Risks in the Construction Industry

High Risks in the Construction Industry

High risks characterize the construction industry due to the heavy investments companies must make to undertake projects. It is important that investors conduct a detailed analysis and assessment of the risks involved before they can venture into a new market. The Deyaar Construction Company, one of the top-ranked construction companies, is considering entering the Indian market which has experienced sustained growth in its economy over the past. According to Dixit et al. (2017) the country’s construction industry has registered growth in the last few years with more spending on buildings (commercial, institutional, and residential buildings), infrastructure (dams, power systems, urban infrastructure, telecommunication systems, rail, airports, and road), and industrial construction. This report outlines the risks and opportunities of venturing into the Indian construction industry and determines how political, economic, social, technological, environmental, and legal factors affect the move by Deyaar Construction Company.

India’s Construction Industry Analysis

PESTEL

Political

The construction industry is affected by some political factors relating to permits and documentation, taxes and royalties, refusal of import licenses, and forced government participation in the different stages of construction (Serpella et al., 2014). The Indian government through the relevant authorities is giving support to its construction industry. For example, the “Housing for All” is a program that was launched by the government to provide housing to the urban poor population by 2022. In 2014, the government introduced “Make in India” a program focused on attracting foreign investors and companies to invest in the Indian construction industry (Apollo Infratech Pvt. Ltd., 2016). Real estate investments, especially for small investors, have received a boost from the introduction of Real Estate Investment Trust (REIT) and the Real Estate Mutual Fund (REMF) (Dixit et al., 2017).

Economic

The country has experienced tremendous economic growth and expansion that has had a desirable impact on the construction industry. According to the Planning Commission of India (2015) construction constitutes the largest share of the Gross Domestic Product (GDP) making about 8 percent of the GDP and the government is encouraging investments from non-residents to venture in housing and real estate sector.

Social

There is extensive support for green building projects around India. Serpella et al. (2014) explain that these buildings are environmentally friendly as they use less water, conserve natural resources, optimize energy efficiency, generate less waste, and provide a healthy environment to its users. Furthermore, the brand name and value of a company is an essential factor that people put into consideration before considering using their services such as buy a house or hire their construction services. Therefore, a foreign company with low credibility is likely to experience a poor financial performance in the Indian construction industry.

Technological

Technology has been integrated into the construction industry to enhance the quality and design of projects delivered. For example, in India’s construction industry the use of ready-mix concrete has become a widespread practice among construction companies as it uses less cement and helps save time and produce better quality. Construction companies using low-grade technology deliver sub-standard qualities of construction projects and have time overruns in their projects.

Environmental

Construction projects are hugely affected by environmental factors such as natural calamities, the availability of a reliable labor force, and the availability of raw material (Serpella et al., 2014). These factors have an impact on the cost and quality of construction. In India, the country experiences natural disasters from time to time which impacts its construction industry. For example, during the construction of a new railway line in New Delhi, heavy rains were experienced that caused the collapse of the line and delayed the completion of the project.

Legal

Construction companies must take into consideration certain legal factors that have an impact on their operations. The National Housing Policy was implemented to help create an enabling environment for companies in the construction industry (Dixit et al., 2017).

CAGE Analysis

Cultural Distance

The UAE and India have cultural differences concerning different religions, ethnicities, and languages that may reduce economic interactions. There is no primary source of cultural proximity between India and the UAE which is a risk to their economic relations.

Administrative Distance

There are political relationships between India and the UAE hence there are fewer political and administrative obstacles for Deyaar Construction Company to do business in UAE.

Geographic Distance

The geographic attributes include the physical distance between the two countries, the absence of a common land border, differences in climates and time zones (Ghemawat, 2007). India and UAE have a long physical distance that will raise the cost of physical transportation between the two nations and the communication costs.

Economic Distance

Ghemawat (2007) explains that economic distance affects cross-border economic activity. Countries whose economic size is almost the same engage in more trade than those of different sizes. India and UAE are growing economies and have signed agreements between themselves to conduct direct trade and to eliminate their reliance on third parties.

How These Risks Can Affect Profitability

The environmental risks could lead to increased project costs as the company will be forced to comply with various environmental standards. Furthermore, the local populace could carry out environmental protects against a project leading to delay in completion. The new technological inventions may make the technology used by Deyaar Construction Company not to be approved for use in the country.

Other Factors/Findings to Be Considered

The Indian construction industry is highly unstructured as approximately 95 percent of the total number of companies are small enterprises (Dixit et al., 2017). Bodies such as the Central Public Works Department (CPWD) and Bureau of Indian Standards have set several standards that construction companies must consider. Also, there is a resource risk that involves the shortage of raw materials for the operation and completion of projects which may affect the overall cost of a project.

Recommendation/Conclusion

The construction industry is a dynamic, risky, and challenging investment that requires companies to conduct an analysis and assessment of the risks involved to enable them to manage and deal with the risks. The Deyaar Construction Company has a huge experience within the UAE construction industry. Venturing into a foreign market presents the company with a new opportunity. Therefore, the company should invest in the Indian construction sector as it is a growing area of business. The Indian economy has been growing rapidly over the past few years which has increased the demand for infrastructure projects and real estate. The government has offered support through programs such as “Make in India” that has made it easier for foreign constructions enterprises such as Deyaar Construction Company to invest in this sector and make a good profit. However, the risks and uncertainties within this industry can have damaging consequences for most construction projects as it affects profitability, productivity, and quality of a project. It is difficult to eliminate all of the risks involved, but their effects can be minimized. The company should employ a risk maturity model, a tool for monitoring every recognized risk, identify new risks, and reduce their impact on the construction process.

Resources

Apollo Infratech Pvt. Ltd., 2016. Role of Make in India for Construction & Infrastructure Business. Retrieved from http:\/\/apolloinffratechblog.apolloinffratech.com\/construction-and-infrastructure-business-in-india\/

Dixit, S., Pandey, A.K., Mandal, S.N. and Bansal, S., 2017. A study of enabling factors affecting construction productivity: Indian scenario. International Journal of Civil Engineering & Technology, 8(6), pp.741-758.

Ghemawat, P., 2007. Differences Across Countries: The CAGE Distance Framework. Harvard Business School Press, Redefining Global Strategy: Crossing Borders in a World Where Differences Still Matter, Boston, USA, pp.8-10.

Planning Commission of India., 2015. Twelfth Five Year Plan (2012-2017) Economic Sectors. Vol. II. Retrieved from http:\/\/planningcommission.gov.in\/plans\/planrel\/12thplan\/pdf\/12fyp_vol2.pdf

Serpella, A.F., Ferrada, X., Howard, R. and Rubio, L., 2014. Risk management in construction projects: a knowledge-based approach. Procedia-Social and Behavioral Sciences, 119, pp.653-662.