Giant Chinese construction firms are cheap and fast – but they’re struggling to win contracts in a $3 trillion global infrastructure market. Mark Godfrey reports.
A spat on the sidelines of the recent APEC and G20 gatherings featured two unlikely adversaries: the Chinese delegations cornered visiting Mexican counterparts over the abrupt cancellation of a $4bn railway construction contract, awarded to a Chinese consortium.
The deal was a fillip for Chinese construction firms keen to get contracts abroad during an ongoing slowdown at home.
China has spawned a bunch of enormous construction companies that have been tasked with building the metro systems and airports currently being installed in China’s larger and inland cities. These companies have also publicly stated their ambition to win some of the contracts opening up in the developing world in particular for public works projects.
The China Investment Corporation, a sovereign wealth fund, has predicted there will be a $3trn infrastructure market in Africa and the Middle East over the next 30 years, and given its energy purchases in the region, Beijing will be stating its claim to those projects.
Indeed, anyone who observes the queues of nervous, young men lining up in the early morning in Beijing’s tree-lined Sanlitun diplomatic district will be in no doubt of the intensity of Chinese activity in Arab, African and Latin American states. The lines are formed by staff from some of China’s largest construction firms, waiting for visas from countries like Venezuela, Nigeria and the Republic of Congo – all of them the focus of infrastructure-for-energy deals which have been financed by China’s large policy banks, such as the China Export Import Bank and China Development Bank (CDB). The CDB is putting up $500m to help pay for four airports to be built in Nigeria by the China Civil Engineering Construction Corps.
Overseas projects
China sees major export earnings at stake. The Ministry of Commerce in Beijing estimated in 2012 that every $1 earned in overseas construction projects yields another $4 in China’s domestic GDP – a figure it realised based on calculations of wages and investment spin offs in the machinery and construction materials sectors in China.
Leading the charge abroad is the China Railway Engineering Company. Its Hong Kong-listed subsidiary, the China Railway Group, is building a $7.5bn railway link between the Venezuelan cities of Anaco and Tinaco: that’s one of $25bn worth of deals financed by the China Development Bank on what are loans backed by supplies of Venezuelan crude oil.
The bulk of projects abroad by Chinese construction firms are in civil works.
Thus, China Civil Engineering Construction Corps (CCECC) agreed $1.49bn for mostly road and rail projects with the Nigerian government at a 2012 China-Africa summit in Beijing. China Harbour Engineering Co has a contract to build Juba International Airport for newly independent South Sudan – also a key oil supplier to China – while China Railway Group is building 30,000 ‘affordable’ homes in Ghana’s capital, Akra.
Scale and cost
Given their scale, access to low-cost labour and diplomatic support from Beijing, should Chinese construction firms be worrying their Western peers? Chinese construction executives, who often double as Communist Party cadres, like to point out that Chinese firms dominate the rankings of international contractors compiled every year by Engineering News Record (ENR) magazine. Chinese firms CRCC and CRC hold the top two spots for Beijing-headquartered firms, while China State Construction Engineering Corp is bigger than French-based VINCI in third place. China Communications Construction Corp (CCCC) is also in the top five.
In revenues earned overseas however, Chinese firms are relative laggards compared to two European-based building firms, Hochtief and VINCI; the world’s number one and two respectively in recent ENR rankings. Both booked over 90% of their revenues overseas.
There will be a $3trn infrastructure market in Africa and the Middle East over the next 30 years …
Pursuing deals
China’s preference for dealing with authoritarian leaders and regimes is a weak point as shown by its experience in Libya, where lack of quality Chinese intelligence and risk management on the region meant it didn’t see the fall of former leader Muammar Gadaffi coming (China Railway Construction Corp continues to pursue Libya for damages incurred to the firm which was building a rail link carrying iron ore to the port city of Misrata when the revolution began) according to a US analyst at an international risk consultancy in Shanghai. He says China is experiencing similar challenges now to the social and financial strife that followed the demise of Hugo Chavez, deceased president of Venezuela with whom China’s leaders forged a close working relationship.
Dictators die, and Chinese construction companies aren’t always ready for what’s coming after the authoritarian leader who was able to approve construction projects quickly.
Unsurprisingly, the Chinese construction sector seemed unprepared too in Angola when CITIC was criticised in the local press for an apartment development 30km outside the capital Luanda. The average price tag of $150,000 per apartment was deemed beyond the reach of most locals – oil-driven economic growth aside.
Likewise, China Railway Construction Corp seemed totally unprepared in recent years for protests by locals over the relocation of villages demanded by the firm during its construction of a railway in Saudi Arabia. Grappling with labour rights has been another headache for Chinese firms. Protests have occurred in Algeria and Ecuador over low wages and lack of jobs for the local community from Chinese construction firms relying on imported Chinese labour.
Shortfalls
The shortcomings of the Chinese firms appeared to be acknowledged by Diao Chunhe, the head of the China International Contractors Association, a body overseen by China’s commerce ministry. This year Chunhe encouraged members to invest more in information technology to better handle and coordinate overseas projects.
A pilot project in Angola with the China Satellite Communications Corp aims to improve long-term communications for firms in Africa, he said.
While peers like Balfour Beatty and Hochtief have prospered by acquiring international technology and talent, Chinese firms continue to suffer from project management and technology shortfalls in niche areas like water treatment. Meanwhile, CCCC still gets over 70% of its revenue from construction, and only 5% from design work.
The lack of project management proved an embarrassment on China’s first foray into the EU market. CRG has been pursued by the Polish government after it withdrew prematurely from a highway project following disputes over construction quality and fees.
China missed out on a golden opportunity in acquiring some Western project management skills during the lay-offs sparked by the global financial crisis in 2008. It’s unfortunately the case that Chinese state run construction firms are unwieldy and awkward about senior foreign executive talent: they just don’t fit well or integrate well in state-run corporations where the Communist Party’s writ is as important as commercial rationale. It’s because they’re cocooned in a massive (and highly protected) home market that largely state-run Chinese construction players haven’t learned to keep pace with international best practice.
National interests
The lack of advancement in project management for instance is put down to the state-owned nature of the industry in China. Shareholders of Hong Kong-listed China Railway Construction Corp were enraged when it was discovered the firm had taken a $600m loss on a $1.8bn railway project in Saudi Arabia, without fully disclosing the potential for such a loss.
“These companies have national and corporate goals and unfortunately the national interests are too often put first,” explains Michael Komerasoff, an Australian mining executive and long-time analyst of Chinese overseas deals. By this, he explains, a commercially unsound deal is signed which furthers China’s national interests in a particular territory, leading to loss making construction deals in developing nations. Chinese construction companies need to embrace international best practice and talent.
Perhaps then their impressive scale and ability to get jobs done on time and within budget in China will serve them well in an international marketplace crying out for roads and bridges.
