China State Construction and its counterparts are becoming important players in the Middle East by winning contracts for railways, power plants and prestige towers with competitive prices.
Chinese build up a firm foundation
First came the Japanese, then the South Koreans and now it's the Chinese. After years of watching some of their Asian neighbours gain clout in construction and engineering in the Middle East, Chinese contractors are building up their presence.
Companies such as China State Construction, Beijing Construction and J and H Curtain Wall are securing more contracts with their competitive pricing and ability to self-finance some projects because of their connections with banks back in mainland China. Between 2001 and 2003, Chinese contractors had just one contract in the Emirates, but their presence has been steadily rising since. In the past two years, Chinese contractors had a total of 18 major projects worth Dh4.8 billion (US$1.3bn), according to data from Proleads, an industry data provider. These companies had 2.3 per cent of the UAE market last year. Companies from Korea and the West maintain the lion's share.
Slowed by perceptions of doing low-quality work, Chinese companies initially had some difficulty breaking into many markets as builders. Instead, they focused on supplying building materials and chemicals. But gradually the companies have been winning bids, including some of the most prestigious and lucrative projects to be recently announced. The China Railway Construction Corporation, in connection with a French firm, won a $1.8bn contract last year to build a high-speed rail link between Mecca and Medina. In the capital, Chinese companies have also won work on the Sun and Sky Towers on Reem Island. "With Chinese construction companies being very cost competitive and proving they can execute projects in any sector within the relevant constraints, they are certainly here to stay," says Emil Rademeyer, the director of Proleads.
One competitive advantage is the link between these companies and the cash-rich Chinese government and banks back in Shanghai and Beijing. Construction companies, like businesses across the spectrum, have been hard hit by the contraction in lending by financial institutions. Contractors are often required to issue a performance bond as an insurance policy to their client that they will finish the work as required.
"The ability for the large China-related contractors is greater because they have deeper pockets," says Martin Seward-Case, the UAE chairman of the Royal Institution of Chartered Surveyors. "It has become more difficult in the last 18 months for established contractors to get the level of bonding - the performance guarantees - because banks have become more aggressive in their terms." He says the financial crisis has created a "significant change in the industry structure", providing an opportunity for well-capitalised companies to gain market share.
The UAE push from Chinese companies comes as the two countries create more economic ties. In August, Sheikh Mohammed bin Zayed, Crown Prince of Abu Dhabi and Deputy Supreme Commander of the UAE Armed Forces, made a two-day visit to China to meet Wen Jiabao, the premier, in a sign of the growing trade between the two countries. Economists from the IMF predicted that a rise in oil prices and a recovery in China in particular would benefit the Emirates in the year ahead. Even Chinese tourists have started flocking to Abu Dhabi and Dubai in greater numbers. Emirates Palace has experienced a 600 per cent increase in guests from China in the first part of the year. This has helped counter, in part, a decline in western tourists in the past year. In the past two years, China's government has put a priority on increasing trade with countries that are rich in commodities, including oil. In Angola, which produced 1.9 million barrels per day (bpd) of oil last month compared with Abu Dhabi's average of 2.8 million bpd, Chinese companies are paving new roads, building apartments and industrial plants.
Ben Simpfendorfer, an economist at Royal Bank of Scotland and the author of The New Silk Road: How a Rising Arab World is Turning Away from the West and Rediscovering China, says China's booming economy has produced dozens of large-scale construction giants and manufacturers that are now looking for ways to expand into the rest of the world. "Construction companies face growing competition back home," he says. "In the last six months, I have seen a genuine increase in activity in the Middle East, especially in anything that is energy related."
Mr Simpfendorfer also points to the key role played by Chinese banks. "It's just like the Japanese in the 1980s and the Koreans in the 1990s," he says. "The Chinese are coming in and are having success on competing on price. The difference is that the relationship between the companies and the banks is tighter than with the others." The rise of these companies in the construction sector echoes the recent Chinese surge in the energy industry. China rapidly built up its electrical-generation capacity in the past 10 years to 900,000 megawatts.
But as domestic supply began to meet the demand for new power plants and generators, the Chinese manufacturers of this equipment began to look outside for new clients. Paddy Padmanathan, the chief executive of ACWA Power in Saudi Arabia, says that at first no one wanted to use a company from China because they were untested, but now they have emerged as one of the fast-growing groups in the sector.
In July last year, ACWA Power awarded its first contract to a consortium of Dongfang Electric Corporation and Sepco III Electric Power Construction to build a 1,200mw oil-fired power plant in Saudi Arabia for $1.7bn. Now ACWA Power has a procurement office in China and is looking at using companies there for more projects in the region. The difficulty is that Chinese companies do business in a different manner than in the West, but the two sides are getting to understand each other better, he says.
This article has been amended to reflect an earlier error that stated Etihad Towers in Abu Dhabi used a Chinese construction firm. The National regrets the error.