A Speech made for Industrial Session of Asian Chemical Congress held in Hiroshima on May 1997

Abstract

Most of chemical engineering companies started the business in their home country market and have enhanced the capability with the growth of market in home country. When the home country market matured, they went out abroad to seek a new market mostly in developing countries. Their approach was welcomed by chemical operating companies in the developing countries, for their capability of technology transfer. This was the driving force of an evolution for global engineering companies.

Despite market globalization, however, they continued relying on the resources in their home country. The system of business associations between engineering companies and their resources in home country worked very well by an agreement implied among the associated parties. They did not need to change the traditional way of their business practices and culture. Here, I would like to name them at that stage the First Breed of Global Engineering Companies. The level of evolution of the First Breed Companies stagnated at the market level. The good reputation of the First Breed of Global Engineering Companies in Japan was created by their high quality design and engineering executed by their own well-experienced engineering staff who matured outside hire and fire environment. Another reason for the good reputation may be attributable to high quality equipment & materials supplied from Japanese industries.

The First Breed gradually evolved to the Second Breed of Global Engineering Companies. This new breed was characterized by globalization of resources and business practices. Recent rising global competition combined with fluctuating exchange rate of the currency forced Second Breed Companies to go out and to seek low cost international resources. The reliance on international resources required them to change business practices and culture to the internationally common basis. Fast track schedule was also market's strong interest. Engineering companies are struggling with this difficult task of achieving all the above market needs simultaneously, with keeping quality of the products. Speaker will concentrate on the challenges and tricks of internationalization of business practices and culture of the Second Breed of Global Engineering Companies.

What looks like the future Third Breed Global Engineering Company ? Will it be an automated engineering company running on the global network or else ?

Speech Text

Chairman, thank you for your kind introduction. Ladies and gentlemen.

It is a privilege for me to deliver an address about "Globalization of Chemical Engineering Enterprises" here in Seventh Asian Chemical Congress.

Under this title, I would like to talk about our identity, history, recent experiences and the future vision of global engineering company.

Our Identity

What is an engineering company ?

They design the plant, purchase equipment & materials from outside suppliers and erect the plant at the site located in the premises of chemical operating company. Summing up all those activities, we call ourselves "EPC Contractor".

The chemical process technology adopted for the plant may be a process provided either by a chemical operating company itself, or by other process licensers, or by an engineering company itself.

In addition to licensing process technology, an engineering company's role in upstream design is mainly composed of the development of process flow sheets, design of process control system, design of safety system and finalization of specifications and data sheets.

Major activity of downstream design is spatial design of the plant. Piping system design is a central part of spatial design.

Rise of First Breed Global Engineering Companies

Historically, most of engineering companies started the business in their home country market and have enhanced the capability with the growth of market in home country. When the home country market matured, they went out abroad to seek a new market mostly in developing countries.

Their approach was welcomed by chemical operating companies in the developing countries, which just started building chemical plants in such countries. This scheme contributed to technology transfer. This was the driving force of an evolution for global engineering companies.

Despite market globalization, however, they continued relying on the resources in their home country. The system of business associations between engineering companies and their resources in home country worked very well by an agreement implied among the associated parties. Agreement implied means a common understanding which does not require to mention in verbal or in writing in daily work. They did not need to change the traditional way of their business practices and culture. Here, I would like to name them the First Breed of Global Engineering Companies.

Chiyoda Corporation was founded about 50 years ago, and became the First Breed Company about 30 years ago.

The First Breed Companies in Japan won the good reputation thanks to their high quality work performed by their own staffs who matured outside hire and fire environment. Another reason for the good reputation may be attributable to high quality equipment & materials supplied from Japanese industries.

Evolution of Global Engineering Companies

Evolution of Second Breed of Global Engineering Companies

The First Breed Companies gradually evolved to the Second Breed of Global Engineering Companies. This new breed company was characterized by globalization of resources and business practices.

Chiyoda Corporation became the Second Breed Company about 20 years ago. The degree of globalization increased ever since.

Recent rising global competition and fluctuating exchange rate forced Second Breed Companies to go out and to seek international low cost resources. The reliance on international resources required them to change their business practices and culture to internationally common basis. In the past 5 years, the shift to international low cost resources was greater than that of early time Second Breed Companies. This was really revolutional change to engineering companies in Japan.

Fast track schedule was also market's strong interest. This need is another burden for Second Breed Companies.

And finally, another recent trend is that regardless of the shallow depth of the front end loading, the time given to Second Breed Companies for verification is very short. Because of the fierce competition, they have to manage on this basis.

Second Breed Companies are struggling with this difficult task of achieving all the above market needs simultaneously, with keeping the quality of the products.

Findings by Second Breed of Global Engineering Companies

What have Second Breed Companies recently found in purchasing equipment & materials at lower cost from global supply sources ? Let me introduce some items. They are late coming vendor drawings, delayed equipment delivery and poor quality of the products. As EPC contractor, who is fully responsible for the entire project, they are forced to transport by air cargo, to repair or replace the defective equipment & materials at the field, and to mobilize more artisans to the erection field.

Regarding farming out a part of engineering work to the developing countries, Second Breed Companies experienced inconsistent bill of materials, which resulted in late coming supplementary orders and surplus materials left after completion of the plant. Conflicting drawings needed correction at the field or at home office.

Fast track engineering schedule often ends up off track. All resulted in additional cost to contractors.

I have to add that the shallow depth of the front end loading and short time given to Second Breed Companies for verification on the front end loading resulted in missing items in cost estimation.

Regardless of those difficulties, Second Breed Companies so far completed the plant to fulfill the requirements of operating companies. But Second Breed Companies are unable to keep the current situation. Otherwise, they may disappear from the services for process industries. In consequence, operating companies also suffer.

Actions Taken by Second Breed of Global Engineering Companies

What have Second Breed Companies done for this situation ?

Getting out of conventional competitive business of EPC work may be a grand strategy for all companies.

Development and acquisition of new process technologies are always the target of engineering company. Achievements of R&D activities and acquisition of new process technologies are rewarding. Typical examples are thermal cracking process and fertilizer plant.

Partnership with chemical company in new process development will be a potential route. The partnership starts from chemical company's laboratory achievements and continues after installation of the first commercial plant.

In viewing of increasing international concerns on global environmental issues, it may be a wise decision for an engineering company to invest in R&D for environmental protection processes. Those technologies are common to all chemical production process industries, and their potential market can be expected.

But like other industries, reliance solely on monopolistic technology is rather limited. There are still substantial needs in conventional competitive EPC business.

Then how are Second Breed Companies going to succeed in this competitive business ? Making alliance or partnering among competing engineering companies eliminates unnecessary competition. Such scheme also reinforces the strength by each other.

Regarding the shallow depth of front end loading, and short verification time, the clear definition of operating company's requirements before entering into agreement on lump sum basis may be a viable solution.

For this purpose, the alliance between operating company and contractor may become more common than before.

Some of malfunctions experienced by Japanese Second Breed Companies were attributable to the traditional tendency of relying on an agreement implied or unspoken understanding among the associated parties. Such classical business practices or culture must be changed to more reliance on an agreement expressed. This means that business practices should be transparent for all the parties concerned.

Qualifications required for all engineering staffs are capability of sensing for change, quick communication, creation of team work spirit, and leadership in the multi-national society.

Grading up of project management skill is among all, urgent necessity. Individual education, qualification and empowerment are mandatory.

Grading up skill of engineering staffs in contractor and of designers in start-up design offices in the developing countries is another important factor to improve design quality. This could be achieved by training and repeated orders to the same startup design offices and adoption of most updated design tools like 3-dimensional modeling.

Design tools such as 3-dimensional modeling are costly, so that it is considered not appropriate when low cost human resources are available. But it is easy to train people and it can yield high quality products even by young designers. Adoption of 3-dimensional modeling will not only enhance design quality, but also shorten design time and reduce engineering cost. Improvement of design quality is achieved by design review in cyber space attended by many functional engineers composed of staffs of both engineering company and operating company.

Nowadays, CAD systems for 3-dimensional modeling is easily available in open market. What would be, then, the cost competitiveness for engineering company? One of answers may be home made engineering tools such as automatic piping model building system called "auto-router". We have been using this system for almost 5 years.

Another answer may be pre-engineered piping spool model. Piping scheme around control valves, safety valves and pumps can be categorized to standard design. After conceptual piping layout on the rack is completed by the "auto-router", plant model finalization is just cutting in pre-engineered modules into the plant model.

Regarding poor quality and delayed delivery of equipment, counter measure is relatively simple.

Second Breed Companies may carefully drop troublesome vendors from their qualified vendors list, validate new suppliers or add estimated additional cost for low quality suppliers during vendor's bid evaluation.

Alternatively, it is possible that contractor still selects weak vendors at the lower cost and gives them assistance in equipment design and shop fabrication.

Fast track engineering schedule often ends up off track because of delays in upstream process design, late coming vendor data and frequent engineering changes.

To avoid this, upstream process design schedule should be kept by allocation of more human resource to this front end activity and obtaining operating company's consent at the early stage.

Concurrent engineering is considered necessary for achieving constractability and reducing costs in construction phase. It is also considered that parallel processing is needed for fast track project. But without well defined procedures, those processes often result in excessive engineering changes.

Well defined sequence of flow including recycle work and sharing of current status among parties eliminate unnecessary changes.

Third Breed of Global Engineering Companies

Are we satisfied with the current status of Second Breed Companies ? What looks like future Third Breed Companies? Will it be a fully automated engineering company running on global network or else ?

Strategy of farming out a part of engineering work to the developing countries was a logical consequence of seeking lower engineering cost, but some day, the time will come when wage level of developing countries lose cost competitiveness.

Already composite engineering cost of farming out a part of design work to certain countries exceeded the case of doing all in Japan.

Third Breed Companies have to be prepared for it. Considering wage increase in developing countries and advancement of computer technology, the concept of automated engineering company becomes strategically important..

Future Vision of Third Breed of Global Engineering Companies

Engineering database is a common tool for concurrent engineering. Nowadays, design data generated by front end loading is transferred in digital format from operating company to engineering company. But due to the variety of formats, data conversion from one system to others requires specific translators. For this reason, establishment of database at the start of engineering becomes difficult in short time. To solve this difficulty is required some kind of internationally agreed common interface for data exchange. Before the initiative of International Standard Organization(ISO) on this issue succeeds, engineering company has to rely on de facto standard.

Know-how of seasoned engineer could be converted to artificial intelligent system. One of example is an application to thermal rating of heat exchanger. This system provides young engineers with suggestions and alternatives on heat exchanger design.

Even heat and material balance could be checked by AI system.

Proven concept of "Top Down Design" used in custom chip designer may be applicable to process flow sheet generation. When flow scheme was described by flow scheme description language, process flow diagrams and piping & instrument diagrams will be generated automatically.

Some day, automated spatial design may not be just a dream. But for this purpose, vendor's data should be transmitted from vendor to engineering company in the 3-dimensional model.

Once 3-dimensional model data starts accumulating, part of the previous model could be reused as a building block for the new plant.

Traditionally, piping isometric drawings are issued to construction site. But piping fabricator has to draw more detailed piping spool drawings from this isometric drawings. In this process, there is a great loss of potential information, in other word, entropy. Why not giving them 3-dimensional model data ? Piping fabricator can extract piping spool drawings from this model. It is easy and less time consuming.

The same may be applied to operating company. For the purpose of life cycle maintenance, operating companies are requesting engineering companies to transmit product data according to plant configuration.

But in the future, product data may be in 3-dimensional model.

Here again, I have to mention the need of internationally agreed common interface for data exchange. When there is no common interface, and number of the systems is n, required number of translators is shown as T = n (n-1). When there is common interface, and number of systems is n, required number of translators is shown as T = 2n .

As you can see in Fig.-1, when there is no common interface, and n becomes large, T becomes too costly and unmanageable. Because of this paradox, specially in the case of vendor data, due to enormous number of home made vendor's system, engineering companies are still forced to rely on hard copies or image data.

Under increasing wage rate in Asia, it is increasingly necessary to achieve lean production management and improve artisan's productivity in host country. Just-in-time delivery of artisans, equipment & materials, and construction drawings at the construction site is the key to minimize inventory of those resources.

Project control has long been considered as key management technology and art. But now, when all engineering data are stored in digital form, we can consider the possibility of automated engineering data flow control and progress monitoring by electronic data management systems.(see Fig-2)

But here, I have to say that, engineering automation is only a helper. Excellent people and organization is the central part of global engineering enterprise.

Do you think that the time will come when operating company fills in the necessary data in the blanks of engineering company's order form, process flow diagrams and piping & instrument diagrams with equipment data will be generated instantaneously ? My answer is no. Creation of new ideas is an act of individual engineer and any human made system cannot substitute. Engineering company must have those creative engineers in hand. This should be an ultimate goal of engineering company.

In concluding my speech, I would like to cite my favorite remarks called Jack Welch's Six Rules for Success. Mr. Welch is a chairman of GE and regarded as a person who remade GE. And above all, he started his carrier as a chemist.

Control your destiny, or some one else will

Face reality as it is, not as it was or as you wish it were

Be candid with everyone

Don't manage; lead

Change before you have to

If you don't have a competitive advantage, don't compete

Thank you for your kind attention.