Tuesday, June 18, 2013

Two stories about Chinese construction firms competing in the international market

[1] Chinese firms invest in emerging markets energy for EU toehold, 11
June 2013, Reuters News, by Maja Zuvela

[2] Build it up
17 June 2013, Global Times
Zhang Ye


[1] Chinese firms invest in emerging markets energy for EU toehold,
11 June 2013, Reuters News
By Maja Zuvela

STANARI, Bosnia, June 11 (Reuters) - When China's Dongfang Electric
Corp. bid to build the Stanari power plant in northern Bosnia, the
strategy was simple: sacrifice profits for a toehold in emerging Europe.

Against little competition from European investors still hurting from
the debt crisis, Dongfang's offer for the 550 million euro ($713.18
million) Stanari plant was too good for its project managers, UK-based
Energy Financing Team, to refuse.

"The logic was clear," said Savo Markovic, head of the 300 megawatt (MW)
plant where construction began in May. "Dongfang offered to carry out
the job at almost half the cost and the China Development Bank lent 350
million euros for the project at favourable terms".

It's a trade-off increasingly occurring as Chinese firms take on
discounts and risks in exchange for access to central and southeastern
Europe. The Balkans and neighbouring regions offer economic growth,
looser regulation - and a place at the gates of the European Union for
firms that can help countries progress to EU power generation standards
and EU membership.

"Chinese companies are clearly searching for an entry point into Europe
and they see the region as an entry point into Europe," said Gabor Gion,
Deloitte's Central Europe Chinese Services Group Leader.

"They are willing to spend the money when the rest of the world is in
need of money. This is a perfect match".

For Dongfang the Stanari project was indeed a strategic fit.

"We were ready to lower our profit margin as we are hoping the project
will serve as a springboard for expanding our market strategy," said Hu
Minsheng, the Dongfang project manager. "We are interested in exploring
the market in Bosnia and surrounding countries and unexploited hydro

Bosnia is particularly popular because it is one of few Balkan nations
able to export electricity due to significant hydro power, which can
store surplus, and is seeking the cash and know-how from foreign
investors to enable it to expand.

China's state-run hydro power engineering firm Sinohydro was picked to
build a 35 MW 120 million Bosnian marka ($79 million) plant on the
Neretva river, and five Chinese firms are short-listed to partner
Bosnia's top utility EPBiH in a 450 MW coal-fired plant worth 1.5
billion marka - the country's largest investment since the end of its
1992-95 war.


According to Chinese Ministry of Commerce figures cited by consulting
group Deloitte, the value of all Chinese investment in Europe grew to
$77 billion in 2012 from $59 billion in 2010.

If similar trends continue, that figure could rise to $100 billion in
2014 with about half the total amount flowing into emerging Europe,
stretching from the Balkans to the Baltics.

Underscoring China's ambitions in central and southeastern Europe,
former Chinese Premier Wen Jiabao announced last April the opening of a
$10 billion credit line and $500 million investment fund dedicated to
increasing trade with the region.

Experts say the energy sector in particular is drawing China's interest
because so much of that part of Europe is still dependent on aging,
polluting coal-fired power plants.

Polish boiler maker Rafako, for example, has recruited North China Power
Engineering to its consortium to build a 900 MW coal-fired power unit
for Polish utility Tauron at its Jaworzno site.

But the need is most acute in the Western Balkans where mostly state-run
utilities have invested little since the wars of the 1990s when many
power plants, grids and other energy infrastructure were destroyed or
badly damaged.

As a result, Balkan governments have offered concessions such as
building and land rights - allowing ownership to companies over a period
of years before they must be handed back to the State - as well as
simplifying regulations relating to planning and permits.

"The region is getting more interesting for the Chinese because of less
strict public procurement procedures," said Zeljko Lovrincevic, analyst
at Croatia's Institute of Economics.

"Chinese firms... are not strictly profit-driven. They look at a project
as an opportunity to expand business presence and engage part of their
own workforce," he added.

Close historical links also help. China was a staunch supporter of
Yugoslavia's communist regime and maintained strong links with the
states created after its break-up - particularly Serbia, which opened
its doors to Chinese immigrants and goods during a time of international
isolation in the 1990s.

In return, Serbia has received substantial Chinese funds, including a 1
billion euro soft loan from Export-Import Bank of China in 2011 to
upgrade its national power grid. It is currently negotiating another
loan to add a new unit at the Kostolac coal-fired plant and Serbian
power utility EPS is in talks with China Environmental Energy Investment
Ltd and Shenzhen Energy Group Co Ltd. on a 2 billion euro investment.

Montenegro also hopes to attract more than 1.5 billion euros in Chinese
investment, half of that into the energy sector.

Slovenia is the only Western Balkan nation to have become an EU member.
Croatia will join the bloc next month, Montenegro has started membership
talks and Serbia expects the go-ahead to start the talks soon.
Macedonia, Albania and Bosnia are all at earlier stages of the process.

For Dongfang's Hu Minsheng in Bosnia, winning projects on the edge of
the EU is a step towards striking deals inside it.

"This is our pioneer project on European soil and we... want to expand
our market Europe-wide starting from this project. We have to prove here
that Chinese companies can do a good job."

(Additional reporting by Petar Komnenic in Podgorica and Michael Kahn in
Prague; Editing by Sophie Walker)

[2] Build it up
17 June 2013, Global Times
Zhang Ye

Governments around the world used to employ Chinese construction firms
just to build bridges, railways and other infrastructure projects. But
now they want them to invest in them and run them too.

"In the past, we would just go abroad with machines and technical teams,
building what customers wanted and waiting for the payment," Zhao Hui,
who has been working in infrastructure construction in Africa since
1998, told the Global Times.

But recently, some of China's major contracting markets, such as
countries and regions in Africa, have offered a warmer welcome and
greater government support to firms and investors who offer abundant
capital, he said.

At the 4th International Infrastructure Investment and Construction
Forum held in Macao from June 6-7, ministerial-level government
officials from 26 countries and regions said that they want Chinese
contractors to invest in the projects, as well as building them.

The officials said that they have many necessary infrastructure
projects, but that they lack the funds needed to undertake them.

Facing this change in the market, domestic contractors need to develop
and move beyond the traditional model of labor-intensive construction,
said Diao Chunhe, chairman of the China International Contractors
Association (CICA) during the forum.

Time to change

Infrastructure construction projects typically require considerable time
and financial investment, which governments of many countries simply
cannot afford, James Stewart, chairman of global infrastructure practice
with KPMG, told the Global Times.

The Indian government, for instance, has announced $1 trillion worth of
investment in infrastructure development over the next five years, 50
percent of which is expected to come from private institutions and
foreign investors, Stewart said.

Indonesia has opened up 28 PPP (public-private-partnership) projects to
investors around the world. PPP is a private business venture, which is
operated through a partnership between a government and the private sector.

Dedy S. Priatna, deputy minister at the Indonesian Ministry of National
Development Planning, said at the forum that the government intends to
offer increased support for the development of local PPP projects.

Both PPP and BOT (build-operate-transfer) models require firms capable
of constructing as well as financing and operating the project, and this
constitutes a sustainable development direction, said Diao.

In addition to the changing business environment on the ground,
diminishing returns from the traditional contracting model have also
made it necessary for domestic firms to adjust their approach.

The traditional contracting practice mainly relied on price competition
when labor and material costs were still low, but now that advantage is
disappearing, Liu Jinzhang, vice president of China State Construction
Engineering Corp (CSCEC), said at the forum.

"As well as tightened profit margins amid increasing operating costs, we
are also suffering from some governments' delayed payment," Zhao said.

Long road

Rather than waiting for payments for low-profit construction, many
Chinese contractors are planning to invest in infrastructure
development, and some of them have already made good progress, said Zhao.

Sinohydro Group, a domestic hydropower station construction firm, has
invested over $6 billion in dozens of projects in countries such as
Cambodia and Laos.

Among these investments, three projects have been completed and come
online, bringing the company an annual sales income of more than $100
million, said Sheng Yuming, deputy general manager of the company's
overseas business department.

Liu from CSCEC noted that his company plans to invest over 200 billion
yuan ($32.6 billion) in global infrastructure development every year.

Chinese companies "have lots of financial capacity" and easy access to
Chinese or international financial institutions, which is a competitive
advantage over foreign peers who are struggling with insufficient
financial capacity, said Stewart.

But there is still a long way to go in transforming the country's
construction contracting sector, said Zhao. "We know how to construct
sophisticated buildings from the ground, but do not know so much about
capital operations."

A report by KPMG released in June indicated that Chinese companies were
concerned about unclear investment targets and strategies.

Even though they can find promising projects and make clear plans, many
Chinese contractors will still have a hard time carrying the plan out,
said Diao.

A lack of sufficient understanding of local laws and cultures is also a
problem, and some Chinese firms have faced labor disputes in overseas
markets, he noted.

When he first began doing business in Africa in 1998, Zhao saw Chinese
contractors receiving a big welcome and lots of respect, but now they
are less popular, due to occasional cultural conflicts and breaches of
local laws.

A Chinese contractor receives a court summons in Africa almost every
week, he said, while firms from the UK or US seldom suffer from such
disputes, largely because they prefer to rely on local people to manage
the company's operations and personnel.

New management needed

Chinese firms lag behind their foreign peers in informatization of
management, meaning they are incapable of leaving the reins in the hands
of their local employees, said Diao.

Such a management model centers around applying modern information
technology (IT) to production and operations, aiming to enhance
enterprises' efficiency and competitive strength.

Applying this strategy would enable staff in Beijing to manage and
control business in remote corners of Africa efficiently and
effectively, which would save Chinese contractors a lot in operating
costs and boost their upgrading and transformation, said Zhao.

But some emerging markets have poor communication conditions, making
this system harder to pursue.

Internet bandwidth in some African regions costs more than in China, but
network speeds are much lower, making it difficult for Chinese firms to
deal with daily work via the Internet.

Additionally, poor communication across regions has hindered the ability
of domestic firms to cope with emergency situations, such as the civil
war in Libya, said Wang He, vice chairman of the CICA.

But it is impossible for firms to build up overseas communication
networks on their own, said Diao. "Therefore, the CICA plans to help
firms out, in partnership with domestic communications companies," he noted.

For instance, the China Satellite Communications Co could achieve
enhanced communication via access to local satellite receiving stations,
which is faster and safer than other kinds of communication networks,
according to Diao, who said that "a pilot project is expected to be
launched in Angola, southern Africa."

"But the project is still at the research phase," he said, suggesting
that its future prospects are hard to predict.

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