Sino the times
Chinese contractors are strengthening their presence in the Gulf
The Gulf construction industry has become an increasingly international market in the last decade.
As the number of projects has multiplied across sectors – with the value of projects multiplying in step – more countries have been represented by hopeful companies in the tendering process than ever before.
Within this mix of global economies, China has carved an increasingly prominent place for itself. The winning and execution of large infrastructure projects – such as the Makkah Light Railway, which successfully became operational for passengers at the end of 2010 – are gradually adding to the country’s portfolio, which has strengthened the trust element that is so vital to business, as well as strengthening deeper economic ties that augur well for long-term work.
The swift rise of the Chinese economy has been irresistible to those who follow the shifting dynamics of global growth. The country’s gross domestic product (GDP) expanded 9.6% in the third quarter last year against the second quarter, according to Trading Economics, the market research house.
For the last 21 years, its average quarterly GDP growth was 9.31%, reaching an historical high of 14.2% in December of 1992. This has the edge over India, its nearest rival in terms of growth, which expanded 8.9% in the third quarter of 2010 over the previous quarter. China’s economy is the second-largest in the world after that of the US, having moved ahead of Japan in August.
Amid its booming economy, the country is in the midst of its own construction renaissance, which creates a logical expectation that it has a broad range of contractors, suppliers and service providers.
The Olympic Games, staged in Beijing in 2008, was a wide-ranging and emphatic demonstration of China’s capability to deliver projects in a cohesive manner, leaving a lasting improvement to the capital’s infrastructure.
The potential for construction companies has also been apparent in a financial sense. In February 2008, as the world was roiled by a property mortgage linked crisis in the US, China Railway Construction Corporation (CRCC) raised HK$18.2billion from a Hong Kong initial public offering. More than 800,000 applications were filed by retail investors, who placed a record of HK$540 billion worth of orders, making it the second-biggest offering ever.
As big contractors and suppliers look beyond its shores, they have found the Middle East an attractive area, from the world-beating construction speed in Dubai in the last decade to the billions of riyals lined up by the Saudi Arabian government for new development. Though regional counterparts from South Korea, Japan and Taiwan have, for a number of years, also believed in the region’s potential analysts of some of the biggest contractors are positive on the inroads made in the region.
One Arab-Sino link-up that caught the eye last year involved a memorandum of understanding between the Meydan Group, the investment vehicle behind the Dubai-based horse-racing stadium and business hub of the same name, and Guangsha Middle East Construction.
Chinese companies such as CRCC, “have been learning through doing things the hard way, like Korean firms a few years before,” according to Anderson Chou, an analyst at Macquarie in Hong Kong. “The Middle East is competitive as there are a lot of construction companies and family-owned companies.”
Political ties, such as the evolving bilateral deals between the GCC and China in the areas of trade, investment and energy (as well as deals between the People’s Republic and individual Arab states), are perhaps the most important driver of cross-continental links.
Referring to CRCC’s work on the Makkah Light Railway project, Chou adds, “When it comes to this Saudi project, when the Saudi government made contact, they referred to several large companies, and CRCC provided the best price for the contract.”
He says certain specialisms have helped the Chinese cause in the region, rather than the general perception that they can simply keep costs down at the bidding stage due to access to voluminous amounts of cheap raw materials.
“I do not think cheap raw material makes a difference, particularly when talking about things like cement. It will only make a difference if the company has need of a special steel structure, for example,” adds Chou.
Financial backing is another crucial element. Some of the biggest companies, though publicly traded entities, are partly owned by the government.
Though this is the case for exponents from other countries, the backing is even more emphatic due to the country’s incredible foreign exchange reserves. Furthermore, the country also has the financing infrastructure to provide vital capital where needed through specialist banks.
Eliza Liu, an analyst at CCB International Securities, points out that this is the case with the Export-Import Bank of China (China Eximbank), a state-owned entity created in 1994.
“For some projects, a contractor may be able to secure a bank loan from China Eximport Bank for purchasing equipment and materials,” she says. “The Chinese companies must be able to supply their own equipment.”
Chou believes the ready capital is a critical factor. “There are only a few companies that have the capacity, [and] a company has to be able to finance themselves to work on a project. If a project is worth AED1billion, then the company needs enough working capital to do the job. If it is a significant project, Chinese banks will be willing to provide financing.”
As with Arab and European contractors, Chinese companies have sought to diversify their building repertoire. China Jiangsu International Construction (CJIC), part of the China Jiangsu International Group, with a presence in the UAE, Qatar and Saudi Arabia through other group companies, has evolved its business from building and infrastructure.
“We are diversifying and converting our core business into other relevant sectors or fields which still show robust signs of surviving,” says Chen Xin, commercial manager. “We even duly changed our vision and values to adapt ourselves to match these movements. During the credit crunch, [we] considered refurbishing hotel rooms during the off-season.
“Many residential developments such as JBR and Greens need this service as well.” Xin says many international companies moving to Dubai and Abu Dhabi are also looking to set up new offices, which has also created a niche market.
Despite the depth of existing opportunities in the region, differences in the business culture over here have presented a challenge to some companies.
Xin said previously in May that in China, design drawings for projects are handled by the design or consultancy firms, whereas in the Gulf, this is typically produced by the main contractor.
This difference in procedure has been a critical point on some projects, most notably for CRCC in the wake of its work on the Mashair Metro system in Makkah. Though the 20km system started operations in mid-November without a hitch after a year’s construction, despite being only 35% complete, reports in China surfaced that the company was set to lose $640million on the back of design changes.
In a statement to the stock exchange, CRCC said it was in talks with Saudi Arabia’s Ministry of Municipality and Rural Affairs (SAMIRAD) to discuss compensation after changes in the project requirements, delays in land expropriations and the need for “large amounts” of manpower and resources to ensure on-time completion saw actual costs of the project rise to $2.4billion, in addition to the initial financial expenditure of $23million.
One analyst at a European bank in Hong Kong covering the sector, who declined to be named, believes that CRCC did not have this additional ability to oversee the design side, though it was outsourced, and the root of the fall-out occurred at a meeting between the two governments when infrastructure projects were discussed.
“When the Saudi and Chinese governments agreed on cooperation, at the time of tendering for the contract for the Makkah railway, the Saudi government told the Chinese that, if it won the contract, the company would have to use one of three specified design companies from Europe,” the source said.
“China was pushing the Chinese company for this order, and the company had not done a lot of market research, and did not have knowledge of the contract details.
“It is different [to other projects], as before this project they would only take the contractor part of the building, not the design and other elements. The design was done by a European company, not their own, and there were a lot of design changes, and I do not think they realised these things at the beginning.”
More regular differences in the business environment include the fact that a Chinese company is likely to work with private-sector clients in the Gulf, rather than a government.
Though this has not yet seemed to have produced any salient difficulties, analysts have noted a longer tendering period in the Gulf. Xin adds that the seemingly endless supply of oil and gas sector projects have so far evaded Chinese companies, often awarded to Asian counterparts in Korea and Taiwan.
Overall, the country views theMiddle East region with a degree of wary optimism. Xin says that, as a state-backed company, China Jiangsu International Construction, has “reinforced” its risk-management process in the Middle East.
China’s Top Companies
• China Railway Construction Corporation (CRCC): A leading contractor, with 40% of the market share for railway projects in China.
• China Railway Group: CRCC’s direct rival, taking up a similar market share.
• China State Construction Engineering Corporation: The largest domestic and overseas construction contractor and real estate developer in China, from surveying to designing, and building major structures, including skyscrapers, hotels, airports, hydroelectric plants, and railways.
• Guangxi Liugong Machinery: One of the biggest distributors of construction equipment and vehicles, including for road construction, building site excavation, mining, underground construction, landscaping, agriculture, demolition, recycling and others.
• China Communications Construction: A contractor engaged in designing transportation infrastructure, dredging and port machinery. Listed in Hong Kong.