Surviving in the post-telecommunications boom market: contractors diversify; analysts...

It is not the best of times to be a contractor specializing in telecommunications construction. Major long-haul routes are finished, and anticipated projects to build local loops and expand broadband services to individual neighborhoods have not developed as anticipated.

Telecom companies

The telecom bust is particularly hard on small specialist contractors, and especially horizontal directional drilling (HDD) firms who have done nothing for the past several years but work as subcontractors installing conduit for long-haul routes. Several already have gone out of business, while others struggle to find HDD work in other markets.

The ripple effect has sharply cut into sales of new HDD units and related products and services, and the two major HDD manufacturers blame the drop in telecom business for forcing substantial reductions in their workforces.

However, not all telecommunications news is bad.

Telecommunications construction projects do continue. In fact, the Image Research Corp., Parsippany, NY, a firm specializing in market research and strategic analysis for the telecommunications industry, projected $16 billion in telecommunications construction in 2001, a figure that, if achieved, would represent modest growth for the year. Of course, all of that money doesn't go to build outside plant, and contractors who currently have telecom projects going say there is no question construction is down and that available work is much harder to get.

Small and medium-sized contractors are finding various ways to cope, but the consensus of those interviewed for this report say a key to survival is diversification.

"We've been through hard times before," says James Ezell of Southern Diversified Technologies, Loganville, GA. "Business cycles are going to happen, and diversity has been one of our linchpins for success. If a company is going to be specialized, it has to have a backup plan."

Expanding services

For Southern Diversified, that has meant expanding the telecommunications services it offers.

"We've been active in underground construction and directional drilling," Ezell continues, "but there are plenty of needs in the industry besides underground work. We have sought to constantly expand our base of services to include engineering, right-of-way acquisition and moving from outside to inside plant work.

"We can perform all the services necessary for a turnkey package, or we can do one or two parts of a total package, whatever our clients require."

Ezell says Southern Diversified has looked at other markets, and the company prepared itself to enter the environmental market in the mid-'90s.

"We completed several environmental projects using directional equipment to install horizontal remediation wells," he says. "But that market never really developed. When projects in other markets come along, we certainly consider doing them, and we keep our eyes open for opportunities. But we are a telecommunications specialist, and we really don't want to jump industries.

"Right now our industry is down, and we're making adjustments. But we know it's coming back and when it does, we'll be ready."

Other contractors are maintaining a presence in their core telecommunications market, but also are expanding into other areas.

"Our telecommunications work has slowed down quite a bit," says Jeff Hobgood, president of KJ Construction, Edmond, OK. "We still have work, but it's necessary to hustle to get jobs that are available."

Diversification

Diversification into other markets is helping. KJ has done both gas and water work in the past - mostly involving directional drilling installations. More of these projects will help while telecommunications work is down.

But Hobgood expects the company will get a large project after the first of the year, one in which the company will assist with design and do outside plant placement. He also is hopeful that cable replacement projects will increase this year.

Diversification is critical for current and future success, says Michael Mistler, director of business development for a family of three Gilbert, AZ, companies: Advanced Directional Boring, RV Drilling and Thunderbird Exploration.

"The construction business can be compared to investing," says Mistler. "It's fundamental that all your eggs shouldn't be in one basket."

Advanced Directional Boring and RV Drilling are directional drilling specialists heavily involved in telecommunications work, but have expanded to serve other utilities, oil and gas pipeline construction, dewatering for the mining industry, and horizontal remediation wells for the environmental market.

Thunderbird Exploration does core drilling, utility locating and potholing.

"We have just begun one project that involves making more than 1,000 potholes," says Mistler.

LeRoy Schoon, president of Schoon Construction, Cherokee, IA, views the current market situation from a perspective gained by 40 years in the utility construction business.

"Telecommunications is down, but we still have telecommunications work," says Schoon. "We have completed many broadband projects, and this work is continuing. Many rural communications are doing complete overbuilds of their existing telecommunications systems. Many older systems are undersized by today's demands, and they can't provide high speed internet service. Municipalities are building their own systems, and that's our big market right now."

In the short term, Schoon expects to see the slowdown in telecom work to continue. He says one way his company is adjusting is to use more subcontractors, which allows Schoon to maintain a smaller work force.

Schoon Construction also has diversified into public utility construction, including water and power, and Schoon sees growth potential for directional drilling in the water market.

Water work, says Schoon, requires larger equipment and more support equipment than typical telecommunications projects.

Whatever the market, Schoon says the real key is project management. "Many contractors just won't have the experience, capitalization or patience needed to survive," he believes. "Our intent is to continue to provide quality work to our customers as we have since 1962."

Bright spots

Despite the most turbulent year in the history of telecommunications, there are bright spots. Insight Research's 2001 Telecom Industry Review disagrees with one widely-held theory that telecommunications troubles stem from overbuilding capacity.

The industry's inability to quickly transition to a business model oriented around data is what brought the industry to its knees in 2001, believes Insight President Robert Rosenberg

"It is not capacity glut that brought the industry to its knees in 2001," he says. "Voice services are still the primary generators of revenue for service providers throughout the world, even though the growth of data traffic and demand for broadband services continues unabated.

"We forecast that data traffic will continue to double every 12 months, despite the bumps from the current telecom recession."

Telecommunications contractors can only hope that demand for broadband services to fulfill needs beyond traditional telephone services translates into real projects - sooner, rather than later.