unfortunately, the same relationship exists in bearish times. The communications-related construction market is no exception. In fact, it often exhibits more volatility than other markets, with annual swings in spending of 10 percent or more are not uncommon. Case in point: Over the last decade, communications-related spending has exhibited six annual movements of greater than 10 percent — four positive and two negative.

Given the economic and financial situation, FMI has updated its forecasts from only two months ago to take into account a much more pessimistic assessment of 2009. The precariousness of the communication construction market should come as no surprise to most participants in this sector. They have seen this type of dramatic shift before. Often the leading edge during both economic investment and retreat, communication construction slowed its pace significantly during the fourth quarter of 2008.

On an annual basis, FMI predicts a 13 percent drop from 2008 to 2009. This forecast is in line with all non-residential construction sectors, which all are slowing dramatically.

The across the board slowdown contrasts with just the past 12-15 months when the spending associated with communication systems resulted in full backlogs for many contractors. Some long-lead time projects and owners with secure financing should help sustain some communication contractors’ revenues through the first three months of 2009, though the back half of the year will likely be much more difficult. Fewer projects and more aggressive contractors will create fierce competition in the high-margin communication sector. John Phillips, president of Columbus, Ohio-based Team Fishel, offers fellow communication contractors the following advice to weather the downturn:

• Know your cost and don’t price your work below your cost. We don’t need any more practice.
• Downsizing is an appropriate business strategy. If the market is shrinking, capacity needs to shrink as well.
• Now is the time to focus on improving business processes to help grow your business when the market begins to grow in the future.

Today’s volatile economy begs comparison to the 2000-2001 recession and communication spending slowdown that began in 2000 and did not report an uptick in spending growth until 2004. While communications construction was buoyed through the early stages of this recession by overloaded backlogs from the tech bubble, spending eventually dropped 9 percent and then 21 percent in 2002 and 2003 respectively.

History shows that the communication market adheres to a seven-year construction spending cycle. The most recent bottom point was 2003 indicating that 2010 is the next likely bottom point. The most recent peak in this cycle was 2007 with spending levels not seen since the last crest during the tech bubble construction boom in 2000 and 2001. This time around, the communication sector is feeling the credit crunch on the leading edge of the recession. Credit scarcity and a general recession cause FMI to anticipate another three-year spending slowdown through 2011 for communications-related spending.

Despite the gloomy short-term outlook, some rays of optimism shine. With a new president taking office in January and a host of new policies surely to follow, the likelihood of a broad infrastructure package that includes some funding or encouragement to address the aging telecommunications infrastructure is increasing. As an example, outside of the United States, in November 2008, the Chinese government announced a $586 billion infrastructure stimulus package; similar packages have been the topic of heated discussion in the U.S. legislature.

Given the recent election and the resulting centralization of Democratic control of both the legislative and executive branches of government, it is more likely that the United States will pass an infrastructure package. In addition, the United States may join the bulk of industrialized nations in implementing a comprehensive policy to promote broadband access. According to EDUCAUSE, a nationwide fiber-to-the-home (FTTH) infrastructure construction plan will command a price tag well north of $100 billion — exactly the shot in the arm communication construction could use. (EDUCAUSE is a non-profit group that represents IT managers from 2,200 colleges and universities, based in the United States, but open to international institutions.)

Looking around the globe at industrialized nations over the last decade, results in a recognition that the United States has fallen behind in the adoption of broadband and other high-speed communication technologies. Korea and Japan, for example, both exhibit over 40 percent of its broadband users achieving an Internet connection with fiber-optics whereas the United States only exhibits 3 percent. According to the Organization for Economic Cooperation and Development (OECD), the United States currently ranks 15th among the 30 developed countries in broadband penetration with approximately 23 per 100 inhabitants (see Exhibit 2).

It is clear that aggressive investment in communication infrastructure is necessary to bring the United States up to par with our international peers. While the funding may be more difficult to obtain through 2009 and 2010, that does not require communication contractors to think reactively.

On the contrary, there are a number of proactive strategies that successful contractors will pursue. Strong balance sheets with large cash holdings will reduce the high cost of obtaining debt and enable greater flexibility in loan terms. Rethinking owner-supplier relationships offers additional savings. Team Fishel’s Phillips may have explained it best, “[2009] will be a challenging year for both owners and contractors. We need to work together to help each other be successful by utilizing business processes and practices that drive cost out of our businesses. If we focus on this goal together, it will yield a mutually profitable and successful relationship.”

Mark Bridgers and Dan Tracey are consultants with FMI Corp., which provides management consulting, training and investment banking services to the worldwide construction industry. They can be reached at (919) 785-9351 or MBridgers@fminet.com. For more information on FMI, visit www.fminet.com.