October 23, 2010

Building by design: how China develops the developing world

Chinese contractors and design firms have become major players internationally. In construction, one of the world's most important industries at over 10 per cent of global GDP, China accounts for one-sixth of all activity. Most of China's contracted projects have been where improvement is needed most: in the developing world, primarily shaping the landscapes of emerging Asia and Africa. China's resilient growth may yet spread through infrastructure construction and design projects abroad.

Number of Top International Contractors and Design Firms Based in China - ENR 1991-2009
Source: China Statistical Yearbook; THE BEIJING AXIS Analysis

Humble origins

Despite numerous accomplishments at home, Chinese contractors are relative newcomers on the global scene. Historically limiting governmental policy and fragmentation within the industry slowed the emergence of China's abilities in international construction. As part of the 'Great Leap Forward'(1958-1961), direct government financing further decreased competition, thus raising inefficiency in the market.

In the 1980s, reform was applied to the construction industry with the allowance of tendering in construction projects. This step saw a shift in the industry in which, in addition to domestic growth, saw Chinese builders move abroad in earnest, although still on a limited scale. International revenues remained under US$3 billion in 1989, but quickly rose to $5 billion three years later. Admission to the World Trade Organisation would only act as a further catalyst for China's contractors, with revenues earned abroad increasing more than tenfold since admittance in 2001.

Chinese contractors in emerging Asia and Africa

Itself a developing nation, China has shown great prowess in changing the skylines and infrastructure of likewise emerging economies, particularly those in Asia and Africa. With $57 billion in contracted revenues, China has been the most prevalent location for its contracted projects. Chinese firms have overwhelmingly been the builders of choice for Hong Kong and Singapore, due as much to cultural affinity as to their proximity with the mainland. The most promising Asian markets at present, however, reside in the developing countries of ASEAN -- the Association of Southeast Asian Nations.

Source: China Statistical Yearbook; THE BEIJING AXIS Analysis

Vietnam and Indonesia are the ASEAN nations with the fastest infrastructure development and, as such, have been important markets for Chinese contractors. China currently holds a third of the estimated $6 billion Vietnamese construction industry, focusing on rail, port, and energy projects. The much larger Indonesian market -- estimated at $38 billion in total -- has provided massive energy infrastructure project deals for Chinese firms, with no fewer than nine power plants, among other projects currently under construction.

There is yet more good news for Chinese contractors operating in ASEAN. As of the start of this year, the ASEAN-China Free Trade Agreement became fully operational. To further cement its commitment to expand economic activity between Southeast Asian countries, China signed an agreement to initiate a $10 billion China-ASEAN Investment Cooperation Fund, with an accompanying $15 billion line of commercial credit, specifically targeted at infrastructure development.

China Contracted Project Revenue 1999-2008, USD bn
Source: China Statistical Yearbook; THE BEIJING AXIS Analysis

Ranked first for African market share, Chinese contractors--active in 53 out of Africa's 57 nations-- are playing a leading role in the continent's development. Some 80 per cent of Chinese projects here are related to basic infrastructure, with many of the contracts received through initiatives from government agencies and financed by grants. Diplomatic channels, financial aid, and a reputation for quality have all contributed to Chinese contractors expanded presence in Africa.

The China advantage

There are several key features that give Chinese contractors an edge over their predominantly Western competitors in developing countries. First and foremost is cost. Chinese labour could cost a mere 5 per cent of the compensation given to counterparts from the US and Japan. Additionally, Chinese firms are able to source inputs cheaply, such as generators, turbines and cement, from manufacturers at home, to forward massive cost savings on to clients in developing nations.

The experience and adaptability of Chinese contractors confers another advantage in developing nations. Firms often bring many of their own workers on-site who are first trained at home prior to expatriation. This experience and training enhances the skill-level of Chinese contractors beyond that of competitors. The increase in Chinese outward direct investment (OFDI) also provides opportunities, as Chinese firms in other sectors often turn to their compatriots for construction projects abroad.

Challenges and the future of Chinese design

Chinese design and engineering firms will be part of the next wave in China's development overseas. Although still lagging behind their domestic counterparts in construction due to globally incompatible Chinese standards, here too, China is improving rapidly.

China's design firms have learned from foreign involvement at home, which increased substantially in the run-up to the Beijing Olympics. This event advanced China's knowledge of the more innovative and modern EPC (Engineering Procurement Construction) and EPCM (add Management) techniques. This extension will greatly assist China's ability to compete for projects in the petrochemical and metallurgical industries, where knowledge of the intricacies of specially made high-tech components are not easily transferred between contracted entities.

Bolstering the transition of China's design firms is a wave of newly-trained engineers. An influx of new graduates in engineering will gradually replace the current set of ageing managers who gained their experience in the old Chinese system of strict regulation. The addition of new minds will enhance the innovative repertoire of Chinese designers and contractors.

With improving design capabilities, and through its distinguished contractors, China is set to influence economic development internationally. As the economist Jeffrey Sachs once put it, "China gives fewer lectures and more practical help". It has long since been the goal of global leaders to eradicate uneven living standards and to blur the division between developed and developing economies. Silently and largely unrecognised, Chinese contractors and design firms press on, doing their part, one brick at a time.

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