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Making an entrance

China

China wants foreign expertise, but getting a toehold is tricky.

Bonds between the state and the construction industry in China are strong. The country's major contractors are proud to list senior staff who have gone on to prominent government positions, and engineers lead the country: President Jiang Zemin and premier Zhu Rongji both trained and worked as engineers.

Some observers believe this explains Chinese politicians' apparent weakness for megaprojects such as the Three Gorges Dam, the National Theatre project in Beijing, a proposed pipeline to supply water from the south to the north of the country, or even the Olympics.

Historically, the construction industry has been a key employer in China. Now, as the country embraces open market economics, old and inefficient Chinese industries will unquestionably be forced out of business; unemployment and attendant social unrest have already become a pressing issue and constitute one of the government's greatest fears. The government therefore continues to set huge store by ordering projects that will keep large numbers in work - 5,000 labourers are currently employed on construction of the National Theatre alone.

From the construction industry's perspective, having close personal contact with the right people in government is vital to the realisation of projects. All schemes over US$44M require central government approval.

Increasingly, municipal authorities and private developers - mainly Hong Kong Chinese and international - are taking the initiative in pushing projects forward, and good contacts can be decisive in getting the go ahead.

Meanwhile, though most government projects are now put out to competitive tender, a significant 20% are negotiated or awarded directly.

Relationships are no less important for overseas companies wanting to work in China, says Jiang Hua, senior economist at Beijing Urban Construction Group (BUCG). This is not least because formal contracts have little real value in China.

Negotiations and changes are common long after contracts are signed, and overseas firms have learned from bitter experience that the contract is usually of little use in settling disputes.

'The contract goes into the bottom drawer and you won't see it again unless it's to the client's advantage, ' notes Roger Ray, vice president of building systems specialist Invensys.

Everything ultimately rests on the degree of friendship and trust built up between individuals.

Overseas engineering and construction firms must register to work in China. Though they can bid for work independently, finding a Chinese partner is seen as more or less essential to success. To work for Chinese clients, the benefits of established relationships and insider knowledge of the industry is hard to overestimate, says head of the British Consulate commercial team in Chongqing, Scott Strain.

Meanwhile, it is difficult to win jobs put out to bid by Chinese clients against local competition. 'Chinese designers and contractors can match the design and construction standards of the US and Europe, but are far cheaper. Clients often opt for lowest cost or fastest delivery time over value or quality, ' notes Hong Kong Trade Development Corporation chief economist June Ngan.

Chinese clients are, however, starting to look for a degree of sophistication in the design of prestige projects that homegrown consultants cannot deliver - for example long span structures, steel frame construction and structural glazing - and for project management and quality control in construction.

Chinese consultants and contractors are eager to draw on skills that will give them extra selling power.

Many western firms operating in China work on projects funded by international banks, which demand third party management and supervisory expertise, or for western, private sector clients, who want projects executed following western standards and procedures.

Here again, the value of a Chinese partner is high.

Under Chinese law, designs by a overseas consultant must be approved by a local counterpart, and this can create huge problems. Chinese codes are very conservative. International clients often select non-Chinese designers for the structural, time, cost and space savings, and sophisticated services integration that they can offer.

But solutions that would be acceptable in the West frequently fail to satisfy local design criteria, says Peter Metcalfe, managing director of consultant WSP Hong Kong, which works extensively in mainland China. Beefing up reinforced concrete columns and beams to satisfy structural regulations, or installing masonry partition walls to meet fire codes, eats up time, materials and cost, and can tip schemes from profit into loss.

'Design institutes must be involved and have sway over the way a project is tackled, but have no financial accountability, ' confirms Ray.

All parts of China's construction industry are state owned, with close links to the Ministry of Construction - UK firms complain that this results in little real independence or objectivity in the construction market.

Consultants and contractors are graded from A to D, national to provincial, with the largest firms operating across China and abroad designated A+.

Architectural and engineering design is carried out by design institutes, the largest of which are multi-disciplinary and employ in the region of 3,000.

Between them, China's two biggest consulting houses, Beijing Institute of Architectural Design & Research or China Architecture Design & Research Group, can lay claim to nearly every landmark project in the capital, and many more across the country.

According to Jiang, China has 30,000 contractors. His own group BUCG and competitor Beijing Construction Engineering Group (BCEG), which are among the largest, have in-house design offices and in the last decade have diversified into manufacturing construction plant, real estate development and management, and service provision.

The largest designers and contractors are competent across the board - they have expertise in marine works, industrial structures, tall buildings, deep foundations and tunnelling, rail, road, and transportation, water, power, bridges - the lot. But growing cost consciousness (see box p13) means they are looking for new financial and project management skills, construction technologies, methods and products.

China's Cultural Revolution, from 1966-79, disrupted education for millions of young people. This has translated, nearly 25 years later, into a severe shortage of senior managers.

'There are very bright people up to 40 and very bright people of 55 and over, but there's a gap in the 40 to 55 age range, ' comments one UK engineer. As China modernises, management skills will be increasingly urgently needed, he says.

BCEG senior engineer Wu Junxi says the firm has recently completed a major restructuring that has cut the workforce from 120,000 to 30,000.

Though the contractor is aiming to grow its workload at 30% a year, it is pioneering a new approach to construction in China. Where historically major contractors would have been entirely self sufficient, BCEG is now calling in subcontractors to provide labour, and is focusing its own attentions on management and supervision.

China's material of choice for the last 50 years has been reinforced concrete. In the quest for faster construction though, steel is starting to make inroads. The country is desperate for steel mills so that it can meet anticipated demand internally, and for expertise in designing steel structures.

Growth of the commercial building sector and slowly increasing demand for variety in domestic building, which has so far been dominated by standardised, mass produced designs, is creating interest in more sophisticated design and analysis tools.

Meanwhile, a couple of UK consultants tell of desk studies carried out only to be ignored by Chinese design institutes and contractors. Entirely avoidable conflicts have been encountered between new and existing structures, pushing project costs up hugely. Despite this, Chinese firms say that they want to develop better trouble-shooting skills and to become more versed in value engineering.

Demand is also growing for specialised equipment. Indigenous construction plant can be bought for a fraction of the cost of machinery produced abroad.

The downside is that reliability is proportionate to cost, says director of the China Building Material Industry Association, Xu Yongmo.

Chinese contractors have always turned to overseas suppliers for exotic plant such as tunnel boring machines, but are now interested in a wider range of products, including concrete pumps and specialised piling and drilling equipment.

The move is in part driven by increasing shortages of labour in China's most developed cities.

Natives of Beijing, for example, are eschewing building work as too rough, dangerous and poorly paid. But it is also due to the pursuit of higher and more consistent standards.

Contractors are finding that results attained by machine are more reliable than those from unskilled labourers, Xu says.

And the huge workload the construction industry must tackle means it cannot wait for Chinese manufacturers to catch up with international standards.

Trade routes

China joined the World Trade Organsiation (WTO) in 2001, underlining its commitment to opening its market internationally. For oversea consultants, contractors, manufacturers and investors, this means they can trade in China, subject to restrictions - and certain operating hazards.

Payment can only be made to companies registered on the mainland and for Chinesebacked projects is in RMB Yuan, a currency that is at the moment relatively stable but which is expected to become vulnerable to fluctuations as China integrates more fully with the international financial markets.

Though Chinese firms are hungry for foreign investment and keen to form joint ventures as a way of realising projects, foreigners are forced to make do with minority stakeholder status. This can make risk difficult to control - Chinese firms often have little real idea about project or business planning, making them dangerous controlling partners.

Chinese construction law and regard for contracts is dramatically at odds with that operating in the West.

It is common for Chinese clients to keep back 10% of the agreed project fee, a form of thinly disguised corruption that is commonplace in the construction industry, some non-Chinese firms say.

They advise arranging payment on a regular monthly basis rather than against results which, however well delivered, are liable to be found wanting.

At the same time, Chinese clients expect foreign firms to make concessions in order to win work. 'You are forced to do loss leaders to get into China, but the question is how to convince the client that, when you've done the job cheaply once, he should pay more next time, ' says one UK consultant.

One of his competitors confirms: 'It is very easy to grow orders but far more difficult to turn orders into profit.'

To make life trebly difficult for overseas firms, clients are historically used to shopping around and trying out different suppliers.

There is no certainty that having won a job and done it well there will be repeat orders.

A second phase of integration with the WTO will take place in 2004, however, which should see some revision of Chinese construction and contract law, will allow payment to be made to companies based outside mainland China, and will enable foreign firms to become majority stakeholders in joint ventures.

However, for greater certainty of outcome, working on privately financed schemes offers better prospects. China's project list cannot be realised without private capital and the country is eager to embrace the design, build, finance, operate (DBFO) model.

French, US and German investors have already entered the road, water supply, waste water, airports and ports sectors.

Finding schemes that will provide an adequate rate of return on investment is difficult, though. Some, for example light rail and metro projects outlined for Chongqing, are too ambitious and must be scaled down before international firms should even consider them, say some UK firms with expertise in private finance.

Though it is claimed that the government has a slush fund that can be drawn on to bail out DBFO projects that run into trouble, it is against the law to provide guarantees.

To some extent project sponsors are already aware of the problem. The government has developed a formulaic approach to providing urban infrastructure, dictating predetermined lengths of road, metro or rail line in proportion to local populations.

Elaborate schematic designs are developed in order to win government approval, in the knowledge that they are unworkable and can be scaled down later, government insiders admit.

Chinese contractors are rapidly positioning themselves as investors by developing land bequeathed by the state. Real estate prices in Beijing have risen by 125% in the last year. And construction activity will be given a huge boost if China succeeds in unlocking the wealth of personal savings, squirreled away in banks by its citizens.

In the past banks were ordered by the state to invest in schemes whether they were profitable or not.

As a result they have become hugely conservative since gaining greater autonomy in the last decade and have all but stopped lending to construction projects. As a result, they have built up significant reserves.

In the long term the opportunities China presents are dazzling. Foreigners should not be blinded to risk, however, warns trade commissioner for the Belgian Consulate in Beijing, Ivan Korsak.

'People come here and take risks that they would never dream of taking at home, ' he says.

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