Published May 1, 2007
SME SPOTLIGHT
Straits Construction happy to stay small
ARTHUR SIM finds out how the family business survives the competition
THINKING small in an age of global expansion may sound contrarian but it has helped Straits Construction remain a lean and fit operation through the tough times.
Until only recently, construction companies, Straits included, were languishing.
'Staying focused on residential construction actually helped during the (construction) downturn because we did not diversify into other areas of construction like infrastructure,' explains director Wong Chee Herng.
As such, Straits is not too bullish about construction contracts coming up at either of the integrated resorts (IR). 'But the spin-off effect will be relevant to us because we believe the IRs will soak up the supply of construction companies and leave us with less competition for other jobs,' he added.
The construction industry is especially competitive, not least because Singapore has welcomed many foreign firms. 'First it was the Japanese, then the Koreans, then the Chinese,' says Mr Wong. So it is no small feat to have survived the decades.
'Staying focused on residential construction actually helped during the downturn because we did not diversify into other areas...like infrastructure'
- Mr Wong
In 1969, Wong Swee Chun, 69, also Chee Herng's father, started Straits Construction after working as an apprentice and a sub-contractor.
After building up the company, Straits clinched its first Housing and Development Board (HDB) contract in 1982 and went on to build more than 10,000 units for the board.
Perhaps more remarkable is that between now and 2009, Straits will build another 3,000 units for HDB and also hopes to be awarded another 2,000 units to build over the next two years.
And this is a significant number as Straits estimates that HDB built around 8,000 new units in 2006.
Wong Chee Herng's contribution to the company probably has something to do with its share of HDB contracts.
Mr Wong, 37, joined his father's business in 1994 at his father's request. He had just graduated from the National University of Singapore with a degree in business administration. 'I thought I would try it for one or two years,' he added, and was immediately deployed as a site foreman.
He stayed on and was tasked with getting the company ISO certified.
Any company that has gone through certification process will know that it can be a painful experience. But in 1994 HDB had made it a requirement that only ISO certified companies could tender for jobs of a certain size. 'Back in those days, getting ISO certified was considered a big hassle,' he remembers.
Getting the certification simply means getting the work processes down pat but for many of the 'old timers', it meant duplicating their work - doing it the ISO way and their own. 'At the supervisory level (on site), staff weren't affected. It was the middle management that had to accept the most changes,' he said. There was attrition but Mr Wong says: 'Those that stayed back embraced the changes.' Straits has since become a champion of sorts for such work processes, especially when it comes to safety and health, perhaps even to the point of obsession. 'We started our own penalty system in 2000 to fine staff who breach safety codes on site,' he reveals. Most recently, it won the HDB Quality Award and the HDB Construction Safety Award in 2006. Validation came last year when Straits was awarded two HDB contracts despite not having put in the lowest tenders. Mr Wong believes its quality and safety track record had something to do with it.
Reliance on public sector jobs alone may be a bit risky though. Mr Wong does concede that the number of flats HDB has been building has dropped from the heyday when it would roll out 30,000-40,000 units a year.
Straits, however, hopes to benefit from the 'value-add' that has gone into HDB flats since. By his reckoning, if construction levels can be brought up to about 12,000 units a year, the total value of construction contracts could match those in previous years because the cost per unit has doubled. 'Before, the construction cost per unit might have been $50,000-$60,000. Today, it costs about $100,000-$150,000 per unit to build,' he says. Mr Wong said he also expects profit margins to increase from almost nothing to about 8-9 per cent this year.
Through its property development arm Hoi Hup - headed by his sister, Wong Sjew Hung, a quantity surveyor - property development actually contributed 90 per cent of the group's profits last year. Hoi Hup has developed about 900 private residential units since the mid- 1990s and currently has about 500 units at different stages of development. Mr Wong reveals that Hoi Hup plans to develop at least two to three residential projects each year with a total of 200-300 units.
But as he notes: 'The businesses are very different. Construction is basically a cash-flow business while development is more capital intensive.'
One of Straits' survival strategies was to wise up to the availability of various financial instruments offered by banks to help SMEs.
Working with OCBC, for example, it obtained project financing which was tied to a specific contract, unlike previously when customers could only draw on overdrafts. OCBC would evaluate the contract and provide a customised solution for each contract depending on the cashflow projection and financing needs for the contract. By doing so, the customer is able to manage the financing needs of the project more closely.
The customised solution will include performance bonds, trade facilities and receivable financing. The receivable financing allows SMEs to convert their receivables immediately into cash. While receivable financing requires documentary evidence (versus overdraft), it serves the same purpose of giving contractors the steady cashflow to proceed with their project, something very important to construction players.
With this support, Mr Wong says the company has no immediate plans to go the IPO route to finance any expansion. 'We are well-supported by the banks,' he added.
Even with its property development arm, projects are likely to stay small. 'To play a significant part in the market, you need capital,' says Mr Wong. 'We are a family business - quite conservative actually.'
When foreign funds came knocking on their doors a year ago - the same funds that have been making the rounds - the company felt the time was not right. 'We have no reservations. It's just a matter of time and conditions. It's a matter of commercial terms. We are not averse to it,' Mr Wong says.
Could the next big joint venture with the Lehman Brothers of this world be with Straits Construction? It is hard to say. What seems clear is that this efficient outfit is quite happy the way it is already.