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The challenge of China

CHINA

The West's fascination with China began when Marco Polo returned to Venice after a 24-year journey to the Far East. Some 800 years later, China's appeal is even greater as its surging economy creates a wealth of opportunities.

Alasdair Reisner talks to UK construction rms, manufacturers and engineers hoping to protit from the boom

IT HAS become very fash ionable to get excited about construction in China. The past couple of years have seen a hubbub of excitement in the industry about the People's Republic, either from steel contractors worried about rising prices as China sucks up the world's supplies of scrap or from architects dreaming of grander and grander schemes for airports, sports stadia and even whole cities.

The Chinese are, of course, past masters of the building arts. It is, after all, a country that had the confidence and technical expertise in the 15th century to build a 6,700 km-long wall along its borders. More recently some of the country's state-sponsored contractors have started muscling into international rankings, touting for trade in the global marketplace.

Yet despite the wealth of home-grown building talent, some UK firms see opportunity and have dipped their toes into the Chinese waters.

'What is so attractive is the change that is going on in the market, ' says Francis Budge, regional development director for water in China for consultant Halcrow. The firm has worked in Hong Kong since 1978 but only recently made the jump onto the mainland, forming its first wholly-owned company in the country last year.

'China has grown to the point where it is outstretching its massive internal resources. Despite its huge population, it is running out of skilled labour.

It is estimated that by 2007 China will be a net importer of people, particularly from India, Thailand and the Philippines. We are talking about something like a 1,000,000-head shortfall each year on a compound basis, ' says Mr Budge.

He adds: 'The Chinese are terrified they will not have enough skilled resources, because the scale of works is so vast. Look at the expressways and railways and ports and bridges: the scary thing is that we really haven't seen anything yet. Just today there was a story on the front page of Shanghai Today saying that 120 km of metro lines will be built in the city for the 2010 Expo and then there is all the work for the 2008 Olympics.' Certainly the building work for the Beijing Olympics has turned the world's attention onto China's booming const ruct ion sector and , with the Olympics to be followed in short order by the World Expo and Asian Games in 2010, both of which will involve large construction programmes, that focus does not look set to shift any time soon.

But these spectacular events are just the tip of the iceberg. China has an ongoing construction spend in the order of £200 billion a year, making it one of the largest global construction markets. The Hong Kong Trade Development Council estimates that around 15 per cent of this business has overseas firms involved in its delivery. And many of these are British, according to Douglas Barrett, director for Africa and Asia Pacific at the British Consultants and Contractors Bureau and former deputy commercial consul at the British Consulate in Shanghai.

'There are certainly plenty of British firms out there, ' says Mr Barrett. 'The UK is the largest single investor in China from the EU and has been involved in a number of huge infrastructure projects. British f irms have been involved in a massive boom in work on China's east coast, specifically in the Pearl River Delta, Yangtze River Delta and the Bohai Rim.' So which firms are making their way in China?

Leading the charge are the consultant engineers.

Besides Halcrow the major firms out there include Arup, Atkins, Scott Wilson and Mott MacDonald.

Cost consultant Gleeds has just opened a second off ice in the country.

But what about the contractors?

Scott Wilson China director Peter Chan says: 'UK contracting companies are not very active in China, although many Hong Kong firms that have UK roots have established themselves. Firms from France, Germany, Japan and the USA are here mainly serving the foreign direct investment market. I believe Costain and Balfour Beatty have been having a look, too.' Tom Goldberg is the chairman of the AWI group, an independent offshoot of steel firm Atlas Ward. His business has been operating in China since 1994, working for international clients such as Proctor & Gamble, Shell and ICI. During that time he has seen a lot of UK firms show an interest in working in the country.

'Over the past 12 years we have seen UK firms come and go. Taylor Woodrow, Kier and Costain have all had a go. But generally speaking there are no UK contracting firms out here. The UK contracting industry has drawn its horns in globally, which is a great shame, ' says Mr Goldberg.

If main contractors from the UK do attempt to have a crack at the Chinese market, as Laing O'Rourke is doing, they would be foolish to try to play the country's contractors at their own game.

'There is no point sending people out to tell the Chinese how to pour concrete. They are already very good at that, ' says Arup director Peter Budd, who has worked on major airport projects in China including the new Beijing International Airport. 'I think any offering has to be about project management and international procurement techniques. The Chinese have ident if ied this as an area where they can benefit from other countries' skills. They are currently putting whole rashes of graduates through European and Amer ican management programmes but they don't seem to th ink they are up to standard yet, so there is definitely an opportunity to help them, ' says Mr Budd.

Scott Wilson's Mr Chan gives a rundown of what the Chinese are looking for from foreign contractors.

'The sk ills and technologies required by the Chinese include niche services not currently available in China, such as project management, safety systems, new construction techniques, new materials, building services and architecture. These are all typical demands for a developing country, ' he says.

One firm that is look ing to capitalise on the market for project management skills is Mace. The firm has been operating in Macau since 2003 but is now looking to burst onto the Chinese scene.

Barbara Welch, Mace's operations manager in Asia, explains how.

She says: 'Our ideal client would be foreign direct investors. China isn't a very easy market to get into.

We are looking to work for large, international corporate firms, some of which are from our exist ing client base in the UK.' She believes one of the major challenges to overseas firms is the rigid law contractors have to conform to if they want to work in China , a point also made by Liu Mengjiao, country manager for China at the Charted China facts n China's population hit 1.3 billion in 2005, with a birth rate growing at 1.2 per cent a year.

Last year the Chinese economy grew by 9.9 per cent.

Investment bank Credit Suisse forecasts that the country's economy will grow by 10 per cent this year.

China's gross domestic product is US$2.26 trillion.

China's steel exports hit a record 2.81 m illion tonnes in March, up 27 per cent on the previous year. Steel imports fell 30 per cent to 1.79 million tonnes.

Institute for Builders. 'The legal framework in China is an issue for UK firms. It is quite different from that of the UK and , as China is still moving from a planned economy to a market one, there are many obstacles for foreign firms.

'UK firms need to understand this and be patient, ' says Ms Mengjiao.

One project manager working in China details how legal issues typically arise. He says: 'Licensing is quite a challenge. There are many grey areas. Until recently, I think my business was, theoretically, operating illegally, because it was unclear precisely which licences we should hold for the work we were doing.

China is one of the most regulated countries in the world. Any company wishing to work in construction needs to hold one of six licences: construction contractor; design institute; construction inspector;

construction supervisor or pricing consultant.' Recently, even project management work, previously exempt from regulation, was brought under licence, forcing firms to get signed up if they wanted to work in this field.

Last summer a second change in the law opened the door to more overseas construction firms. Whereas previously firms had been able to work in China under licence on a project-by-project basis without actually having a permanent base, now firms have to make a commitment to the country. Under Decree 113, any firm wishing to work in China must set up a construction company there, either as a stand-alone firm or as part of a joint venture.

This company can then apply for the same six licences that have to be held by domestic firms. But in order to receive the top class of licence, which is required to win work on the largest of projects, the firm must deliver a considerable level of commitment of capital ? up to £20 million ? into China.

The newly-formed company must also employ local labour and is liable to local law and taxation.

'Its all a bit chicken-and-egg, ' says another source.

'It is difficult for companies to get work without investing in the country but it is also difficult to convince your board to invest in China until you have won some work.' One firm that has been convinced by the opportunities presented by the Chinese market is JCB.

Last year it announced it had started building its first plant in Shanghai. Just a year later the plant, which is expected to produce backhoes and small midi excavators, has been completed and is set to start feeding the voracious demand for construction equipment in the country.

'It is a market with huge potential so the question for JCB has always been 'how' and not 'if' we enter the Chinese market. We wouldn't disclose our market goals but we clearly want to establish JCB in the urban maintenance sector that we are targeting with our compact machines, ' says JCB chief executive and managing director John Patterson.

'The main challenges we face are the recruitment and retention of staff. There are so many firms investing in China at the moment there is fierce competition to employ the best people, particularly at the management level. But, once you recruit and train staff it then becomes very difficult to retain them.' But perhaps to talk of UK firms entering the Chinese market is looking at the issue down the wrong end of the telescope. China already produces 60 per cent of the world's engineers and is expanding into the global market.

'When I first moved to China I was dealing with guys that were old enough to be my grandfather, ' says Arup's Mr Budd. 'Now it's young guys who have done their training overseas. The next generation after them will be even more international. English is taught at primary school. At this rate they are going to be employing me, not the other way around.' 'The Chinese are already embedded in a lot of places around the world, such as Africa and the Middle East ? even North America. I think we could do a lot worse than act as a centre for them to operate in Europe through the UK. They are going to come anyway.' Dr Kegang Wu is international trade and documentation manger at China Link, a body that helps trade between the UK and China. He says: 'The problem as it stands is that immigration laws would prevent Chinese firms working in the UK. They might win projects but they would struggle to get their full labour teams across to carry out the work. It's a oneway street at the moment.

'But I think it would help the efficiency of the UK const ruct ion market to have some Chinese compan ies working over here. The UK has a notorious reputation for delivering projects that are delayed and overbudget. That is not something that happens with Chinese firms.' The first signs of Chinese firms looking for work in the UK have emerged with China Harbour's bids for port work at Felixstowe and Shell Haven in Essex. The firm has also formed a joint venture with Costain, perhaps the first of many such deals between UK and Chinese firms.

So, who is to say? The next Chinese revolution might happen much sooner than you expect ? and right on our doorstep.