Chinese Contactors Grapple With Risks of Working Globally

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This article was originally published on Engineering News Record on 08/27/2013. 

With 82.6% of their market share in Asia and Africa, Chinese construction companies working globally and in mostly unstable nations face unforeseeable risks that, if not managed properly, could weigh heavily on their business. Attacks on construction sites have pushed companies to adopt more comprehensive defenses and take further precautions for risk recovery and management.

Uncertainties aside, last year was a good one for Chinese contractors working globally, according to the China International Contractors Association (CHINCA), an alliance of companies that work outside China. Both the monetary worth of completed projects and new contracts grew by at least 10% over 2011, more than stabilizing the recovery from recession.

Zhejiang Construction Investment Group (ZCIG) had to learn about risky global business the hard way. During the 1990s, ZCIG had significant losses after attacks on its construction sites in Yemen and Sierra Leone. In recent years, the firm has been operating its biggest overseas branch in Algeria, where local instability creates frequent business interruptions. Two of ZCIG’s residential projects were attacked in 2011, during the Arab Spring. The equivalent monetary loss was more than $3 million, according to Gao Xingfu, the company’s CEO and board chairman.

After the most recent attacks, however, the company negotiated with the local government and was able to obtain compensation for most of the loss. “We are learning how to strike better deals with local governments,” Gao says. ZCIG also is taking more precautions against possible attacks and implementing more comprehensive procedures in the event of an attack, Gao adds.

Chinese companies completed overseas projects worth $116.6 billion last year, 12.7% more than the total for 2011, according to the CHINCA annual market report. Newly awarded contracts increased the backlog by 10%, to $156.5 billion, over 2011, the report says.

To forestall losses from attacks, some firms harden construction sites, which include worker housing compounds, and increase site security. “We are building sturdier and more concentrated sites for our workers to defend against future attacks,” Gao said. ZCIG also has detailed employee evacuation plans in the event of a sudden burst of conflict.

In addition to better risk management and recovery, Chinese firms working internationally have been exploring other ways to cut costs and stabilize operations.

Labor costs are weighing more and more on companies in light of the decade-long trend of rising wages for Chinese workers, both domestically and abroad. In China, the average annual salary of an urban worker more than quadrupled to 25,959 RMB last year from 5,854 RMB in 2002, according to the Chinese Academy of Social Science.

The dollar-to-RMB exchange rate, on the other hand, dropped to 6.3 RMB per $1 from 8.3 RMB per $1 from 2005 to 2011. Consequently, Chinese companies working outside China, which typically are paid in U.S. dollars, also have had to deal with the weaker exchange rate. Increased wages compounded by a weaker exchange rate have dramatically increased companies’ expenses for labor and cut further into profit.

The climbing labor cost is pushing companies with overseas operations to hire local labor or bring in crews from nations with cheaper labor than both China and the host nation. For instance, workers from the Philippines, paid in U.S. dollars, receive lower salaries than Chinese workers.

On top of increasing labor spending, Chinese companies have been absorbing the rising cost of raw materials and equipment. For example, the price of cement increased by 16%, to 332 RMB per ton, in China in 2011, according to an annual industry pricing report by WeFore Group, a Chinese-based research firm.

Costs of equipment and other materials, such as steel, have also gone up, the report says. The price instability adds to cost risks for Chinese companies working internationally because of their mostly exclusive supply chain for materials and equipment.

“Most Chinese construction companies working overseas are doing so through government-to-government aid programs, and part of their brief is to purchase Chinese-made construction equipment,” says David Phillips, managing director at Off-Highway Research, a construction-equipment consultant and researcher. “They buy this equipment either through specialist export houses based in China or through the export departments of the relevant Chinese manufacturers.”

Construction companies are seeking ways to diversify their material and equipment supply to dilute the risk of domestic price fluctuations. “We only purchase equipment of a special kind from sources other than from the Chinese domestic market at this point,” says Gao, “but we intend to localize our business aboard and start to localize our supply as well.”

Chinese construction companies also are seeking cheaper financing. They have long had the luxury of strong domestic funding from state-owned banks. In 2012, projects funded this way amounted to $88.9 billion, or 23% of all the overseas projects on which Chinese companies worked in that year, the CHINCA report says.

The cost of money, however, has been growing for the past few years, further burdening companies. For example, interest on a five-year loan increased to 6.55% last year from 5.76% in 2002, according to the CHINCA report. Chinese firms working globally are considering tapping further into the private lending market for better deals and more customized financing packages, CHINCA adds.

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