Despite buildup challenges and flat economy, revenue growth—and optimism—continues
By Maureen Maratita and Steve Graff
For the 27th year, Guam Business Magazine is proud to present the Deloitte & Touche ASC Trust list of Top Companies conducting business in Micronesia—including Guam, the Northern Mariana Islands, the Marshall Islands, and the Federated States of Micronesia. The distinguished list captures a snapshot of the health of the economy and the business sector in the region. Companies with gross revenues over $1 million were invited to be a part of the annual poll. This year, 31 companies shared their successes with Guam Business.
The Top Companies feature also includes results from an anonymous economic confidence survey that reflects the participating companies’ bottom lines in comparison to one year ago, staffing trends, and expectations for the coming year.
In total, 70.1% of the companies experienced revenue growth, which represents more than a 11% increase compared to last year. The growth rate for 2018 was 62.9%, 63.9% for 2017 and 62.5% in 2016. Staffing also increased this year, with 76.7% of the companies bringing on new employees or maintaining last year’s numbers, compared to 60% of respondents reporting staff increases the year prior.
Overall, apart from several standout companies that experienced substantial increases in gross revenue, mainly in the construction space, this year’s top companies experienced moderate revenue growth, with a median growth rate of 11.3% among those that increased.
That revenue growth was also reflected in the confidence survey, with 62.5% of the participating companies indicating that bottom lines were “much better” than a year ago, while 25% of bottom lines were “somewhat better.” What’s more, none of the companies indicated bottom lines were “somewhat worse,” compared to 23.1% in 2018.
Over 62% of the companies that participated in the confidence survey also indicated an increase in staff over the last year, while roughly the same percentage expected staff numbers to remain steady next year.
While the economy appeared relativity flat over the past year, movement in the construction arena, as the number of H-2B workers increased for military-related projects, and stronger tourism numbers did serve as a boost to the business sector. Last year, the overall theme among top companies was that opportunities and advancements related to the buildup were expected to come to fruition over the next year. Based on this year’s results, that appears to have been fulfilled for some companies.
This year, that same optimism carried over, with 87.5% of survey participants indicating 2020 would provide openings. One participant believes that next year will bring opportunities around “housing developments, sustained tourism, and shovels moving on infrastructure projects.” Another expected more federal funding towards training and education.
Read on to see the full rankings of top revenue-generating companies in the region, responses from company leaders on their biggest accomplishments, and economic assessments by sponsors Joe Arnett of Deloitte & Touche and David John of ASC Trust LLC. Note that some companies in this list reported figures for fiscal years that go into 2019.
Guam Business looks forward to welcoming again companies on the list next year from all industries.
Factors, such as the minimum wage increase, the increase of the business privilege tax by 25%, and how businesses will react to the uncertain labor situation, will be reflected next year when the 2020 Top Companies list publishes.
What was your biggest corporate accomplishment in the past year?
Editor’s note: Each of the companies participating in this year’s Top Companies survey was asked about its biggest accomplishments during the past year. The following are responses of the head executives.
“We have a longstanding commitment to helping families, businesses and communities of the West Pacific region. Construction continues on our new West Pacific regional headquarters in Tamuning, which will house an administrative building and modern ‘Branch of Tomorrow’ for our customers, with completion scheduled for 2021. Additionally, since 2012, we have encouraged small businesses in Saipan to apply for our Small Business Revitalization and Development Grant, which provides $5,000 each to five small businesses to stimulate economic activity. Further enhancing entrepreneurial development in Guam is our multi-year $100,000 pledge to the University of Guam for the Bank of Hawaii Center for Entrepreneurship and Innovation, aimed at providing unique learning opportunities for students.”
Peter S. Ho
Chairman, president and CEO
Bank of Hawaii
“In 2018, our team was the successful bidder for the 2018-2019 LIHTC Qualified Allocation Plan for 64-units at Summer Town Estates Phase 4 in Dededo.”
Ho S. Eun
Core Tech International Corp.
“2018 was our best year ever with sales of over $120 million and a workforce of over 1,000 employees.”
Wayne L. Cornell
President and CEO
DZSP 21 LLC
“We opened Red Lobster in Guam and broke ground on third housing project in Saipan, Ocean Ridge Homes.”
Robert H. Jones
Chairman and CEO
Triple J Enterprises Inc.
“The creation and implementation of a new workplace culture at PIC. ‘PIC Happy’ is a collaborative effort of PIC’s entire management team and is a program that seeks to further employee engagement within the organization. Being PIC Happy means being an engaged employee that strives to make PIC a better place for our guests every day.”
Benjamin H. Ferguson
Pacific Islands Club Guam
“Significant vehicle market share growth from Atkins Kroll Guam and Atkins Kroll Saipan.”
Alexander W. Hammett
Atkins Kroll Inc.
“This past year we had the opportunity to redesign and renovate our main lobby. This allowed us to overall enhance our guest experience.”
Hilton Guam Resort & Spa
“Continued network build-out and expansion of capabilities and services to take advantages of new opportunities in our operational areas.”
Robert J. Maloney
President and chief operating officer
Pacific Data Systems Inc.
“The biggest accomplishment for us this year is the successful launch of our own BOMI debit card. These cards are only used domestically, but have given our customers another means of purchases other than cash and checks. The debit card can be used on Majuro and Ebeye, but will soon expand to the outer islands within the Marshall Islands. “
President and CEO
Marshall Islands Holdings Inc.
“Architectural and engineering drawing plans are completed for our future Mar-Pac office and warehouse in Saipan.”
Frank S.N. Shimizu
“In 2018, we made substantial progress in modernizing our public image, most notably updating our Bank’s logo with a more progressive, stylized format. As part of a long process, we are refreshing our brand, updating our color schemes and revitalizing our branch network. We are in the process of completing our vision of our branch of the future, which will upgrade the look and feel of our branches, and we will continue to enhance our efficiency with the adoption of several of the most current banking technologies. Our Familia Ambassador program is changing the way in which we interact with our customers, taking a more personalized approach. As the program continues to expand, we have been developing enough experienced ambassadors to accelerate its implementation throughout our branch network. We continue in our long-standing journey toward corporate social responsibility and provide sustainability principles to all the communities we serve across the Pacific.
Joaquin P. Cook
President and chief executive officer and vice-chairman of the board
Bank of Guam
“Our biggest accomplishment over the last year is continued improvement of overall member service. From our 45-day loan closing program to receiving the SBA’s Small Business Lender of the Year award, to our recently launched youth banking program, everything we do is focused on serving the needs of our members. Continual improvement of our service delivery and thoughtful product development is a reflection of the commitment to our mission of building lifetime relationships and a better community for future generations.”
Gener F. Deliquina
Coast360 Federal Credit Union
“Our biggest accomplishment during the past year was the smooth transition of the company ownership, while growing our business by 25%.”
“First Hawaiian Bank celebrated its 160th year of helping customers achieve their financial milestones with our team members marking this historic milestone by raising over $821,000 for charities and volunteering thousands of community service hours to assist those in need. Our dedicated Guam and Saipan teams take great pride in getting to know our customers, listening to their needs, delivering outstanding experiences with WiFi in our branches and offering 24/7 convenience through online and mobile banking.”
Robert S. Harrison
Chairman and CEO
First Hawaiian Bank
“Our company’s single biggest accomplishment during the past year was the integration of our franchise food services business unit in our operations, rooted in our founder’s high standards of customer service.”
Elaine C. Jones
President and chairwoman
Jones & Guerrero Co. Inc.
“The company’s biggest accomplishment was expanding into the CNMI, where the majority of our work was completed. This growth permitted the company to further develop its management team and the services it offers in the region.”
Keith J. Stewart
Pacific Rim Group of Companies
“The last 12 months has seen Smithbridge Guam Inc. reach several milestone achievements, including the biggest secured forward work pipeline in the company’s history, mobilizing the biggest capacity crane on Guam, doubling the number of our local employees, and significantly expanding our off-shore construction contracts.”
Albert J. Smith
Smithbridge Guam Inc.
“We refreshed our brand and new retail Experience Center connecting our truly local brand, showcasing leading edge technology and on-trend Internet of Things devices.
We built Guam’s first combined neutral cable station and data center for undersea fiber optic cables connecting Asia Pacific and USA. And we were awarded ‘Best Mobile Coverage in Guam’ from Ookla, a global leader in internet testing.”
President and CEO
“2018 marked 10 years of service in Micronesia. While some may consider 10 years a small achievement, for Vital this milestone represents a most crucial growth and learning period. Within the past decade, the Vital culture of safety, of honesty, of capacity-building, of family, and of service has been developed and ingrained into our people. In 2018, we saw the successful launch and establishment of our smallholder farmer community based enterprises model — the PGS — and the completion of the site preparation and earthworks for the construction of our new integrated coconut processing facility, marking the start of a new journey of business growth and diversification.”
Jared C. Morris
The Vital Group of Companies
“We commenced tuna transshipment, as part of our ﬁsheries initiative that includes our private dock with purse seine net repair facility.”
Joseph “Jerry” Kramer
President and CEO
Pacific International Inc.
“PDC Wholesale, the distribution arm of Pay-Less Markets, was established to service other retailers, hotels and restaurant operations. PDC is a 50,000 square-foot. warehouse in Harmon, with a state-of-the-art banana ripening chamber and a USDA certified meat facility. Pay-Less Logistics is a produce wholesale company located in the SFO Produce Market, which supplies to Guam businesses and institutions. The construction of a new Maite Pay-Less Markets began in 2018, with a scheduled completion date of October 2019.”
Edward J.B. Calvo
PMC Investments Inc.
“Having provided air transportation services to patients, recovery service organizations, and relief workers within days following the passage of Super Typhoon Yutu. Within three weeks of the storms passing, we were able to move over 3,500 passengers and 200,000 lbs of cargo in support of relief and recovery efforts.”
Shaun R. Christian
Star Marianas Air Inc.
“I’m most proud of how we delivered more value to our customers this year; here’s three examples: We drastically decreased the time to close a home loan, and doubled the number of first-time home buyers we helped get into a new home on Guam. We upgraded our online banking to be optimized for mobile devices and opened up new payment features to make it easier to move money online. We also invested in our card processing platform to improve the reliability, capacity, and security to make digital payments in American Samoa.”
ANZ Guam Inc.
Déjà vu; all over again
By David J. John
In preparing to write my annual article, I review my notes for the year from our discussions with the executives in our top companies listing and reread my last few year’s stories in an effort to spot trends. I actually could have sent in last year’s article, a few data points and no one would be the wiser. To quote the legendary Yogi Berra, “It’s like déjà vu; all over again.”
Similar to 2018, 2019 is experiencing strong tourism numbers and the military buildup continues to gain momentum, which should be the formula for a booming economy. Yet that is not what we have been seeing at all. In fact, according to the U.S. Bureau of Economic Analysis, Guam’s gross domestic product officially decreased by 3% year over year in 2018, adjusted for inflation. By all accounts from our meetings, 2019 will shape up to be a continuation of 2018, with flat to no growth.
If the no-growth part of the equation was not concerning enough, the island has been experiencing high single-digit inflationary pressures in healthcare, utilities, food, housing and discretionary household items — brought on by a combination of increased transportation costs, inflated construction costs due to a lack of skilled labor, and most of all by the local government increasing the Business Privilege Tax by 25% (from 4% to 5%),
At first glance, one might label the economy in a period of “stagflation,” a term economists use to define an economy that has inflation, stagnant economic growth and high unemployment. However, the island is not experiencing high unemployment (3.6% as of September 2018).
There are several issues that came together to create this stagnation-like economic environment, to include the increase in BPT — which is a very regressive tax — hitting consumer activity, changes in tourism spending as the market shifts from Japanese focused to Japan/Korea focused, and overall inflationary pressures. However, the largest contributor to the island’s economic malaise is the current restrictive H-2B policies of the federal government.
For those readers who are not following the situation, the federal government has historically allowed H-2B workers for construction projects on Guam. By statute, these workers are supposed to be temporary in nature and workers with skills that cannot be found locally.
In the last decade, Guam has averaged 1,500 H-2B workers on island at any one time and approvals of request for these workers were near 100%. Further, as part of the commitment on making sure the military buildup minimized negative consequences, such as inflation and housing shortages, Guam was promised continued support to bring in these workers. Not only did the numbers not increase as promised, but without notice the number of H-2B workers on Guam went to virtually zero in 2017.
At any point in time the island has a zero sum formula for infrastructure, equipment and workers available. This means, that if a worker is used on one project, he/she will not be available on another. The same holds for infrastructure and equipment. Over time, the supply of labor, equipment and infrastructure can be increased, which should have been the case over the last couple of years as the buildup began to ramp up. Instead the federal government decreased our labor pool.
The demand for more workers inside the base in 2018 to 2019, along with the decrease in available H-2B workers created a shortage of labor on Guam, driving up the price of construction and halting multiple hotel projects and countless housing projects on island as costs of construction made projects uneconomical.
It should be noted that virtually all development should factor positively into the island’s GDP. However, if you look behind the numbers, dollar-for-dollar private sector development is typically more valuable to the GDP of the island then large federal contracts. This is not a social comment or a comment against the buildup (of which I am very supportive). This is a straight economic formula.
Most private investments, with the exceptions of large hotel development, are financed by regional banks, utilize local architects and engineers, buy their trucks from local dealerships and insurance from local insurance companies. While work inside the fence uses the same labor pool, and companies such as Black Construction, Core Tech and many smaller sub-contractors purchase a lot of goods and services from local suppliers and wholesale companies, most large stateside contractors bring in their own fleet of vehicles and have their own supplier networks that circulate less dollars throughout the economy.
Again, this is not a tit for tat argument of one being better than the other. It is an argument for maintaining market forces to allow for more skilled labor to be brought to the island so that the military projects are not pricing out private sector development. For the economy to truly capture the benefits of the buildup, the island needs access to its necessary workers. Until such time, the island will continue to see slow to no growth at best.
The good news is the National Defense Authorization Act approved up to 4,000 H-2B workers for military realignment projects and H-2B workers are being approved for work inside the fence and for private sector projects outside the fence when they can be justified as being needed for the buildup – such as hotels and housing. To this point, the Government of Guam is trying to work with the federal government on a “One Guam” policy that essentially states that every construction project on Guam is tied to the military buildup. The logic to this argument is that both the private sector and the military use the same infrastructure, restaurants, hotels, malls and housing stock.
While Ken Corp. was able to successfully get H-2B workers for its new Tsubaki tower, and the U.S. Citizenship and Immigration Services recently approved the application for 258 H-2B workers for a multi-family housing project, most companies remain cautious about applying for workers using this approach out of fear of being turned down, as the cost to applying per worker can go into thousands of dollars when including legal and government fees. At this point, we need to find contractors willing to try to obtain workers and see if the one Guam policy has legs.
July 2019 was the best July arrival month on record with 136,878 visitors to the island, a 4% increase over July 2018, and 2019 should finish in the top five years for tourism. In addition to solid arrival numbers, the more granular numbers indicated strength in the market. Japanese arrivals have begun to pick up in recent months, increasing 20% year-over-year as of July 2019, with a 14% increase in seat capacity from Japan. Additionally, according to the Guam Visitors Bureau, on-island spending has increased significantly per visitor from $393.41 for the second quarter of 2018 to $591.04 in the second quarter of 2019. The increase seems to be attributable to an increase in Free Independent Tourist arrivals over wholesaler arrivals, which solid trend brings revenue for companies in areas like auto rental.
The market continues to be a two country market, with approximately 45% of the island’s visitors coming from Japan and 52% from Korea. A diversified market is a good long-term trend, as it creates more market opportunities. However, the spending habits and marketing strategies necessary to reach this new demographic are significantly different and companies who have not yet updated their business plan to reflect this new paradigm continue to experience lost market share.
The success of the island’s tourism industry in recent years has caught the eye of investors. Ken Corp. is set to open its 340 room Tsubaki Tower in 2020. Tan Holdings recently announced it will rebrand the Fiesta Hotel & Resort as a Crown Plaza Hotel (a member of the Intercontinental Hotel Group) with extensive renovations in 2020. Most of the major hotels we spoke with discussed plans to upgrade their room inventory.
Additionally, the island needs 500 to 1,000 new rooms and there are at least three investor groups looking to build hotels which have been unable to start due to the H-2B issue. If these workers can be freed up under the One Guam initiative, we could see much growth coming from the tourism industry.
If something is not done to get more workers for home construction, the island could be in a world of hurt for housing within the next few years. Housing costs are reaching well above $200 a square foot for construction, not including land (nothing fancy mind). If you run the numbers on this, it costs $400,000 to build a 1,500 square foot basic house, not including the land. This is helping to shape a no-growth economy and if these policies don’t change soon, this trend will price locals from affording homes.
The island is already feeling the pinch for lower rent apartments as construction companies have been buying entire apartment buildings for their soon to arrive H-2B workers. In doing so, they are pushing out tenants in a market already short of inventory.
If nothing is done soon, middle class housing will be next. This initial group of workers coming in for the buildup will be H-2B construction workers. They will live in barracks or company apartments. However, the next wave of workers will be the skilled workers tasked with running the new facilities. These workers are going to bring their families and will require houses and larger apartments.
The majority of Guam housing stock is comprised of projects consisting of one to six homes built on small family parcels; workers in this market are almost impossible to get. If additional housing is not built soon, Guam will begin to see a huge shortage in housing stock compared to the new demand. This will drive up the price of housing and rent and new workers who have federal jobs on base will be in a position to out bid employees in the local economy. If this happens, Guam could be in for major social economic problems.
Consumers are feeling stress of inflation caused by increases in utilities, healthcare, housing, but most of all from the increase in the BPT. While income tax only hits those with profits and income above certain thresholds and property tax only hits those who own property, BPT is regressive; it’s hitting everything consumers buy, from food to automobiles. Every business we spoke with mentioned how the increase in taxes negatively affected their operations, forcing them to look for new ways to reduce costs, as there is only so much elasticity in their pricing.
Consumers are responding to the price increases businesses are passing on by reducing spending on large ticket items such as cars, and moving to generic brands for food and beverages. If the increased BPT was not putting enough pressure on small businesses and consumer spending, Guam’s minimum wage rate is set to increase 50¢, from $8.25 to $8.75 in March of 2020 and another 50¢ in March 2021, bringing the rate to $9.25. There are differing views on whether the increase will be good or bad for the economy.
Proponents of an increase say the minimum wage has not kept up with inflation and that many minimum wage workers are impoverished. They cite a Guam-based study measuring the impacts of the last minimum wage increase, which concluded that GDP went up, the rate of inflation in the price of goods remained within an acceptable range, hours were not cut back and the island saw an increase in jobs.
Opponents believe that increases to the minimum wage will place a burden on employers, especially small companies, resulting in slower growth and decreased levels of employment and that minimum wage should not be decided on by government, This is the role of the market.
I am more in the middle. First, I believe government is fulfilling its role. What I don’t like is the arbitrary nature of the process. Under the current system, the legislature picks a number, in this case a nice round $1.00, and states it to be fair. Why is that the right amount? Why not 10¢ or $10? I believe that we should switch to a system where we negotiate a basket of goods to program the minimum wage and make changes (up or down) every three years based on the inflation of the basket. Every 10 years negotiate the contents of the basket. Nonetheless, the wage increases are on the way.
The buildup has begun, tourism numbers are strong and the economy is flat due to the inaccessibility of H-2B construction workers. There appear to be positive movements in the H-2B saga. If the island can get workers, there is a lot of pent-up investment demand, and the economy should be able to see some traction. If not, between the lack of workers and inflationary pressures of increased wages and BPT tax, the economy could see continuous headwinds with slow to no growth and increased costs.
Regional economies struggle to stay even
By Joe M. Arnett
After visiting with companies that do business across the region, it’s clear that the economic picture is mixed.
Visitor arrivals in the Northern Mariana Islands continued to slide as typhoon damage and troubled economies in major tourism markets weighs on visitor arrivals. Guam on the other hand, has experienced a record number of visitors to the island, primarily from Korea. The construction industry remains challenged with project delays, and diversion of funds for the U.S. Marine relocation to Guam to other federal projects. Qualified labor, regional conflicts, and continued reductions from arrivals out of Japan bring are among the list of growing economic concerns.
The construction industry had mixed results for the year in Guam. Department of Defense construction projects continue to increase, bringing much needed revenue into the Guam economy. Public sector infrastructure projects and private sector residential projects have been cancelled or delayed due to a shortage of available construction workers. The H-2B visa approval process has improved, but not in sufficient numbers to avoid further delays and rising costs. It is a major factor in the reduction of the gross island product this year, as compared to the same time last year.
This situation has challenged Guam contractors to reallocate resources as delays in awarded projects continue. The National Defense Authorization Act allows for approximately 4,000 H-2B workers dedicated to Department of Defense projects. There has been some relaxation recently in using NDAA guidelines in the H-2B approval process for public and private sector projects related to the build-up. The challenges will continue next year as the number and amount of new Department of Defense projects continue to increase.
The damage caused by two major typhoons has weighed upon the NMI visitor industry over the last year. Arrivals overall have dropped 30% as compared to the prior year, with significant reductions in arrivals from Japan (127%) and reductions of 30% or more in arrivals from China and Hong Kong. Even the country responsible for the most visitor arrivals is down 11% from the same period in the prior year. But the cause of these declines reaches beyond the borders of the NMI. The growing civil unrest in Hong Kong, the trade war between the U.S. and China, and the Japanese-Korean trade war have all affected consumer sentiment and spending including leisure travel. Previously, high visitor arrivals launched a construction boom, particularly for the new casino and hotel operations.
Despite similar challenges, the Guam visitor industry remains vibrant. It was recently announced that Guam tourism numbers set a record high for this fiscal year, surpassing 1.6 million visitors to Guam. There was a notable increase of 25.4% in visitors arriving from Japan. This number was partially offset by a 26.1% decrease in arrivals from China and a 2.4% decrease in arrivals from market-leading Korea. Again, trade tensions between the U.S. and China can be blamed for the reduction in arrivals from China. In the case of Korea, a reduction of consumer confidence and a slowing of the Korean economy is starting to have some effect on Korean leisure travel to Guam. Yet tourism dollars remain the largest local source of revenue for the government of Guam.
The Bureau of Economic Analysis reports that island gross domestic product fell for the fourth year in a row. The latest year reported actually saw negative growth 0.3%. This is indicative of the reduce level of government infrastructure investments, private investments.
We noted in our interviews with business leaders that the outlook for next year was for a flat economy at best. Many segments of our economy, especially our small businesses are weighed down by the increasing costs of doing business in Guam. From increased port fees, to significant increases in the liquid fuel tax, the business gross receipts tax, and the recently passed increases in the minimum wage is squeezing profits from all businesses, large and small. There is a sense among lawmakers that businesses easily pass along in tax increases to the consumer.
Our discussion with many business operators of all sizes tells us that is not necessarily true. When consumers begin to rein in discretionary spending because the price of necessities continues to rise, then their focus shifts to maintaining the bottom line. This means all costs are heavily scrutinized. Because labor is typically the number one expense of any small business, employee costs are particularly susceptible to reductions in periods of flat or declining revenue.
The tourism industry in Guam remains optimistic and vibrant. At a time when new construction can be prohibitively expensive, many have ongoing plans to renovate and rejuvenate their facilities and offer expanding options to our visitors. There are concerns. In many discussions, we heard concern about the health and outlook for the Korean economy. Many of our tourism leaders are keeping a close eye on the Korean economy to determine how to make adjustments in their own financial plans.
At the same time, proposed tax increases and government borrowings would increase the cost of doing business as the prospect of declining revenues becomes more likely. Careful economic planning is necessary to prevent a further economic decline.
A more positive expectation is the influx of dollars to the region in support of the U. S. Marines relocation. Final approvals for significant increase infrastructure work on Department of Defense installations is anticipated, with hopes that the H-2B labor issue can finally be resolved. These investments benefit all sectors of our economy, with significant revenue generated for the tourism industry.
With these thoughts, our top companies remain extremely cautious about their business plans for next year, but remain hopeful for meaningful progress in the coming year.