{"id":25536,"date":"2017-11-15T20:13:37","date_gmt":"2017-11-16T01:13:37","guid":{"rendered":"https:\/\/digital.hbs.edu\/platform-rctom\/submission\/local-content-requirements-in-oil-gas-what-is-the-impact-on-construction-firms\/"},"modified":"2017-11-15T20:14:19","modified_gmt":"2017-11-16T01:14:19","slug":"local-content-policies-what-is-the-impact-on-construction-firms","status":"publish","type":"hck-submission","link":"https:\/\/d3.harvard.edu\/platform-rctom\/submission\/local-content-policies-what-is-the-impact-on-construction-firms\/","title":{"rendered":"Local Content Policies: What is the Impact on Construction Firms?"},"content":{"rendered":"

What is local content?<\/strong><\/p>\n

Local content, as defined by the World Bank, is \u201cthe share of employment\u2014or of sales to the sector\u2014locally supplied at each stage of this chain\u201d. [i]<\/a> In other words, local content is the concept that a certain percentage of a project\u2019s inputs (whether materials or labor) must come from the \u201chome\u201d country. This is especially relevant for large construction projects \u2013 these projects often represent capital expenditures in the $10B+ USD range \u2013 and have very strict local content requirements, especially when the majority investor is the government itself, or an entity controlled by the government (i.e. a National Oil Company). [ii]<\/a> Ultimately, local content is an example of the isolationism megatrend, as it is a classic example of high tariffs or laws affecting the manner in which a firm\u2019s supply chain functions.<\/p>\n

The manner in which local content is implemented can be seen in Figure 1 created by the World Bank, which shows the different categories of local content, and how in particular Category 2 local content can affect the supply chains of a construction firm.<\/p>\n

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Figure 1 [iii]<\/strong><\/a><\/p>\n

Local content\u2019s impact on industry players<\/strong><\/p>\n

\u201cIn many of the countries where we work, clients are requiring more local content in their projects by mandating use of in-country talent and procurement of in-country goods and services.\u201d<\/em> \u2013 Fluor 2016 Annual Report [iv]<\/a><\/p>\n

An example of a company heavily affected by these local content laws is Fluor (NYSE:FLR). Fluor is a large multinational EPC (engineering, procurement, and construction) firm, headquartered in Texas, with revenues of ~$19B in 2016. [v]<\/a> Fluor is exposed to a number of industries which have local content restrictions, including mining, energy, chemicals, and large infrastructure projects. [vi]<\/a><\/p>\n

Local content restrictions greatly affects Fluor\u2019s ability to do business. First off, it restricts the countries in which they can work, depending on their local presence. In addition, local content restrictions often require significant training of employees, as many of the countries with strong local content laws lack the \u201cin-house\u201d expertise to complete the project themselves. To address this concern, Fluor is focusing on developing office locations within many different countries, and building a supply chain organization that understands local content restrictions. Fluor is also focused on developing local training programs that help to educate the workers and manufactures within a certain country, as well as utilizing centers of excellence to provide supply chain consulting services when needed. [vii]<\/a><\/p>\n

Next steps<\/strong><\/p>\n

Going forward, Fluor must focus its efforts on working with the sponsoring countries to better define the \u201crules of the game\u201d for local content projects. In order to accomplish this, Fluor, as a well-respected player in this space, should include in its bids the option for no local content, and the savings that could be realized by implementing this change. Local content policies often result in schedule delays and higher cost, which are not always communicated well to the customer. [viii]<\/a> By including this information in its bid packets, Fluor can help to steer the client to reduce their local content requirement where appropriate.<\/p>\n

Despite this, it is unlikely that local content policies will decrease significantly, as many governments view them as being highly effective (whether they are or not is an entirely separate policy debate). \u00a0Flour thus should make a concerted effort to investigate core strategic decisions such as \u201cwhere to play\u201d and \u201chow to win\u201d in these markets that have high levels of local content requirements. In the author\u2019s opinion, Fluor should focus on markets where their supply chain organization can help to improve the productivity of local manufacturers in a differentiated manner. Along that line, Fluor should focus on recruitment of experts in both the cultures of countries they expect to grow and in manufacturing of resources that are expected to be needed. In this manner, Fluor can leverage their existing supply chain competencies to create a competitive advantage, especially if stricter local content policies are enforced.<\/p>\n

Questions that remain to be answered<\/strong><\/p>\n