The Art of War: Beyond the Possibility of Defeat
“If you know the enemy and know yourself, you need not fear the result of a hundred battles.” Sun Tzu’s Art of War is relevant today in navigating a utility contractor through the 2019-2022 utility construction market. Survival and victory are available to the levelheaded and self-aware who calculate and analyze future events and then strategize to act decisively with appropriate preparation. Leaders and managers can dramatically increase their chance of success by analyzing the global economic situation in regards to how it affects each utility sector. Let us begin our preparation.
Utility Spending Forecast
In Exhibit 1, 2018 growth continued to accelerate and we forecast a slowing of growth in 2019-2020 tied to a short and shallow recession. Telecom, electric and gas utility construction will prove resistant to steep spending declines due to their underlying growth factors: wireless data demand paired with fiber backhaul need; undergrounding and asset hardening or replacement of electric assets; and derived demand associated with accelerated replacement programs, respectively. As we enter the 10th year of this, the longest economic expansion the U.S. has ever experienced, it will end, as all expansion do, with a recession. The recent stock market performance and fear of a bear market have many firms and leaders worried, yet we remain bullish on the long-term prospects of the utility construction markets. There are challenges, however, that will dampen growth, the largest of which include:
- Trade and supervision workforce availability issues.
- Tariffs and subsequent retaliatory tariffs imposed by the Trump administration and trading partners.
- Current trading environment creating a drag on global economic growth or a full-on trade war.
Sun Tzu described that “Water shapes its course according to the nature of the ground over which it flows; the soldier works out his victory in relation to the foe whom he is facing.” There are and will always be obstacles to the successful execution of capital construction, maintenance or operations activity. Following is a review of the landscape of the utility construction markets to assist the reader in adapting.
Transmission & Distribution Spending Forecast
Sun Tzu described “Rapidity is the essence of war” when outlining how to succeed in conflict, and so it is with electric, gas and liquid markets. These combined markets are shifting, so rapidly positioning your firm for success is critical. Specifically, the electric market is beginning an upward trajectory that we anticipate will continue over the next 10-15 years and an anticipated transition in the gas distribution markets that will require repositioning both geographically and in work type.
Construction put in place figures for electric transmission and distribution (T&D) and gas distribution/liquid pipeline indicate that both markets show continued spending growth over the forecast timeframe.
Electric Transmission & Distribution
The electric T&D market continues to improve with increased spending through 2022 with strong underlying fundamentals driving growth. However, we expect an economic slowdown in 2019-2020 to slow spending growth temporarily; followed by 2021 faster distribution growth rate due to reliability and replacement spending acceleration. The electric T&D spending patterns are in a long-term growth phase that is likely to last at least through the next decade and beyond. There is a window of opportunity to enter this market over the next three years while spending is accelerating and utilities are willing to try out new construction service providers. After this window, contracts will be in place and it will be challenging to enter organically.
The electric T&D market is bifurcated between transmission and distribution that have different drivers and behavior. The transmission market, while still cyclical, has grown dramatically since 2000, after a nearly 30-year period of slow decline. Figures show an anticipated peak in CapEx spending followed by slower growth and potentially decline. A glimpse at a nearly 40-year history of CapEx spending shows the recent acceleration of electric distribution.
Gas Distribution & Pipeline
Our spending forecast shows the downturn experienced in 2015-2016 led by the pipeline market while gas distribution markets were and remain strong. Looking forward into 2020-2022, we see shifts in the nature of the distribution work that is occurring from broad accelerated asset replacements to more general modernization, and integrity-related programs, but no change in total spending. This shift requires contractors to take a hard look at their service offerings, better understand where their customers are headed, and then decide if they want to follow the spend patterns of their customers or potentially search for new customers with whom their current capabilities fit. Sun Tzu shared “If it is to your advantage, make a forward move; if not, stay where you are.” In this case, distribution contractors should search for their advantage, and move forward; standing still is the only mistake.
Water & Sewer Spending Forecast
Sun Tzu observed that “When you engage in actual fighting, if victory is long in coming, then men’s weapons will grow dull and their ardor will be damped.” The water/sewer segment is like a victory, long in coming. This market has outsized demand, deferred maintenance and aging infrastructure – for 15 years or more – and cannot seem to demonstrate the construction spending growth implied by these factors. Figures show a slow decline in spending since 2008, even after the passage of the American Recovery and Reinvestment Act in 2009, the Flint Water Crisis, and other performance issues reinforcing the demand for construction activity. Some topics to consider:
- Overall pipe breaks are up 27% since 2012 from 11.0 to 14.0 breaks per 100 miles per year.1
- The average expected life of installed pipe today is 84 years, up from 79 years in the 2012.2
- The average replacement schedule addresses 0.8% of installed pipe is replaced each year equating to a 125-year replacement schedule.3
- Leak rates range between 10%4 and 25%5 depending on the study, representing significant non-revenue water.
Have we turned the corner? Yes! The forecast growth rate begins addressing a decade of declining investment and 2018’s passage of $200 billion in federal money help yet the underlying funding issues remain.
Communication Spending Forecast
The telecom construction market is the most volatile of all the utility construction markets and it continues to be a critical force for growth, innovation and disruption across multiple industries. Sun Tzu defined nine situations in the Art of War and recognizes nine varieties of ground. He defines each ground and gives the positives and negatives of each ground. Similar to an army, a contractor must know each ground that he is working in and adjust according to the changing environment.
Figures display that construction spending will continue to increase at a stable rate through 2022, especially with the rollout of 5G. While the rollout of 5G will be a multiyear journey, the foundation began in 2018. This highly anticipated mobile technology platform is the connective tissue for the Internet of Things (IoT), autonomous vehicles, and mobile media, all of which will require fiber backhaul. Other prognosticators are also bullish on spending in this sector in which $275 billion in U.S. infrastructure spending, creating up to 3 million jobs, for a boost annual Gross Domestic Product (GDP) by $500 billion is foreseen.6 Much of the described $275 billion might include 300,000 small cells needed to be deployed in the next three to four years—roughly double the number of macro towers built over the past 30 years.7
Growth opportunities over the next four years include:
- Rollout of 5G – Small-cell densification is essential to enabling 5G, particularly in densely populated areas.
- Autonomous Vehicles – Next-generation wireless networks are critical to mass-market adoption of autonomous vehicles, guided and communicated to through wireless and fiber optic means.
- Smartphone Functionality – Mobile delivery of augmented reality (AR), virtual reality (VR), artificial intelligence and machine learning are all examples of mobile services personalized to the user, the geography, the time of day and the preferences of the user that require much more robust infrastructure, like 5G to supply.
- Improved Chips – Download/upload speed, sensor sensitivity, infrared or higher camera quality, etc., all encourage more data usage continuing the need of more infrastructure.
- Net Neutrality – Federal Communications Commission (FCC) regulatory stance on Network Neutrality will be a driver of activity, however opinions differ as to whether it will drive investment into infrastructure down or up? We believe the current stance to allow for some differentiation in network speed based upon price will yield overall higher spending on infrastructure.
- Greater stability and long-term growth are forecast for the telecom market.
“The good fighters of old first put themselves beyond the possibility of defeat” counseled SunTzu. How will you accomplish this for your business in the utility construction market? Let’s start with a review of our greatest challenges including regulation, environmental protest, global tariffs, economic recession and the pressing question of “Who Will Do the Work?”
Sun Tzu observed that “The clever combatant imposes his will on the enemy, but does not allow the enemy’s will to be imposed on him.” Using Sun Tzu’s axiom, firms that get their arms, heads and hearts wrapped around workforce attraction, retention, training and development of supervisory talent will be the survivors over the next decade in these markets. One workforce solution is SkillsUSA (www.skillsusa.org).
Many readers will never have heard of SkillsUSA, which has developed a set of training and competition programs to replace the lost trade skills programs many of us remember from high school. Ultimately, all construction is local and GROWING rather than hiring local resources is the answer. As you look around the industry, take the time to “know yourself and you need not fear the result of a hundred battles!”
Mark Bridgers, Jay Rendos, Chris Jang and Heather Phillips are consultants with Continuum Capital, which provides management consulting, training, and investment banking services to the worldwide energy, utility and infrastructure construction industry.
1 Folkman, Steven, “Water Main Break Rates In the USA and Canada: A Comprehensive Study” (2018).
Mechanical and Aerospace Engineering Faculty Publications, pg 4.
2 Ibid. pg 5.
3 Ibid. pg 6.
4 Ibid. pg 38.
5 “Evaluation of Indiana’s Water Utilities: An analysis of the State’s aging infrastructure,”
Indiana Finance Authority, November 2016, pg 16.
6 “How 5G Can Help Municipalities Become Vibrant Smart Cities” (https://api.ctia.org/docs/default-source/