Chinese engineering companies brave the international market
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E-mail China Today, September 8, 2015
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Fang Qiuchen. |
Stable growth in traditional markets and breakthroughs in new ones
China Today: What are the geological characteristics of China's contracting business in foreign markets? And with what opportunities are these companies presented?
Fang Qiuchen: China's engineering contracting businesses are still concentrated in Asia and Africa, which take up 85 percent of the value of new contracts. Although facing fierce competition from Japanese and Korean peers, Chinese companies have been awarded a number of massive projects due to their outstanding engineering strength. These include the KPA5 barrack project (valued at US $1.98 billion) and an IGCC (Integrated Gasification Combined Cycle) plant (valued at US $1.83 billion), both in Saudi Arabia.
The growth in Africa has remained brisk, with the highest in Central and West Africa. This is largely accredited to the Chinese government's efforts to promote interconnectivity in the continent and its generous financial aid. Several large railway pacts have been reached between China and African countries, including the US $11.97 billion line to cross the coastal area of Nigeria to be built by China Railway Construction Corporation Limited (CRCC).
Chinese companies have also scored steady growth in Africa's home building sector. There is a strong demand for low-cost homes on the continent, and some Chinese contractors are ready to make forays into this market by duplicating the domestic housing development model. This will nudge China's contracting business to move up the industrial chain in the African market.
As for your question about opportunities, the Belt and Road Initiatives advocated by the Chinese government will open up new opportunities for Chinese contractors in countries along the Belt and Road.
Besides, the desire for greater integration in such regions as Central and Eastern Europe and Latin America has led to greater demand for better infrastructure and interconnectivity. China has been incessantly promoting bilateral cooperation with these countries in this regard, and sees enormous potential in this market. So far Chinese companies have made impressive advances in the Central and Eastern Europe market, with the value of newly signed contracts up 65.1 percent year on year.
Meanwhile, Europe and the U.S. have revved up investment in their aging infrastructures, opening the chance for Chinese businesses to crack these mid- to high-end markets through merger, purchase or investment. The value of contracts signed in 2014 was twice that of 2013, a result of mergers and purchases by Chinese companies there, which also boosted their other businesses in these regions.
New trends and challenges
China Today: What's the latest development in China's contracting businesses abroad? And what problems are they facing?
Fang Qiuchen: Many enterprises have come to the understanding that investment in foreign projects is indispensable to their participation in global competition and business transition/upgrading. Some have thrown their weight into development projects including real estate, mines, agricultural, and commercial facilities in order to expand their business scope. China Harbor Engineering Company Ltd., for instance, funded and built China's first BOT (build-operate-transfer) highway abroad in Jamaica, which will be open to traffic by the end of this year.
Some companies make smaller investment in foreign projects in return for contracts for parts of their construction. An example is Beijing Construction Engineering Group, which took up ￡12 million of the ￡800 million total investment for Airport City Manchester, and won contracts for part of its facilities.
There has been a market tick-up in acquisitions, mergers and investments by Chinese companies in foreign countries. One example is that of China State Construction Engineering Corporation buying the U.S's Plaza Construction last year. The deal not only doubled the Chinese company's business in the U.S. – with a contract value exceeding US $3 billion – but also upgraded its market qualification there, and hence enabled it to expand into the southern and western states of the country.
Difficulties and challenges nevertheless persist for Chinese contractors. First, external competition is increasingly fierce. In addition to competition from peers of other developing countries who normally offer lower prices, developed countries have also joined the lowballing race, like Spanish companies in the Republic of Equatorial Guinea and the Republic of Congo. What's more, some countries have ramped up investment and loans, of low or no interest, to African and Asian countries, subsidized their businesses or offered tax rebates on exported equipment to support domestic companies in international competition.
Second, market bottleneck is now an outstanding problem. There is barely room for further expansion in certain foreign markets where Chinese contractors perform well. For instance, they already account for 70 percent or more of market shares in Tanzania, 60 percent in Kenya and about 50 percent in Zambia. The share is also too high to expand further in certain areas of foreign markets, like the housing market in Algeria and road construction sector in Ethiopia and Uganda. Trade protectionism has also grown in certain countries, restricting imports of Chinese building materials and workers.
Third, there are more uncertainties and risks in the global market. The grim security situation is at the top of the list. Terrorist incidents have threatened the security of countries like Nigeria, Kenya, Pakistan, and Iraq. Political risks are also a growing concern for Chinese companies, the major manifestation being national security investigations of Chinese investments. The Greek government, for instance, suspended the privatization of Piraeus Port, in which the China Ocean Shipping (Group) Company (COSCO) led the bidding. In some emerging economies like Southeast Asia, South Asia and Latin America certain China-funded or constructed projects were suspended for no reason by local authorities. They include the high-speed railway project in Mexico and the Colombo port city in Sri Lanka. The sharp fluctuation in raw material prices in the global market is also an adverse factor. The steep falls in oil prices have in particular plunged Chinese operations in oil-producing countries into peril.
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