Electrical services industry powers on

The electrical services industry has faced challenging market conditions over the past five years, but improved investment into the housing market and ongoing maintenance activity on commercial and industrial premises is expected to spur industry growth, according to research firm IBISWorld.

The Australian electrical services industry is expected to grow at 2% a year over the next five years to 2020, registering a revenue of $21.4 billion, predicts IBISWorld. The research firm has conducted a detailed survey on the industry, highlighting macro industry trends in the overall sector and micro trends faced by companies that do business in the industry. Below are the highlights.

The electrical services industry includes installation and maintenance of basic electrical circuitry in residential and non-residential applications including the installation of electric lights, power facilities and other systems, such as electric water heating in construction projects. The variety of construction projects requiring electrical services means that there is a diverse range of requirements, particularly in relation to the size of jobs. Engineering and more sophisticated electrical installation projects have grown over the past five years as industries have become increasingly automated and the resources boom has created a range of complex, large-scale projects.

Current state of the industry

Australia has operated on a two-stream economy for much of the past five years, with accelerated growth driven by the resources sector outweighing the sluggish conditions prevailing across the traditional economic base. The electrical services industry has displayed a similar trend.

The larger, multidisciplined contracting firms have benefited from investment into the mining and infrastructure markets, which has helped insulate them from subdued demand from commercial and housing construction. Many small-scale contracting firms have struggled to carve out a regular flow of contract work, although some have specialised in faster growing niche markets such as IT cabling and renewable energy. Some contractors have focused on the delivery of home automation services, including the electronic control of lighting, appliances, security systems and comfort settings.

Contractors chasing housing renovation and maintenance work in the Victorian and SA markets have faced unusually tight trading conditions. The National Electrical and Communications Association’s (NECA) annual reports for these states indicate that particularly challenging economic conditions are causing hardships for many of its members. Contractors are bidding on extremely narrow profit margins to maintain cashflow and are often looking to subcontract to the larger electrical firms. IBISWorld expects industry profit margins to narrow over the five years through 2014-15 due to competition between smaller contractors chasing contracts in the building markets and between the larger contracting firms in the facilities management market.

Market trends

The industry generates the bulk of its revenue from new installation, repair and maintenance activities in the residential and non-residential property markets (70.4%) and the balance from work in the industrial and engineering market. Contractors generally work across a range of markets and use a range of multidisciplinary skills. Key industry activities include the installation and maintenance of basic electrical circuitry in residential and non-residential applications including the installation of electric lights, power facilities and other systems, such as electric water heating in construction projects.

The variety of construction projects requiring electrical services means that there is a diverse range of requirements, particularly in relation to the size of jobs. Engineering and more sophisticated electrical installation projects have grown over the past five years as industries have become increasingly automated and the resources boom created a range of complex, large-scale projects.

Residential market demand

About one-third of industry annual revenue is derived from work in the residential market. This is evenly divided between installation work on new buildings; installations in the renovation and upgrading housing market; and maintenance and repair activities on existing premises.

The demand from the residential building market is expected to increase by 1% a year over the five years through 2014-15, including accelerated growth in the construction of apartments and townhouses, outweighing the decline in traditional single-unit housing construction.

Installation activity in the housing market has been boosted by the widespread acceptance of emerging communications technology, notably home automation, broadband cable, pay TV and ADSL connections. The residential market has also been boosted by demand for the installation of solar photovoltaic panels for electricity generation and water heating and growth in demand for energy-saving assessments. Building companies will usually enter into long-term contractual arrangements with electrical firms proving to be reliable, well priced and of suitable standard. On smaller scale customised housing construction, electrical contractors will usually be required to display some understanding of creative architectural plans for lighting, communication facilities and home automation.

Commercial market demand

Installation, rewiring, maintenance and repair work on new non-residential buildings, eg offices, shopping complexes and schools, generates around 37% of the total value of work done by the electrical services industry. This market segment has maintained its importance throughout the past three decades, largely due to the heavy growth in use of data processing and communications equipment. This includes computers, telephony and data transfer. Commercial property markets are expected to gradually expand during 2014-15 as businesses invest into retail and office space and look to install energy-efficient options into existing premises. Growth in the commercial and industrial building market stimulates demand for electrical installation services and long-term monitoring and repair activity.

Improved demand from the commercial and industrial building construction industry will help generate demand for the installation of complex and energy-efficient wiring and electrical equipment into offices, hotels, factories and other business premises.

Heavy industry and other non-building construction market

Demand from the heavy industrial and non-building construction industry is expected to decline by an annualised 5.6% over the five years through 2019-20. However, activity in this market will remain at historically high levels and provide a substantial platform for contractors servicing the resources, energy and telecommunications infrastructure markets.

Lucrative contract work on public transport and communication networks will involve the installation and handling of high-voltage equipment and specialised electronic systems. Several of the largest industry players and specialists are already involved in rolling out the National Broadband Network (NBN) and the national 4G network. This work is expected to continue through much of the next five years. However, the federal government will likely reduce the scale of the NBN, with only 22.0% of connections being optic fibre to the home, instead of the originally planned universal connection.

The provision of services to heavy industrial and engineering firms includes the installation and maintenance of manufacturing, transport, heavy industrial and electrical machinery (often high-voltage applications). Electrical contractors install and maintain electronic controls for industrial machinery and install conduit for carrying wires in structures. Work in the industrial and engineering market often cushions the effect of downturns in economic activity, because preventive maintenance and repair expenditure tends to increase as clients attempt to extend the use of equipment rather than investing in new replacement equipment. The segment has performed strongly since the late 2000s on the back of the mining and resources boom. Demand from China and other key trade partners has been high, resulting in high capital investment in industrial and engineering markets. Demand for electrical services and for electricians has increased as more sophisticated electronics need to be fitted into mines and related operations.

Technology trends

Technological advances in electrical and electronic equipment will support industry expansion, with key growth areas including the installation of networking systems for electronic data transfer in existing premises, the installation of C-Bus systems in homes and businesses, the installation and maintenance of surveillance instrumentation and the installation of telephony, broadband and pay-TV services.

The industry is expected to expand by adopting new technologies and entering into long-term facility management and energy-auditing contracts. The large-scale contracting firms, which employ economies of scale and product diversity to contest the facility management market, are likely to take the lion’s share of the contract electrical maintenance market. This will leave the household maintenance and small building installation markets to be fought over by the smaller independent contractors.

The trend towards energy conservation across all types of buildings and structures has contributed to a significant swing towards specialisation in new technology skills. These skills are required for the installation of renewable energy apparatus, home automation (stimulated by the rollout of the National Broadband Network) and measurement and remediation services for industrial, home and commercial building energy-efficiency projects.

Skill shortages

Over the next five years, industry employment is projected to climb by 1% a year to 148,500 people.

The industry has contended with rising wages and a lack of skilled electrical workers over the past five years. This problem will likely be addressed over the next five years, which will help contain the cost of electrical service provision. Proposals from within the industry have included the recruiting of several thousand temporary electrical workers from the United States. While such a move would be controversial, the proposal highlights the severity of the skills shortage issue.

COAG’s decision in late 2013 to abandon the National Occupational Licensing System is likely to inhibit the mobility of electrical licence holders between states and territories. This could result in regional skilled-labour shortages and a greater reliance on sourcing skilled migrants. The NECA 2013 Market Monitor survey identified skill shortages emerging in some specialist areas (eg, home automation and renewable energy). However, poor demand conditions have significantly eased demand for general qualified electrical contractors. The survey also noted a fall in the number of apprentices being taken on, which could emerge as a skill shortage as the projected upswing in industry activity takes hold.

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Key success factors

IBISWorld identifies 250 Key Success Factors for a business. The most important for the electrical services industry are:

• Business expertise of operators — operators must have good management skills in controlling work and cashflow.
• Ability to change which market the firm operates in — the capacity to refocus activity away from slower growing markets towards markets with the strongest demand enables contractors to minimise revenue volatility.
• Ability to quickly adopt new technology — the steady technological change in the market for electrical contracting, notably in the installation of communication cabling and equipment, necessitates the rapid adoption of technology.
• Having a good reputation — maintaining a reputation for quality and timeliness and maintaining good industrial relations is important.
• Highly trained workforce — small business management training can be as important as technical qualifications for the small to medium-sized operator.
• Having contacts within key markets — maintaining good relationships with clients (eg, prime builders, developers and building owners) is important in the industry.

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To purchase the electrical services industry report, click here.

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