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Chinese contractors 'go global' Editor's note: Chinese contractors are increasingly being encouraged by government policies to venture into overseas markets. The China International Contractors Association (CHINCA) issued recently its 2004 Report of Overseas Projects by Chinese Contractors, an annual overview of Chinese contractors' outbound steps and a forecast for the coming years. Following are excerpts from the report: Chinese contractors signed over US$20.7 billion worth of overseas projects from January to November last year, reflecting an increase of 43 per cent year-on-year. The companies fulfilled an overseas turnover of around US$14.5 billion, up 28.8 per cent over the previous year. By the end of November 2004, China had achieved an accumulated contractual value of US$153.2 billion and an accumulated realized turnover of over US$111 billion. Statistics from the Ministry of Commerce show that construction, electricity industry, petroleum industry and manufacturing projects accounted for the majority of contracted value from 2001 to 2004. International market The global architecture market is enjoying an investment boom, as the world economy recovers. The Engineering News-Record (ENR), an authoritative US magazine of the construction industry, selected the world's top 225 international contractors in 2003. Based on the data of these 225 firms between 2001 and 2003, the magazine calculated the proportion of each area in the contractors' business. In 2003, transportation accounted for 27.5 per cent of the total turnover of the 225 contractors, construction of buildings represented some 25 per cent, and petroleum chemistry nearly 19 per cent. The report predicts international contractors enjoy the greatest potential in three areas: projects related to fundamental energy and infrastructures, petroleum chemistry and water supply projects, and environmental protection projects. Europe remained the world's largest contracting market in 2003. And Asia, driven by the economic growth of countries on the continent, has become the most active contracting market. Large-scale contractors speed up the restructuring between companies so as to maximize the utilization of resources. The companies begin to get more profits from the research and design before construction and services after construction rather than the construction itself. Some large contractors are, at the same time, investors in the projects they conducted, reflecting a new trend of the industry. The contractors set up unique operating systems to further their control of information, capital and projects. New trends of Chinese contractors The domestic giants, including the China State Construction Engineering Corp (CSCEC), China Harbour Engineering Company, and China National Machinery & Equipment Corp, are playing an increasing role in the country's "go-out" policy. Forty-seven Chinese contractors were recognized among the world's top 225 international contractors in 2003 by the Engineering News-Record; their total turnover stood at US$8.3 billion, accounting for 60 per cent of the nation's total in 2003. For example, CSCEC, which ranked 17th among the top 225 contractors in the world and was the number one firm in China, achieved an overseas turnover of nearly US$4 billion in 2003. Meanwhile domestic enterprises began to embark on more sophisticated, large-scale and high-tech projects. In the first 10 months of 2004, Chinese firms obtained 19 large deals with a contracted value of US$100 million each, and this number surpassed the total figure of the previous year. Asia and Africa accounted for most of the contracts, nearly 70 per cent of Chinese contractors' total contracted value. Besides progress in their traditional markets, such as Asia and Africa, the contractors endeavoured to diversify their business in over 180 countries and regions. The report says Chinese contractors, particularly large enterprises, have made breakthroughs in the high-end markets in the United States in the past few years. For example, CSCEC (US) won contracts for subway stations and the Marriott Hotel in New York in 2003, and the China Metallurgical Construction Corp signed contracts for a heavy rolling mill in the United States in August 2004. Major markets Despite the negative effects of the Iraq War and the SARS (severe acute respiratory syndrome) outbreak in 2003, the Asia-Pacific region remained the largest construction market in the world. Most Asian countries and regions witnessed fast economic growth, which spurred investment in fixed assets and construction. With an annual contractual value of around US$13 billion, Hong Kong is always a major contracting market; and it is one of the most important overseas markets of contractors from the Chinese mainland, as the region contributes to some 19 per cent of mainland's overseas projects. The Closer Economic Partnership Arrangement, initiated in Hong Kong beginning from 2004, was predicted to enhance the economic growth of the city to about 7.5 per cent last year and surely means even better prospects for the construction sector. The Hong Kong government is expected to attach more importance to the construction of infrastructure, such as transportation, harbours, housing and hospitals. The market in Macao is limited, but there is still potential demand for high-tech projects and labour. The contracting market in Viet Nam is predicted to grow faster as its government plans to invest heavily in the construction of architecture, transportation, power plants and telecommunications to improve infrastructure in the years to come. Chinese enterprises are active participants in international bids in Viet Nam, concerning roads, bridges, harbours, power plants and factories with a total contracted value of US$337 million in 2003. They also face severe competition from their Japanese, Indian and Turkish rivals, and Viet Nam's restrictions on foreign investment in the construction and management of harbours also confine Chinese companies' expansion in the country. The improvement of infrastructure construction has topped the Indian Government's strategy over the past decade, which means unprecedented opportunities for contractors. Chinese contractors clinched this opportunity in India and made breakthroughs in various sectors. ZTE Corp won the bid for a CDMA project from Indian BSNL Corp in February 2003, the first in the communications sector. Shandong Electric Power Corp obtained a contract worth US$230 million for a power plant in India in April 2003, reflecting one of the largest co-operative projects between the two countries. Chinese enterprises have made steady progress in Myanmar and Pakistan, traditional contracting markets of China, signing a number of deals, including those for docks, power plants and communication networks in Myanmar and roads and harbours in Pakistan. With a contractual value of US$276 million in 2003, Chinese contractors have a comparatively small market share in Indonesia. The contractors have started co-operation with some central Asian countries concerning the exploitation of crude oil and natural gas and the construction of housing. Chinese firms also participated in bidding in other Asian countries, but most of them were restrained by the scale, technological barriers and local restrictions imposed on foreign contractors. Europe The European construction market was predicted to recover from 2004 to 2006 after several years of stagnation. The report says two major markets in Europe - France and Germany - are suffering from economic decline or stagnation, which will have a negative impact on the construction sector. Therefore, the report predicts that eastern European countries are a good way to gain access to the European market, as Chinese companies encounter great obstacles in western European countries. Poland is one of the most promising contracting markets in eastern Europe because its annual investment in construction remains over US$15 billion, and foreign investors enjoy a fairer market environment in Poland. Chinese contractors have been doing business for a long time in Poland, but most of their projects, mainly construction of buildings, are of small-scale and low value. Chinese firms are always looking for a way into Russia, the largest market in central and eastern Europe, although a majority of the projects in the country are taken by contractors from Turkey, Serbia and Montenegro, the United States and Germany. Besides, some other European countries, such as Croatia, Hungary and Finland will also provide some projects that are attractive to the Chinese contractors. America North America is a major market of the international contracting sector due to its remarkable market scale. The total contractual value in the United States is predicted to reach some US$509 billion, but about 95 of the projects belongs to local contractors. Generally speaking, it is considerably difficult for Chinese companies to tap the US market as more than 40 Chinese firms have gained less than 1 per cent of the market share in the United Sates. Chinese contractors have become more actively involved in projects in Latin American countries as China witnessed a brisk growth in its economic relationship with the region in 2003. A Chinese company has won a contract for a 1,300-kilometre natural gas pipeline in Brazil, indicating a new development era for Chinese contractors. Overcoming disadvantages such as political instability and imperfect legal frameworks, Chinese companies have carried out projects in Ecuador concerning cable communications, services for oil fields and agricultural technology. Africa Chinese enterprises cashed in on their advantages in terms of competitive prices and quality to gain more share in Africa, one of their traditional markets. For example, deals in Algeria had contributed US$720 million, or 5 per cent, to Chinese contractors' overseas turnover by the end of November 2004. Eighteen Chinese contractors are engaged in business in Algeria, ranging from construction of buildings, public projects and irrigation works to petroleum prospecting. Chinese enterprises are also conducting projects, such as the construction of bridges, roads and water supply systems in Tanzania. Other markets The experts also suggest the enterprises diversify their business into some other markets, such as the Middle East. Chinese contractors have conducted projects such as power plants and subways in Iraq. However, the report reminds enterprises they should be cautious of the high risks despite the potential in the region. Bottlenecks and suggestions Apart from a few specialized companies, most of domestic contractors are weak in perambulation, consultancy and management compared with their overseas rivals. Even for the 47 top Chinese contractors, which represent over 20 per cent of the top 225 contractors worldwide, their annual turnover only accounts for less than 6 per cent the turnover of the 225 companies. Therefore most Chinese companies are kept out of the high-end markets in the United States and Europe. The report says illegal competition, extremely low bids and a lack of co-operation between companies exists among Chinese contractors. The bad practices have not only hurt the common benefits of the industry but also arouse concern among contractors of other countries. Experts worry that such bad performance may result in penalties from other countries. Financing problems have become the largest bottleneck, which blocks the development of the companies. Because of the lack of credit records in China, Chinese companies always encounter great obstacles in obtaining loans overseas. Chinese State-owned commercial banks are reluctant to provide large loans to contractors and the policy banks' support to the enterprises is insufficient in comparison with their demand. Although the government has established special funds for overseas contractors, the procedure is complicated and the scale is limited. Domestic enterprises encounter some technological barriers as China's technology standards do not meet the international requirement; in some cases the enterprises also face restrictions from local governments. Although Chinese contractors have improved their ability in construction and design and enjoy low labour costs, they remain weak in terms of patents, technology, dispute-resolution experience and technicians. Some enterprises had to use materials and equipment from other countries even when they won bids because they lacked an international purchasing network. In order to address the financial problems, which blocked contractors, the report suggests the banks should offer more financial services to support domestic contractors and offer preferable policies to companies with high credit. The report says the country should lower its loan rate to contractors for overseas projects because the rate is 3.8 per cent in China and around 1 per cent in some other countries. With some profits from contractors and fiscal support from the central government, the country should establish a number of contracting risk funds to deal with some unexpected accidents, such as wars and terrorism. Alliances and acquisitions between contractors are encouraged because by doing so, the enterprises will take advantage of each other and utilize capital in a more efficient way so as to improve the whole industry. The report also requests domestic contractors to strengthen self-discipline and avoid bad practices and unfair competition. Furthermore, contractors should increase their presence in the high-end markets and high value-added markets, including environment protection, communications and energetic exploitation. |
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