In China, enterprises in construction industry are organized into three categories: State Owned Enterprises (SOEs); Urban and Rural Collectives (URCs); and Rural Construction Teams (RCTs). The construction state owned enterprises in China dominate the domestic construction market as well as the majority of the shares of Chinese enterprises in international construction market. Therefore, Chinese construction SOEs involving with international operations are chosen to illustrate the developmental path of Chinese construction MNCs. The development of Chinese construction MNCs in international construction market may generally be divided into three stages as described below.
5.2.1 Chinese government's economic and technical aid: pre-1979
The economic and technical aid (ETA) to foreign countries, also referred to as
“development aid” in international journals, commonly refers to the endowments or the favorable loans with no less than 25% of endowments from one nation’s government to the developing countries or to the international multilateral organizations, in order to improve economic development in these countries. The Chinese government’s ETA for some developing countries prior to the 1970s was perceived as an important means for its international politics and foreign relationships in the particular historical background.
China’s ETA in this stage was to achieve the so-called objective of "liberation and independence of brother countries in the third world", other than to pursue as international business. During the time, the international involvement of Chinese construction firms is mainly for ETA projects in developing countries with the funds provided by Chinese government. These projects were agreed upon by the two governments and administered by the corresponding government authorities instead of independent enterprises. The Chinese construction enterprises undertaking ETA projects during this time became the pioneers of the Chinese international construction MNCs later on.
The ETA projects funded by the Chinese government normally included technical aid, financial aids, or a complete package of project aids. The complete package of a project normally consisted of project investigation, design, construction, and permanent equipments supply and installation. From 1954 to 1978, China had provided more than 1,300 complete packages of projects under ETA for about 70 developing countries, including North Korea, Viet Nam, Albania, Cambodia, Yemen, and Tanzania. Of these
projects, 884 projects were completed and 10 of which were with over Yuan 100 million investments (EOMC, 1989)(Table 5.1).
Table 5.1 Chinese government’s ETA pre-1979
Period
-1964-1970 555 70 10 313 31 3
1970-1978 509 101 8 470 59 7
Total 1307 202 19 884 96 10
Projects undertaken Projects completed
Source: EOMC, 1989
Essentially, these ETA projects did not technically constitute a part of works in international construction market for the following reasons: (i) the enterprises undertaking the projects were not motivated by the market place or profit-driven for the firms; (ii) all project costs and other expenditure was funded by the Chinese government, therefore, the firms did not bear any business risks, nor had they any decision-making activities on the managerial issues; and (iii) they also could not earn profit from the projects management whether the project cost went beyond the budget or not. However, the ETA projects during this stage did bring some intangible benefits for the Chinese construction enterprises involved in. These enterprises obtained the very rare chances in light of the then economic environment in China to secure the information about the international construction market and to set up the international connections with various foreign organizations, all of which became their advantages to contract overseas projects when they were allowed to bid the international projects later on. Meanwhile, the ETA projects also trained many technical and managerial personnel who became the elites when the Chinese construction firms would contract overseas.
5.2.2 Emergence of Chinese international construction enterprises
The Chinese construction enterprises began to contract the international construction projects and to export the contracted labor in the international construction market from the late 1970s. The affluent labor resources and the sufficient engineering and construction expertise in Chinese construction enterprises provided them the basic requirements to venture into the international market. Nevertheless, the large Chinese construction enterprises had accumulated some international working experiences through the ETA projects during the 1960s and 1970s, and the third boom of the international construction market in the late of the 1970s helped the initiation of the international involvement of Chinese construction enterprises. However, in strict terms, the international construction projects contracted with the Chinese construction enterprises in the very early stage may not be classified as the transnational business.
Almost all the enterprises contracting overseas were organized by the Chinese government and the participation of the international contracting had to be strictly approved by the related government departments whether the project would be profitable or not.
The Chinese construction industry started to reform in the early 1980s following China's open-door policy. On 13 August 1979, China's State Council introduced an Act which allows Chinese specialized companies to invest in other countries. In the construction industry, the government started to introduce regulations to help set the basic ground rules. At the enterprise level, the companies were gradually given the flexibility to operate as "commercial entities". Subsequently, several SOEs were separated from governmental departments, but they continued to work primarily for overseas financial aid projects until the mid-1980s. Soon after, SOEs at the central
government level (under the direct administration of the corresponding Ministries) were able to obtain licenses issued by the Ministry of Foreign Economic Relations and Trade to bid for projects in the international market. The operations of these enterprises from then on became independent of financial aid from the Chinese government. They participated in international bidding, tendered for commercial projects and negotiated with their foreign counterparts. Their motivation soon turned to one that is profit-driven from going abroad.
In November 1978, the first international construction enterprise in China - China Construction Engineering Corporation (formerly the China State Construction Engineering Corporation) was set up under the administration of the Ministry of Construction. During the same period, a few other SOEs in the fields related to construction under the administration of various ministries were actively initiating their international businesses; and these firms eventually emerged as the largest construction firms from China in the international construction market. For the sake of qualifications in bidding the international tendering projects, most of these firms could date their initiations back to the 1960s, when they were assigned many ETA works by the Chinese government as mentioned above. In fact, they were evolved from various government departments where their functions were taking the construction works in different specialized fields. Some of them had built up their expertise from their domestic working experience all over China, but some had accumulated their track records only from the overseas construction of ETA projects since they were originally established by the government as the windows to the foreign countries. Wherever they were originated from, their growth was phenomenal and their work scopes were not restricted to the original fields since the end of the 1970s. In 1979, 27 international engineering/
construction contracts and 9 labor contracts were signed by the Chinese international contractors with the contract value of only US$ 33.52 million and US$ 17.65 million respectively (Li, 1995), and most of these projects located in Middle East. Up to 1982, 27 Chinese construction companies were actively involving in the international construction market and they secured 755 international contracts with the total contract value of US$ 1.2 billion. Their business lines had covered about 45 countries’ market in Asia, Africa, America and Europe. The management of projects was eventually transformed to that of profit-driven and of independent from the governmental administration. This signaled the first stage of the transition and reform of the Chinese SOEs including those in the construction related sectors, and the prelude of the development of Chinese construction enterprises towards the MNCs began.
5.2.3 Development towards multinational enterprises
Since the early 1990s, some of the largest Chinese state owned construction enterprises had gained considerable experience in the international market. Subsequently, provincial-level and some other local companies from various areas in China were allowed to apply for the licenses to contract overseas. A number of Chinese international contractors were contracting a variety of construction projects in many developing countries, and their business grew fast in the international construction market. Soon after, the price-war among Chinese companies in some traditional markets in the developing countries such as Pakistan, Iraq and other Middle Eastern and African countries also commenced. The more experienced and larger companies expanded their businesses rapidly into the new markets in Central and South America, and Europe. By 1994, several Chinese construction firms recognized as the international contactors had
shaped up including the 23 Chinese firms listed among the top 225 international contractors by ENR (ENR, 1995). Thereafter, the more profitable firms were encouraged to list in the stock market following a strict evaluation exercise, which means they would no longer be protected by the government. Between 1997-1998, many construction SOEs were completely separated from their respective government organizations. Large scale SOEs were supervised by the Office of Large Scale State-Owned Enterprises under the State Council, while other SOEs were under the provincial or local governments. In terms of the management structure and the business strategies, the Chinese international construction enterprises have become a multinational development perspective from this stage. The top management set the long term and international business development strategies. They established the international networking in the construction market through their subsidiaries, representatives and project offices over the world. Although the foreign direct investment (FDI) of the Chinese international contractors are still very low comparing with their western counterparts, they have expanded their business presence in many countries with long term operating strategy, other than based on the one-off project running as before.
Figure 5.1 shows the value and components of overseas contracts won by the Chinese international construction firms in 1980-2000. It exhibits an average annual increase of 20% in 1990-1999 in terms of the contract value of overseas works. Up to 2001 the cumulative dollar amount of overseas contracts undertaken by Chinese construction firms since 1976 was reported to be US$127.867 billion (DFEC, 2002). Most of these overseas contracts were for civil engineering works in the developing countries. The involvement of Chinese construction enterprise in the international construction market are mainly in three categories: the construction project contracting, labor service and the
0 2 4 6 8 10 12 14 16
1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000
Year
Billion US$
Design and Consultancy Service Labor Service
Contracted Project
Figure 5.1 Components of overseas contracts won by Chinese international construction companies
Source: China Statistical Yearbook, 2000 and Department of Foreign Economic Cooperation (2001)
design & consultancy services. Overseas design and consultancy services were first offered by Chinese international construction companies in 1995. However, as shown in Figure 5.1, the amount from design and consultancy services contracts was small relative to the overall contract value.