15 Jan Building competitiveness through innovation and digitalization
Balázs Báthory, Deputy CEO Innovation, Market Építő, reveals how the leading construction group acts as the pace setter for the Hungarian industry
A big contributor to Hungary’s rapid growth in gross domestic product has been the country’s construction industry: in the first two months of 2019, its output grew by 39 percent, which is quite an achievement. As a major player in the construction market, can you give us your analysis of the sector’s performance in the period leading up to the global pandemic?
The picture is not always black and white, and one of the positive stories behind the headlines is how the construction industry was able to cope with that sort of output increase. Between 2015 and 2019, an exponential growth and a very steady increase in construction output was experienced, while the subcontractors and the number of people working in the industry had not been increasing at the same pace. What made that even more challenging is that Hungary is in Central and Eastern Europe (CEE), and the trend is that construction workers from Moldova, Ukraine and other non-European Union (EU) countries treat Hungary as the entry point on their journey to Germany or to the U.K., when it was in the EU. And what made it even worse is that many Hungarian blue-collar workers went abroad where the nominal wage is higher but, of course, the cost of living is higher too. Whether they made more money at the end and whether it compensated for the lack of family relations and other adversities is another story.
So that’s how the output of the industry increased while the labor base rather decreased at the same time. By 2019, weaker, less stable companies couldn’t keep their subcontractors and workers loyal. That caused delays in construction, mainly for midsize players. Market Építő, on the other hand, invests quite heavily into relationship building with subcontractors and other key contributors to the construction value chain in order to secure our own projects and make sure that we deliver everything on budget on time. That’s the very reason why Market Építő created a group of around 1,200 people, out of which about 440 are working in the main company—which is Market Építő—and the rest are in our subsidiaries. Our subsidiaries cover the most important “packages” of our work. With our loyal workforce, the majority of which are white-collar engineers, we could fulfill our obligations toward our clients on all our projects. We have been carrying out around 30-35 projects simultaneously, which requires a strong management force, a committed middle management and well-trained site management capability.
Due to many measures taken by the Hungarian government, the housing sector started to boom quite heavily during those years. There was a reduced VAT on newly built apartments, for example. This meant that there were many smaller projects just flooding the market. It seemed like an endless flow of work. That is how I would describe the period leading up to 2019. The sector was booming and, basically, there was no unemployment in the construction industry, but rather a lack of applicants for the jobs.
How would you assess the impact of COVID-19 on the Hungarian construction industry?
One must distinguish between the immediate impact in the first half year and the long-term impact. From the cockpit of one of the largest and best Hungarian construction companies, the immediate impact was limited as we have had a crisis strategy in hand. We shot for larger and longer projects to reduce their number. We also selected stable partners who would be there even if a crisis struck to limit our risks. Of course, you must build up your financial capabilities and the trustworthiness of your organization to get this change happening. For smaller, financially less-healthy contractors and those who lacked a crisis strategy, the immediate effect was probably more visible. New orders immediately fell by a two-digit number in the first quarter of 2020 and the industry’s output also fell by a two-digit number in the first half of the year.
Most developers were hesitant to sign up for new deals. They knew there would be an effect and, without knowing what this effect would be, they preferred to wait and see how the first, second and possibly the third wave of the virus progressed. Uncertainty is never good for markets. Most developers have been postponing decisions on new projects. However, we have not really experienced any stoppage of already running projects. Nevertheless, 15-20 percent of our projects were somehow affected by the uncertainty of the environment. The very big difference between the global financial crisis 10 years ago and the one today is that this one did not stop projects with an immediate effect.
Market Építő is the leading building company in Hungary. Founded by Mr. Scheer in January 1996, the group has about 1,200 employees and has delivered hundreds of projects all across the country. Can you give our readers some background to Market Építő?
In January 2021, Market Építő celebrated its 25th anniversary. This is already an achievement in a country that has been through a complete economic transition, including some very uncertain periods. Over these years, we have delivered around 750 projects. Market Építő ranks as Hungary’s number one construction company, with a current annual turnover of around €500 million, and its is about number 10 in CEE. This is quite an achievement for such a small country like Hungary to provide a construction company that is part of the leading pack in the region.
We have been concentrating on the Hungarian market only. That is where our leading edges are and that is where our trusted subcontractors are. A key element of our market strategy is our appreciation for our trusted subcontractors. We keep supplying them with work and—in cooperation with our real estate development arm—we are even able to create projects to keep us and them alive in turbulent times. As a result, when the effects of the 2008 global financial crisis eased, we had a much better chance for new projects because we had the circle of people and companies to work with already. This sort of relationship also comes handy during very good times as well. Being in a bad market situation is bad, being in a too good a market situation can be challenging too.
To stand on several feet, we established a real estate development arm, which is called Property Market. Many years ago, we invested in a new development site, which is a whole new district in Budapest called BudaPart, which has the potential for 250,000 square meters of offices. When completed in 5-7 years, it will give accommodation and workplaces for up to 30,000 people. This is a mixed development: offices, housing and commercial activities. Besides starting our own development arm, we have diversified our activities in many other ways. We are quite evenly working with hotel developers and office developers, as well as logistics companies and industrial players. We have had a chance to build some beautiful public buildings—such as university campuses—and sport facilities. For example, we had the honor to build the first top-quality football stadium in this country—the Groupama Stadium—which is a state-of-the-art German-style, very functional building from 2014.
While we are quite evenly distributing our resources into hotels, offices and industrial buildings, we also pay attention to client diversity. For instance, public procurement has never exceeded 30 percent of our turnover in any year. One of the reasons why we created our own real estate development arm is to be in full control of certain projects. This way we can test and try innovative practices—building information modeling (BIM), prefabrication and so on—and product developments taking into consideration the effect on the whole value chain.
Are there any specific projects that you are particularly proud of?
It is difficult to choose but I would mention our own office building that we moved into in June 2020. We had been trying to follow the growth of the company and we had already moved six times in 25 years. I really love the Market 6.0 building; it is a state-of-the-art office used entirely by our employees.
We are also very proud of the headquarters of Hungarian Telecom, which is part of Deutsche Telecom group. At the time of construction, it was the largest office building built in this country and it was undoubtedly a challenging job. We are very happy with all of the many hotels delivered by us, but I would name probably one, Hotel Clark, which is a beautiful jewelry box. We are also very proud of the campus of Moholy-Nagy University of Art and Design, which was completed last year, and some of our industrial works, such as the Apollo Tyres manufacturing factory.
We are currently working on 30 exciting projects concurrently. The most important ones are the headquarter buildings of MOL and OTP. We are constructing the Hungarian oil and gas company MOL headquarters building, which is one of the most challenging jobs we have ever done: it’s a 120-meters tall tower with an adjacent podium building—all together, it’s around 80,000 square meters. The design is by Foster and Partners. The quality required there is a pace setter for the whole Hungarian market. This will certainly stand out for many years, not just because of its sheer size, but also the quality of the building. We are also very proud of the headquarters building construction for OTP, the largest Hungarian bank. Building headquarters for the largest local companies is really challenging but also beautiful. These are long and complex projects where the developer of the building can really benefit from our expertise.
You mentioned quality standards and innovation. Those are primary criteria in any kind of industry, but even more so in the construction sector and they are core values of the group. Market Építő is fully ISO compliant and has won a bunch of awards over the years, including contractor of the year in 2019. How are you pushing new standards of construction and tackling today’s mega trends like sustainability, digitalization, mobility and improving local urban environments?
Being the leading company in a sector comes with responsibility. This is not a written responsibility, but rather a moral one. Whatever we do, the industry follows. If we are lazy, if we don’t innovate, then the whole sector will suffer; so, we took on this challenge and we live up to it. I am sure there are only few construction companies with a deputy CEO dedicated to innovation. This came about because of recognition of the need to speed up innovation and digitalization for our group and for the sector.
First, we defined what is innovation meant to us. Is it research and development or being a fast follower of international best practices? We look at the new international trends and we try to implement the things that fit into to our strategy as quickly as the market can digest it in Hungary. This way we are paving the way for all the other companies and our own subcontractors to do things digitally. To be able to improve with the pace we desire, we had to strengthen our own internal systems like enterprise resource planning, document management and site management tools. Last year, we started to quality check out building sites’ progress with laser scanners. Whenever one craftsperson is finishing a job in a certain part of building, we laser scan it and we point out any places where it must be corrected. Only following a full repair is the space is handed over to the next professional.
In some of these innovations we work together with competitors and, by doing so, these significant changes can affect the whole industry. For example, we took a leading role in modernizing onsite warehouse digitalization. At the completion of this program, all the materials entering building sites will have a special unique digital code, which will be used by all players in the industry.
The Hungarian government has already been ahead of some other countries in the CEE region in digitalizing administrative steps of the construction process, however proper official BIM standardization is still missing. We are also realizing the importance of data-driven decision making. To make the most of this, we are investing quite heavily on digitalizing all the information we have. Market Építő is at the beginning of this exciting journey, however we have already seen the first advantages in increased efficiency.
Over the past 25 years, the Market Építő group has implemented more than 730 project, you have built something in every corner of Hungary and achieved sales revenues around €3.6 billion, according to the latest figures I have seen. What is your strategy for continuing on a growth track?
Our primary aim is not compulsive growth, rather smart efficiency enhancement via employing modern technologies to enhance the effectiveness throughout our value chain. To achieve this, we do our best to evenly distribute our resources. Our real estate development arm has started to look beyond BudaPart project and invests in new development sites where we will pursue mainly office and hotel developments. Two or three quite significant sites in Budapest are already secured for this reason. And we have been monitoring the Hungarian countryside as well in terms of office developments. In order to enhance our resilience, an expansion toward other CEE counties is actively being considered, primarily the Visegrad 4.
As we are closing what has been a tumultuous year, how would you summarize the group’s priorities for 2021 and beyond?
I believe 2022 will be a more difficult year for the industry than 2020 or 2021, as there are still running projects and some new ones in the pipeline. However, if the economic impact of COVID lasts longer then the industry will suffer in 2022. The construction industry lags a couple of years behind: the 2008-2009 financial crisis hit us most in 2011-2012.
If I want to summarize our program, it will be to keep us where we are today. Any growth is good. Partnerships and good working relationships with companies along the value chain are as important as ever, if not more. Together, we need to make the Hungarian construction industry more competitive. There are certain areas—for example, logistics—where other markets are more competitive than us and this is going to be a growing part of the business due to changes like e-trading and home-office working.
Small markets have their own peculiarities. For example, there are fewer specialized subcontractors to choose from here than in larger economies. However, any regional logistics investor will look at the price of the land with existing infrastructure and at how competitive the pricing of the development is. The margin of logistics is small, so each dollar or euro spent on the development influences the profitability of that logistics development. This is a challenge we are working on: to make ourselves more competitive.
What is your final message to our readers?
We must be ahead of our competitors—that’s valid for our company, as well as for the whole country and the whole construction sector. Developers, main contractors, specialized contractors and designers must work hard, and the government must make sure that rules and regulations are competitive enough. Competitiveness is the key word.