Can Locals Compete?

Even after a year defined by offshore acquisitions, Hawaii-based contractors refuse to back down.

July, 2002

Russell Young wasn’t surprised when one of Hawaii’s largest and oldest general contractors announced its pending sale to a Japan-based firm. Involved in Hawaii construction for nearly 30 years, the president of Albert C. Kobayashi Inc. had already seen several local construction companies snapped up by out-of-state firms.

But the sale of Hawaiian Dredging Construction Co. to Kajima USA Inc., expected to be completed this month, has not changed Young’s mind one bit: Locally based construction companies can compete and succeed in Hawaii.

Young can quickly rattle off the names of Hawaii-based firms acquired by offshore companies: Australia-based McConnell Dowell Corp. Ltd. purchased one-time powerhouse E.E. Black Ltd. in the late 1980s. E.E. Black formed a joint venture that included Idaho-based Morrison Knudsen Corp. to bid on the rapid transit program, which was later scrapped by the city and county of Honolulu. In the mid-’90s, E.E. Black was sold to California-based Tutor-Saliba Corp. The company eventually withdrew from Hawaii to focus on its operations in Guam.

Then there’s the story of Pacific Construction, founded in Hawaii in 1939. New Zealand-based Fletcher Challenge acquired Pacific Construction in 1986. Three years ago, Pittsburgh-based Dick Corp. bought Fletcher Pacific Construction Co., renaming the entity Dick Pacific Corp.

Young has mixed feelings about the most recent addition to the list of offshore acquisitions, mainly because his entrance into the construction industry was as a project engineer for Hawaiian Dredging. The company was founded in Hawaii in 1902 to dredge Honolulu Harbor. Parent company Dillingham Corp. expanded operations to the West Coast in later years, eventually moving its headquarters to California in the 1980s. Since 1987, Japan’s Shimizu Corp. has held a significant minority ownership in Dillingham.

“You look at the bigger companies — one has gone from Pacific to Fletcher Pacific to Dick Pacific,” Young says. “So read between the lines, and it tells you what’s happening. But locally based companies like ourselves, Nordic (Construction Ltd.) — the name doesn’t change. It’s still the same people there.”

Young’s confidence in locally based companies is not even diminished by the number of acquisitions, beyond the construction industry, that practically defined Hawaii business in 2001. Texas homebuilder D.R. Horton Inc. last year acquired Honolulu-based Schuler Homes. That announcement came about five months after Paris-based PNP Paribas acquired control of BancWest Corp., the parent company of First Hawaiian Bank.

In the construction industry, bigger is usually better when it comes to bidding on major projects. Winning a large project contract often comes down to bonding capacity, and firms backed by offshore parent companies tend to have the advantage in this area. For example, says President Denny Watts, Dick Pacific has a virtually unlimited bonding capacity. Hawaiian Dredging’s bonding capacity should also be bolstered upon its sale to Kajima USA, a company with annual revenues of $16 billion.

“The broad, international companies like Kajima, Dick, have worldwide resources that don’t rely on local markets, and oftentimes that can be a huge advantage,” says Mark Richards, co-owner of Maryl Group Inc., a Kona-based company with 2001 gross sales of $78 million. “(For example), because of 9-11, local financial institutions became extremely conservative. That put up barriers to doing certain projects here, so these companies looked to the Mainland and off-shore for financing.”

The president of Hawaii-based Grace Pacific Corp. also concedes that offshore-based companies are better prepared for fluctuations in the state’s tourism-based economy.

“If you’re strictly a Hawaiian contractor, you can’t search elsewhere, and that’s part of our problem, too,” Bob Wilkinson says. “If the mayor of Honolulu decides not to pave roads for two years, we’d have no place to go. If you were on the Mainland, in Oregon, you’d search out business in Idaho, Montana, California, wherever you had to go to keep your business healthy.”

Case in point: Two years ago, Dick Pacific established a strategy to expand its operations outside of the state, including projects in Micronesia, Guam, Alaska, California and Nevada that are managed from its Hawaii office. The move has paid off. Dick Pacific’s projected gross sales for 2002 are $440 million, a 57 percent leap from its 2001 gross sales of $280 million.

Watts says Dick Pacific and Hawaiian Dredging have also benefited from specializing in several market sectors, such as general building, heavy construction, special trade, and so on.

“That’s the difference, I think, between us and most of the other companies is the fact that we’re pretty much more diversified in a much larger way and able to compete in different markets, so we’re not locked into one particular market segment,” Watts says.

Young says the key to operating a midsize, locally based company is finding a niche. A.C. Kobayashi consistently ranks among the state’s largest locally based contractors. It earned $66 million in gross sales in 2001. That figure is down more than 30 percent from the year prior due to project delays after Sept. 11, but projected sales for 2002 exceed $100 million.

With a bonding capacity of $200 million per job, A.C. Kobayashi has the financial resources to compete for contracts with Hawaiian Dredging and Dick Pacific, Young says. But it also has the flexibility to bid on smaller ones that wouldn’t appeal to larger general contractors.

“I don’t see us as the smallest large company, I see us as the largest midsize company,” Young says.

The challenge for companies such as A.C. Kobayashi, Young says, is to carefully select the projects they bid on. Most projects generate between a 1 percent to 5 percent profit margin.

Despite their size and the extra care that must go into selecting projects, smaller locally owned companies do have a major advantage over the bigger players, Young says: There isn’t an extra layer of decision makers to consult. The president of another Hawaii-based company echoes the opinion.

“Other companies rely on major decisions back on the Mainland somewhere,” says Glen Kaneshige, president of Nordic Construction Ltd. “They may be strapped with decisions based on a lack of knowledge on what’s happening or what’s in tune with the market.”

It is unclear how much of Hawaiian Dredging’s decision-making process will be affected once its sale is complete.

“We’ve always been part of an organization,” Hawaiian Dredging President Bill Wilson says. “Given that, it’s part of another organizational transition for us. You have to do what’s right for your business based on opportunities. Hawaii construction is different from Hawaii construction 13 years ago.” He says the company will operate under the same name and will not lay off any of its 500 local employees in the deal.

Dick Pacific’s Watts says most parent companies recognize the folly of micromanaging their subsidiaries.

“Most companies realize that to operate in a place like Hawaii, so remote from the Mainland or Japan, you have to rely on people to manage the business based on the marketplace,” Watts says. “So it really depends on the ownership allowing people to do their jobs.”

That’s a statement with which Bruce Coppa couldn’t agree more. The executive director of the Pacific Resource Partnership speaks from experience as the former vice president of operations for E.E. Black Ltd.

“Morrison Knudsen brought in their own management style, and I think they should’ve listened a little bit to the local style here,” Coppa says. “Being local is a big asset vs. coming here (and thinking they are) going to show us how to do it. Kajima’s been a longtime player in Hawaii, unlike companies that just come in and buy. They know the lay of the land.”

Coppa does not doubt that locally based contractors will continue to compete successfully against large, offshore-owned companies, even with the pending sale of Hawaiian Dredging.

“Dredging, Dick, Kiewit (Pacific Co.), they’ll always be big, big players, but they won’t get all the work,” he says. “Local companies like ACK and Nordic could go up against any of these guys. But at the end of the day, it’s not how big you are. If you’ve got the talent to bid on the job, and your number’s right, you’ve got the work.”

A.C. Kobayashi’s Russell Young agrees. He doesn’t lose sleep worrying whether his company is bigger or smaller than any other general contractor. His priority is his 100 salaried employees, all of whom are shareholders in A.C. Kobayashi.

“If we lose money on a job, it could be the end of our company,” he says. “We’re not out there be the biggest. We’re out there to survive.”

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