Who’s going to clad all these?

When Swiss cladding company Schmidlin went bankrupt last February, it looked as though a crisis was about to engulf the construction industry. Consolidation had characterised the sector for the past 10 years, and the collapse left only one large player – the Italian conglomerate Permasteelisa Group – which looked like it would create a monopoly in the UK market – a serious matter, given that the curtain walling element typically accounts for 18-22% of the value of a commercial office project. As contractors scrambled to find replacements to take on Schmidlin’s contracts, fears grew that the Italians’ dominance coupled with a general lack of capacity in the industry would spell rapid price hikes and unworkably long lead times.

Seven months on, the picture is worrying, but not because of Permasteelisa is all powerful. The Italian firm picked up only one of Schmidlin’s major contracts – Multiplex’s White City project – and even that was only part of the work included in the original deal. Financial instability and contractors’ fears of placing so much of their turnover in the hands of one firm means that the industry’s biggest players are seeking out alternatives to traditional cladding procurement, such as off-site solutions.

Uncertainty over how much work Permasteelisa will be able to take on – it is, after all, the only remaining cladding firm with a pedigree in highly specialised curtain walling – may also be sounding the death knell for many of the top-end projects for which Norman Foster’s Swiss Re tower, a Schmidlin scheme, had set the standard.

Before its demise in February, Schmidlin was responsible for the cladding on London’s Swiss Re tower

Why firms are shunning Permasteelisa

The Permasteelisa Group, comprising Permasteelisa, Gartner and Scheldebouw, has unquestionable pedigree in delivering complex curtain walling; its successes include City Point, several towers at Canary Wharf, and work on Wembley National Stadium. However, the predicted rush of calls for help when Schmidlin went bust never materialised. “Schmidlin’s collapse hasn’t really affected us in any significant manner,” says Giancarlo Iovino, managing director of Permasteelisa Group UK. He seems unsure exactly why his firm did not pick up more work – it was called in to talks on a number of projects, but despite its record, contractors ultimately went elsewhere. “Clients are free to choose,” he says cagily. “It’s not up to us to direct that.”

Schmidlin’s collapse hasn’t really affected us in any significant manner. Clients are free to choose. It’s not up to us to direct that

Giancarlo Iovino, managing director, Permasteelisa Group UK

One area of concern for contractors has been Permasteelisa’s financial performance. Its most recent results, for the six months to 30 June, show the firm is barely breaking even, with a pre-tax profit of just £805,000 from a turnover of £355m (see “Permasteelisa at a glance”, below). Although this represents an improvement over the end of 2005, when the firm reported a loss of £18.7m, it is significantly lower than the corresponding figure for June last year, a pre-tax profit of £3.8m. The firm is suffering from similar forces to those which precipitated Schmidlin’s collapse – the specialised, one-off nature of many of its projects creates a high-risk market where, despite the demand for work, it is difficult to make a strong profit because each job is unique and so accurate estimating is next to impossible.

“We’ve recovered slightly, but the results are nothing to shout about – we’re just about breaking even now. Certainly, the shareholders aren’t very pleased,” says Iovino. “It’s a buyers’ rather than a sellers’ market at the moment.”

Iovino also insists that there is no sign of a rise in prices after the loss of Schmidlin, despite the fact that competition between the two rivals helped to keep prices down. “We haven’t seen any effect of that,” he says, a comment borne out by the fact that his company’s recent unimpressive results include the six months since the Swiss firm’s demise.

The problem is that the low end of the market is saturated with capable firms, while the few top end projects that come along are difficult to price and too thin on the ground to provide a sustainable profit. “I don’t think any cladding company, including those further down the market, has a very strong financial position at the moment, so most buyers are able to secure very low prices.”

This question mark over Permasteelisa’s finances, combined with the collapse of its main rival, has been enough to convince some contractors that they ought not to rely solely on the firm’s services. Among these companies is Bovis Lend Lease, which was working with Schmidlin on its Aldermanbury Square project in the City at the time of the firm’s demise. Rather than appoint a different firm, Bovis chose to continue the project with the combined expertise of the two companies that had bought out parts of Schmidlin, now known as Schmidlin TSK and Lindner Schmidlin Facades (see “The Schmidlin Story”, below), even though this meant its cladding supply and installation were coming from two separate sources.

Bovis is working successfully with Permasteelisa on other projects, but Phil Wade, Bovis’ chief operating officer, says the firm is being careful “not to place all its eggs in one basket”. “It’s something all contractors need to look at when there are only one or two major players in a market. You do think more about risk.”

We have been looking at alternatives to the normal way of procuring cladding. You have to try to mitigate against risk in this type of situation

Phil Wade, Bovis Lend Lease

Seeking alternatives

There are other cladding firms emerging that can take on large projects. The two bought-out divisions of Schmidlin have retained some of their former expertise, and the need to procure supply and installation from different sources can work to the advantage of contractors in a market where no firm is making healthy profits. A report by Davis Langdon into Schmidlin’s collapse has identified the potential of German firms TSK Troester and Lindner to strengthen their UK presence since they acquired divisions of Schmidlin: “These are both well diversified European industrial groups,” states the report. “Their presence is likely to enhance competition and product innovation in the UK market for medium-scale unitised curtain wall.” A host of less familiar companies, including Schneider, Felix, Metallbau Früh and Focchi, are also making a play for sizeable cladding contracts. There are, however, difficulties associated with these firms. Clients may be put off using a company with relatively little track record in the UK. And none of these firms has a history of working in the top-end market once occupied by Schmidlin. In its study, Davis Langdon identifies only Gartner and possibly Scheldebouw, both part of the Permasteelisa Group, as capable of carrying out work on a tower on the scale of Swiss Re. Permasteelisa’s Iovino modestly disputes this: “We like to think we’re better placed, but there are others who have the expertise,” but the fact remains that only Permasteelisa has a record on this type of ambitious project.

City Point, also in the City of London, was clad by Permasteelisa, arguably the only firm capable of tackling high-end projects such as Swiss Re

Against this background, consultants such as Davis Langdon are advising clients to consider whether their needs could be met by less ambitious projects. Permasteelisa is understood to have the capacity to deliver just six major projects a year, and Iovino has ruled out further expansion in the UK. “We have no plans to expand,” he says. “Our capacity is limited by the number of project managers and designers we can employ. We can’t grow very rapidly, if at all.”

Permasteelisa’s position on these top-end contracts may seem secure, but with only a handful of these projects coming on to the market each year, it is unlikely the firm will be able to drive up prices across the sector. Contractors will simply look elsewhere for cladding services on smaller projects.

It is this reluctance to go with Permasteelisa and the need to buy elsewhere, however, that poses the real headache for the majority of contractors engaging with the cladding market, as it is driving more contractors to consider relatively untested methods including offsite solutions and alternative providers, such as the cladding expertise offered by major engineers like Arup and Buro Happold. “We have been looking at other, innovative alternatives to the normal way of procuring cladding,” says Bovis’ Wade. “Everybody has to try to mitigate against risk in this type of situation.”