Opinion

Time to batten down the hatches for profitability

As any longstanding business in the Gulf knows, longevity in these markets relies on being resilient and cautious. In the construction sector, individual markets have seen major booms and major busts in the ’80s, ’90s and ’00s.

That makes survival a difficult business. While the construction market is intensely competitive, meaning low contract margins, on the other side of the equation contractors are continuously being squeezed by the rising costs of raw material, manpower and even diesel. Slow payments are also a perennial problem, more so in some markets than others, and this makes business planning even more difficult.

The current business climate in the Gulf shouldn’t yet be causing too many sleepless nights, but in the mid- to long-term, it’s likely that government spending on construction projects will drop as they adjust to the new normal of the oil market.

Analysts expect the price of oil to recover to $75 a barrel by the end of the year, but there is very little optimism that it will go north of $100 any time soon. For some of the GCC countries – notably Oman, Bahrain and Saudi Arabia – this means states will be more cautious when it comes to spending on projects.

The good news is that Gulf countries remain committed to spending programmes, and are aware of the need to avoid provoking shocks by reducing spending too quickly. But the bad news is that readjustments will take place.

As always, businesses can ensure longevity and profitability by focusing on reducing costs within their organisation – the only thing in today’s economy which they truly can control. This is always the case, but it’s something many businesses lose sight of during the good years, and sometimes it takes economic adversity to force a company to look at which areas of their business are underperforming.

On the equipment front, some firms can look at adding more variety and dynamism to their equipment fleet, such as through the addition of smaller machines – such as mini-exacavators or compact tracked loaders – to reduce their reliance on larger machines. Machine control also offers some serious advantages, and with newer machines it is increasingly easy to use or install positioning equipment in the field.

Plant divisions should also take a long hard look at service and try to optimise the costs of machinery upkeep, whether it’s through outsourcing more work to the dealer or shifting their fleet mix towards brands which have proven their worth.

A tougher trading environment may make profitability more difficult, but for companies that know how to innovate and make their business model fit the circumstances, there are always profitable contracts to be won.

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