An American Company Looks at Plant Construction Abroad
As the world shrinks under the impact
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A RL BA
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of improved trans-
portation and communication, time-honored concepts of the effect
of
labor and materials on construction must be
scrapped to get more realistic cost Jigures
EQUIPMENT AND MATERIAL COSTS ABROAD
Ample supplies of indigenou raw materials reduce costs. Sand is cheap in Israel but high in England
36
INDUSTRIAL A N D ENGINEERING CHEMISTRY
Comparisons of U . S. us. foreign construction costs are often made in broad relative terms. I t is generally accepted that construction costs are highest in the United States with some signijicant exceptions. Also generally conceded is that construction costs are next highest in Western Europe with the United Kingdom, France, and Western Germany coming closest to United States costs. I n the same relative fashion, most will rationalize that costs in Southern Europe should be below those in the Western countries and that in diminishing ratios costs in South America, North Africa, and Asia should be respectively Less. M a n y factors enter the determination of more precise relative positions. “ A General View of European Costs,’) IHEC, March 7960, reported onjixed capital costs as seen through the eyes of a European contributor. This, the second of a four-fiart series, will attempt a broader world view of construction costs abroad as seen from the United States.
onstruction costs primarily depend on prices of equipment and material, labor rates and labor productivity, and availability of construction tools and equipment. Local equipment and material prices are functions of factory labor costs and the availability of raw material. When basic materials used in manufacturing must be imported, the finished product price is more representative of costs in the area from which the raw materials came. Entrance duties and freight charges from the country of origin must be included. Labor productivity depends on the health and well being of the working force, as much as on the number and efficiency of factory machine tools, construction tools, and equipment available to replace hand labor operations. Other factors affect productivity of labor, such as strikes, holidays, slowdowns, and political unrest. Generally speaking, a well rested people will tend to produce more during an average working day, and here the number of hours in the work week becomes important. T o an increasing degree, standardization afforded by trade unions affects productivity of labor. Standardization of equipment and parts, and of techniques and methods have a most beneficial effect.
C
labor Rates and Availability
I n the growing world competitive climate, underdeveloped nations look toward the most productive countries for methods and techniques which have contributed to higher living standards. As the world shrinks under the impact of swifter transportation and communication, it becomes easier for one nation to emulate others in areas of productivity. T o offset low competitive factory labor rates, countries having high living standards must increase productivity continuously to compete in the equipment and material markets of the world. Increasingly the United States has had to develop more efficient methods for raising productivity to counteract constantly rising costs. Producers abroad,
experiencing similar price squeezes, must sooner or later develop along similar lines. Because all prices are functions of labor costs, prices of equipment and material used in plant construction should be minimum when produced in local factories by indigenous labor from locally obtained raw materials. An important measure of the cost of equipment and materials for a proposed process plant abroad is the hourly labor rate paid to factory workers in the local industries. Table I compares median average hourly earnings of workers in selected industries in representative countries throughout the world. The labor rates have been adjusted to equivalent 1961 U. S. dollars, using conversion rates shown in Table I V . The data were assembled from several private sources as well as publications of the United States Department of Labor, Bureau of Labor Statistics. The Department of Labor publishes a monthly pamphlet entitled “Labor Developments Abroad.” I t draws from material obtained in reports of United States labor attach&, labor reporting offices, and the foreign and domestic press. The data represent the best information available a t this time and in context is accurate on a relative basis. Fringe benefits included in the labor rates vary in degree and complexity. I n some countries allowances are made and paid for holidays, sick leave, insurance, old age benefits, and workmen’s compensation. Countries such as France make additional allowances for special bonuses and payments for time not worked. Other countries grant extra payments for family allowances. Other fringe benefits include supplementary services and benefits relating principally to health and recreation. Formulas by which these extra fringe benefits are computed are many and quite complicated. For instance, India pays some of its workers a yearend bonus, amounting to as much as three months pay. There seems to be a close correlation of wages paid to workers in specific industries abroad with respect to their equivalents in the United States. I n practically all countries, workers in the iron and steel industries are paid more than in most others. Miners are paid second highest and chemical workers rank approximately third. Workers in the food and apparel industry are at the lower end of the scale in practically all countries, reflecting the lower degree of skill required. Workers in the transportation and utilities field rank near the iron and steel industry in most of these countries. Canada is the only country which comes close to the United States in the hourly wages paid to industrial employees. Wages in Australia are about one third of those paid to American workers. England and Western Europe average roughly a third to a quarter of the wages paid in the United States. Both Mexico and Japan are about on a par in relation to the United States with 1 6 and 17oJ, of U. S. wages, respectively. Hourly rates of India are only 5Oj, of those in the United States with Taiwan averaging 3Oj,. There are indications that hourly wage rates in other countries are tending upward. Table I1 shows the relative change in hourly wages in three Western VOL. 5 4
NO. 5 M A Y 1 9 6 2
37
European nations and the United Kingdom. A table showing relative hourly wages including fringe benefits was published in “A General View of European Costs,” I&EC, March 1960. These relative positions as of 1957 are compared for the same countries in Table I1 with the current hourly wage ratios shown in Table I. While these four countries kept the same relative position with respect to each other, Western Germany, France, and Italy each moved u p closer to the United Kingdom in wages earned by their workers. This reflects the tendency toward greater uniformity in the economies of the European Common Market countries.
origins, parts manufacture interchange, taxes and duty payments, license fees and royalties, and competitive factors such as governmental subsidy, price fixing, and surplus dumping. All of these factors enter the price charged for a product. Data presented, therefore, must be viewed in context as reflecting simultaneously an interaction of all these factors within a narrow time period. Median figures were calculated only for the data at hand and were not weighted for quantity. However, since the list in Table I11 covers a representative group of typical chemical plant equipment, median ratios indicate relative pricing in the countries studied.
Equipment Costs and Availability
Material Costs and Availability
Assuming equal labor productivity and raw material cost, hourly wages abroad should be a reliable index of relative equipment and material prices. That these factors vary greatly among nations is evident from the data in Table 111. With factory labor cost in Mexico approximately 16% of U . S. equivalent wages, Mexican equipment prices are on the average 907, of U. S. quotations. Equipment manufactured and purchased in Italy averages 787, of U. S. equivalent costs but factory labor hourly wages are only 27YGof those in the United States. The table reflects relative prices for equipment purchased and used in the country indicated. However, some of the finished products are no doubt fabricated from raw materials or components imported to the country of manufacture. I n the Common Market it is also likely that equipment purchased in one country with little or no tariff penalty was actually manufactured in another. The fact is that equipment prices relative to the United States are low with rare exceptions. The seeming anomaly of low factory labor cost ratios and equipment costs approaching U . S. prices suggests a means of measuring over-all productivity. This will be discussed in the next part of this series. The data shown in Table I11 was compiledfromprivate experience in the countries indicated. The table was prepared from costs of equipment purchased in the country indicated within a three year period of the time that equipment of similar specification was purchased and installed in the United States. Costs were corrected by a suitable inflation index to adjust to 1961 price levels to assure accuracy of the relative price positions. The impact of related economic spheres is evident. Uniformity of pricing in North America is evident in the cost ratios for the U. S., Mexico, and Canada. Although prices for equipment, such as tanks made from indigenous raw materials, and local labor are lower, the median price for all types of equipment is within 10% of the U . S. price. Prices in Europe as reflected in the cost ratios for Italy and France are about on a par. I t would be a prodigious task to attempt a classical statistical correlation among foreign and U. S. equipment prices, even with limited sampling. I t would take years to accumulate sufficient data to isolate properly such variables as labor wage, productivity, raw material
Material (steel, concrete, lumber, pipe, wire, insulation, etc.), constitutes the second largest component cost of the chemical process plant. These costs must be examined before a proper appraisal can be made of total plant costs abroad. Table I V compares the costs of primary construction materials in representative countries on each continent of the world. I t shows cost ratios relative to material costs in the Gulf Coast area of the United States. As with equipment, material cost ratios abroad generally are considerably higher than equivalent factory labor ratios with respect to U. S. costs. Low cost ratios seem to reflect ample raw material availability-sand in Israel, Pakistan, and Egypt. High ratios suggest imports of the material-structural steel to Puerto Rico, Argentina, and Israel. The median values shown were computed assuming equal quantities of each material used in all countries to provide a single comparative figure. With the exception of England and France, European material prices are approximately three fourths of U . S. prices. Indian and Japanese prices are close to those in the U.S., South American steel prices are generally high compared with other areas except the Near East. Lumber prices seem to depend on availability of timberlands in the respective countries. Similarly, sand and gravel prices reflect an abundance or short supply. Costs of other materials as pipe, conduit, and wire are not available. Cost ratios of basic materials shown should indicate other material costs fabricated from them; pipe and conduit costs are related to the cost of steel.
38
INDUSTRIAL A N D ENGINEERING CHEMISTRY
H. Carl Bauman zs Manager of the Cost Enginaering Department, Engineering and Construction Dioiszon of Arnerzcan Cyanamid. He authored I@EC‘s Costs feature on alternate months from April 1958 to October 1961. AUTHOR
(Includes fringe benefits; United Kingdom Western Germany France Italy 0
I&EC 52, N o 3, 39A (1960).
U. K. assumed as unity) 79575
1961
1 00 0 80 0 95 0.80
1 .00 0.90 0.96 0.94
Median Average Hourly Earnings" of Workers in Selected Industries
TABLE 1.
Country
u. s. Canada Australia U. K. France W. Germany Italy Mexico Japan India Taiwan
Mining
Iron, Steel
2.70 2.25 1 .IO 0.76 0.62 0.71 0.70 0.40 0.50 0.12 0.10
2.90 2.20 1.05 1.05 0.70 0.76 0.81 0.40 0.53 0.16 0.08
a For conversion rates, see Table
IV.
(Expressed as U. S. dollars, and includes all fringe benefits) Consumer Chemicals Machinery Goods Food Afifiarel
2.57 2.07 1 .oo 0.93 0.68 0.62 0.68 0.70 0.48 0.12 0.05
2.63 2.06 1 .oo 0.90 0.72 0.64 0.65 NA 0.34 0.13 0.09
2.37 1.90 0.86 0.81 0.70 0.53 0.49 0.40 0.38 0.08 0.05
2.26 1.68 0.86 0.80 0.66 0.53 0.50 NA 0.30 0.05 0.09
Transport, Utilities
Median
to U. S.
2.39 2.20 1.15 0.80 0.70 0.70 0.75 0.50 0.55 0.16 0.16
2,49 2.06 1 .oo 0.80 0.70 0.64 0.66 0.40 0.43 0.12 0.08
1. o 0.83 0.40 0.32 0.28 0.26 0.27 0.16 0.17 0.05 0.03
1.58 1.22 1 .oo 0.72 0.72 0.45 0.44 NA 0.18 0.11 0.06
Ratzo
For Taiwan, rate is 40 N.T. = $1.00.
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"
TABLE 111.
Equipmcnt Class
I
~ IY.-.II____x-x-
Forezgn and Domestic Equipment Prices Are Compared England
(Ratio of foreign to domestic) Italy Mexico
0.90 0.97
Australia 0.87 0.89
0.92
1.24
0.91
1 .oo 0.98 1.24 1.00
0.78 2.22
0.58 0.80
0.98 0.96
0.60 0.63 0.71 0.58
0.80 0.53 0.79 1.16
0.94 1 .oo
0.79 0.75 1.02 0.90
0.90 0.94 0.88 1.04
0.78 0.27
0.90 0.16
0.87
0.86 0.34
0.97 0.83
0.75 0.95 0.61
0.73 1.05 0.96
0.67
0.74 0.98 0.55
Tanks, carbon steel Tanks, carbon steel with agitators High alloy steel tanks, glass or rubber lined High alloy steel tanks with agitators
0.66 0.75
0.68 0.79
0.70 0.89
0.80 0.70
0.66 0.99
Pumps Filters, centrifuges Ejectors, jet heaters Dust collecting and bagging Heat exchangers, stills, fractionating co1um n s Scales Pulverizers, screens, blenders, separators Dryers
0.80 0.94 0.55 1.12
0.38 0.77 0.61 1 .oo
0 41 0.80 0.68 0.97
All equipment Factory labor ratio
0.76 0.29
Boilers Refrigeration units Air compressors
TABLE
_
Brad
Canada 0.86 0.91
0.96
iv. Foreign and Domestic Prices of Construction Materials Are Compared (Expressed as ratio of foreign to domestic; 1961 prices)
Country B City U. S. Gulf Coast Canada, Toronto England, London France, Paris Italy, Milan Spain, Madrid West Germany, Bonn Mexico, Mexico City Brazil, Sao Paulo Puerto Rico, San Juan Argentina, Buenos Aires Venezuela, Caracas Australia, Melbourne Japan, Tokyo India, Bombay Pakistan, Karachi Israel, Tel Aviv Egypt, Cairo
Rate of Exchange Unit U. S. equiv., $ 1 d Franc Lira Peseta DM Peso Cruziero ~
$
Peso Bolivar
d Yen Rupee Rupee $
d
1 2.80 0,2025 0.00161 0.0167 0.251 0.080 0,0030 1 0.0121 0.218 2.249 0.0028 0.209 0.143 0.556 2.000
Structural Steel, $/lo0 Lb. 6.62 1.28 0.83 1.21 0.83 0.88 0.81 1.16 1.20 1.51 1.61 1.04 0.94 0.90 0.99 1.15 1.67 1.14
Reinforcing Cement, Bars, $/94-Lb. $/lo0Lb. Bag 6.81 1.14 0.78 1.05 0.77 0.81 0.80 1.02 1.25 1.01 1.21 0.72 0.94 0.71 0.95 0.80 1.08 0.97
1.04 0.99 0.69 0.85 0.73 0.55 0.77 0.82 1.45 1.10 1.38 0.95 1.09 0.70 1.05 0.51 2.22 0.44
Lumber, 2nd Grade, $/MBF 0.95 0.95 1.42 1.57 2.02 1.16 1.56 0.88 0.80 1.21 1.70 1.43 2.20 1.46 2.00 1 .E6 3.72 1.84
-
$/Cu. Yd.
gravel 2.41 1.oo 1.48 1.97 0.36 0.59 0.66 0.77 2.00 1.37 2.32 0.84 1 .?2 1.56 1.33 0.88 0.64 0.48
Sand
Median
2.88 0.96 1.30 1.58 0.43 0.53 0.76 0.64 0.70 0.57 0.48 0.82 1.57 0.97 0.94 0.34 0.31 0.16
1 .oo 1 .oo 1.06 1.39 0.75 0.70 0.78 0.85 1.22 1.15 1.50 0.90 1.64 0.93 1.02 0.84 1.38 0.73
Sources: Private Engineering News Record.
VOL. 5 4
NO.
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MAY 1962
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