Thursday, January 12, 2012

VICOM - Part 3B (SETSCO's history and competitors)

Talk about SETSCO and i am sure that not even 5% of the population will know what it is and what it does. SETSCO started in 1981 from Singapore Institute of Standards and Industrial Research (Currently called SPRING after merging with PSB) to provide commercial testing services to the industry. It was also the first testing lab to be accredited by Singapore Accreditation Council for Civil Engineering. It is then privatised in 1987 and sold to Keppel Corp before becoming a part of VICOM in 2003.

Earlier in part 3A, we talked about the two largest firms in the ITC industry - SGS and Bureau Veritas, so now we shall compare SETSCO with them. It is of course unfair to compare SETSCO with the largest ITC companies which operate more than 1000 offices worldwide. However, we can at least compare their operating margins to see how lean SETSCO is as earlier we have already conclude that staff cost is the biggest expense of VICOM's business.
Fig 1 - SETSCO

Fig 2 SGS from Deutsche Bank report

Fig 3 Bureau Veritas

SETSCO's EBIT margin was a mere 7.3% in 2003 when VICOM acquired it from Keppel Corp but has steadily increased to 12% in 2008 before shooting up to 19% after that (same goes for 2011). While I have no idea what happened during 2009, it can be seen that SETSCO produced much more synergies with VICOM as compared to Keppel Corp. VICOM's management has also done a good job in doubling SETSCO's revenue and profit margin through expanding its range of accredited services. SETSCO's EBIT margin is better than that of Bureau Veritas and SGS from 2009 onwards. Will the move of VICOM's HQ further improves efficiency as mentioned by the chairman, this i will not be able to answer.

Competition is indeed fierce in this industry but how do the companies compete with each other? Price competition should be out as in the field of ITC, brand name is the most important. Aside from the brand, I believe that the next most important factor will be the number of accreditations that one have. Why is this important? The amount of products that a company has that require testing are often varied and numerous. For e.g. for a construction - concrete, steelwork, paint and tiles. For a can food producer - meat, preservative and tin can. The point that I am trying to make is if I need to hire only one company to test the whole range of products, why will I want to hire two companies for it. Therefore, the bigger the ITC company the more likely that it is going to get the larger contracts. Now, we shall review SETSCO's accreditations by sectors to understand the competitions. All information comes from Singapore Accreditation Council (under SPRING).

Fig 4 Products Certification

SETSCO is accredited to certified concrete and fire safety products(fire extinguisher, fire alarms, testing of fire resistance of all materials). In the area of concrete certification, SETSCO has only managed to garner a 5% market share because SETSCO was only accredited in October 2010 to do product certification. However, this signifies its push into the certification area to offer a full range of ITC services. TUV SUD is the current market leader in the certification business, accredited to certify electrical appliances safety and a lot more products than any other companies.

Fig 5 Inspection

It is the sole provider of inspection services in the Pressure Vessels and Lifting Equipment category for air receiver, tank and chain block. Air receiver is a pressure tank commonly used in the marine, oil and gas industry. For building construction and maintenance category, competition is slightly lesser with around 2-3 competitors in each of its accredited inspection area. And one last thing inspection service is a recurring income as inspection needs to be carried out regularly. Under the Building Control Act, a building that is not solely for residential purposes will need to be inspected every 5 years from the date of TOP and 10 years for residential building. The following tables will all be on Testing accreditation, where the left side will be on services SETSCO has been accredited with in that category while the right side will be its main competitors and their number of accreditation in that category.

Fig 6 Civil Engineering

Civil engineering is the construction of all types of buildings, bridges, MRT tunnels and roads. For civil engineering, a lot of different products are required as seen above. SETSCO is the sole tester for structural fixing and has the most number of accreditations in this category. Closest competitors will be Al Tech.

Fig 7 Calibration and Measurement

Calibration and Measurement is to ensure that measurement devices like thermometers and weighing scale are accurate. In this area, competition is slightly stronger with Singapore Test Services and Ming Deng Metrology Services, but SETSCO still has the most number of accreditation. In order to maintain the ISO 9001 standard, all devices need to undergo a recalibration every 3 years.

Fig 8 Non-Destructive Testing

Non-destructive Testing is a wide group of scientific techniques to evaluate properties of material, component and system without causing damage thus making it a highly valued technique that can save both time and money. Its applications range from Aviation, Power Plants, Construction, Marine, Oil and Gas and Submarine. SETSCO is once again the market leader here which got every accreditation possible in this category. NDT is often used in "Risk-based Inspection" and it is a requirement for refineries, oil platform and chemical installation to undergo the inspection regularly.

Fig 9 Mechanical

Mechanical Engineering is the testing of materials and mechanical system and overlaps with aerospace, civil engineering and petroleum engineering. Competition is less intense here but SETSCO is also not the market leader here though it is the sole tester for 4 of the products.

Fig 10 Chemical Products

This is the testing of chemical properties and products. TUV SUD is especially strong in this area though competition is relatively sparse here.

Fig 11 Biological Products

This is more of the food safety standard. Nestle is not counted as a competitor as it is used to test their own products. Competition is very sparse here with only HSA, AVA and SETSCO testing most of the products and in fact these 3 bodies work in partnership. To be eligible for Food Export Health Certificate, an application need to be made to AVA for each consignment top be exported. After that

"On the appointed date, AVA officer will carry out an inspection of the food consignment intended for export. He will then draw samples from the consignment for laboratory analysis. Applicant should ensure that the consignment is ready on the day of inspection. The inspection date is scheduled according to the applicant’s request and 3 working days advance notice is required.

The samples will be sent to M/s Setsco Services Pte Ltd for microbiological analysis and/or Health Sciences Authority (Food Safety Laboratory) for chemical and radiation analysis, depending on the type of product and analysis required."

Normally, the ratio will be one-third of the products to SETSCO and two-third to HSA.

Thus, we can conclude that SETSCO has a very stronghold in the local ITC industry with the closest competitor being TUV SUD which is one of the 8 largest ITC corporations. It has the most number of accreditations in the whole range of services and this is its competitive advantage over all other companies. Notice how many of the services are in fact interlinked. A marine company will require certification on Air Receiver, Mechanical Testing and NDT. A construction project will require a testing of concrete, followed by civil engineering testing and maybe even NDT. After that, an inspection of the building might then be required to be carried out. A huge portion of the inspection services are required regularly due to regulations, like building inspection, recalibration of devices, NDT, food export and fire safety products. SETSCO's expansion into product certification is its bid to offer a full range of ITC services downstream and upstream, which is what SGS and Intetek are doing.

With such strength, it is no wonder why SETSCO is able to attract huge projects over the years.

2005-Moog Aerospace (undergo NADCAP), reclamation material for Tuas and Jurong Island, Water quality at Marina Barrage, Jurong Shipyard, SP Power, Hyflux, ExxonMobil and Seraya Chemicals Singapore

2006- Jurong Chemical Hub

2007- Fusionopolis, Orchard Turn, Singapore Art School, Horizontal Bulk Liquid Storage Terminal (Emirate National Oil Company), Henderson Bridge and Dubai Metro Rail

2008- Resort World, MBS, Pinnacle at Duxton, Keppel Bay and Exxon Mobile

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