The downsides of competition – is Fletcher Building an example?

Opinion: Fletcher Building is one of our largest companies and its failure would be a significant setback to the industry and to the economy.  The company has been in trouble for some time and there seems to be a growing list of projects that are running late and/or over budget.  It is in no one’s interests to see the company go to the wall.

There is no doubt a long list of inter-related reasons for the decline of Fletchers.  However, it seems likely that competition in the construction sector has been a factor.  Competition forces bidders to price as keenly as possible and this often results in underestimating the complexity of projects and cutting margins to dangerous levels.

For the market, in general, this has as many positives as it has negatives.  It is normal in well-functioning markets for some companies to fail and other to succeed.  Failure can be the result of any one of several factors but under-pricing is certainly one.  Although this is tough on the failing companies the net result is to increase the strength of the remaining capabilities available.  It is a part of the natural selection process.  And the gaps left by failing companies often provide an opportunity for new companies to enter the market, who are able to offer improved or new capabilities.

This is all well and good but if the market is dominated by a relatively small number of large companies the impact of company failure can be severe.  And because of the size factor, it may not be practical for other companies to pick up the slack.  If major projects are involved, e.g. like some of those in the Christchurch rebuild, the impacts can be quite widespread.

It is tempting to think that stricter regulation of the construction sector might help but it is already subject to regulation on many aspects and I don’t believe more regulation is the answer.  I think the answer lies in the industries own hands – and this is where the Government has to be hands off – so that there are more partnering and the sharing of skills and risks.  There are plenty of examples of this, one of which is the Transmission Gully project.  Several companies are involved in this project and should anyone drop out I am sure it would be possible to pick up the slack, albeit with some stretching of timelines.

Clients also need to be savvier.  They should be looking at risks as much as at price and requiring partnering where they think the risks of a single contractor are too great.  The lowest price is also not always the wisest choice.

This tempering of competition with cooperation may not fit with the perfect market approach but it is a pragmatic solution for a small country in which individual firms often have a dominant position, and where the price of failure can be very significant and wide reaching.

By Bas Walker

This is another of Bas Walker’s posts on GrownUps.  Please look out for his articles, containing his Beachside Ponderings.