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Chinese Companies and the International Engineering Contract Market in the 21st Century

时间:2010-03-03  来源:  Author : CHENG Hongqun, ZHANG 点击:


The international engineering contract market is a platform for competitive bidding for various kinds of engineering projects by corporations from different countries of the world. These corporations are legal entities appointed by the host governments to undertake specific engineering projects according to international procedures and regulations.

The application of advanced technology has enabled building contractors from the West to corner a major share of the overseas market for large engineering projects. They are expanding their scale to improve their technology and management, and to strengthen their competitive power in the international engineering contract market. Economic globalization has increased the competition in bidding for international engineering projects. In 2003, the overseas contract value of the top 225 global contractors was $139.8 billion (Reina and Tulacz. 2004).

International contractors, including Chinese companies, compete to enlarge their share of the global contract market by means of various strategies. After joining WTO, Chinese companies face more challenges as well as more opportunities than before. This paper analyses the current situation and trends of the international contract market as well as the character of Chinese companies. It will propose measures that may assist Chinese companies in bidding for international projects.

The International Engineering Contract Market

A build-operate-transfer (BOT) contract is an agreement between an investing company and the host government by which the former will build and operate an engineering project for an agreed period before transferring ownership and management rights to the host government. The company has the responsibility to raise the necessary capital in the international market and enjoys management rights and profits during the contract period. The BOT mode also includes two other forms such as build-own-operate (BOO) and build-own-operate-transfer (BOOT).

As a form of management and investment, BOT allows a company to mobilize capital resources to build an infrastructure in a country and in turn to allow the host country to assume ownership after the period of contract. With economic globalization and the availability of increasingly advanced technology, the number of capital-intensive projects that will come into the contract market is likely to increase. The BOT mode is an innovative form of development that guarantees the dependability of projects and allows the contracting companies to gain ready access to the financial market, and at the same time yields economic benefits to both contracting parties (Reina and Tulacz, 2004).

BOT is widely used in more than 100 countries and is becoming increasingly popular especially in Eastern European. It involves international co-operation and requires knowledge and experience in engineering, technology, law, finance and a host of related fields. It is characterized by substantial capital investments ranging from several hundred million to billions of dollars, and an extended period of operation lasting from 10 to 40 years.

In September 1999, the international construction industry federation revised and published new contract terms including clauses governing the work of design, building and delivery of projects. The new terms require that contractors be competent in a range of expertise in designing, bidding, building and even post-delivery servicing of construction projects.

Internationa! engineering projects include not only civil engineering but also other specialized areas of work such as investment planning, project design, technological consultation, .nternational financing and purchase, recruitment of labour, project management and staff training.

The international engineering contract market is a typical buyer's market and competition is intense. Of the leading 225 global contractors, the proportion from developed countries such as US, Europe, and Japan declined from 81 per cent in 1991 to 67 per cent in 2003, while the share of revenue fell from 92 to 87 per cent (童继生 / Tong Jisheng, 2003; Reina and Tulacz, 2004). International contractors have to compete in the world market through their own strength in such areas as funding, experience, technology, management, cost and services.

With the increasing number of large-scale projects coming into the global contract market, international engineering corporations are paying greater attention to improving their management and enlarging the scale of operation in order to be competitive. In 2003, the turnover of the top 225 global contractors increased by 20 per cent over that in 2002, and the average rate of profit also rose slightly. This could be the result of merging among international engineering companies. In future, mergers and joint operations between major corporations may become more common as they seek to adjust their corporate structure to improve their overall strength and competition.


China's Entry into the International Market

China first entered the international construction market in 1979 and had since recorded many achievements. Chinese companies initially carried out engineering projects in the Middle East and North Africa in the 1980s, and subsequently expanded to more than 180 countries and regions including developed countries. Of the 225 leading global contractors in 2003, 47 were Chinese (Reina and Tulacz, 2004). Although ranked only below the US and Europe in terms of number, the contract value of Chinese contractors was only $8.3 billion or a mere 6 per cent of $139.8 billion of the contract value among the global contractors. Among European countries, Sweden's Skanska AB alone, whose contract value was $26.6 billion, exceeded the combined contract value of 47 Chinese companies. Although China ranks among the top 20 in the global construction industry, it is facing increasing competition in the domestic market. With China's entry into WTO, the domestic construction market is becoming rapidly "internationalized".

Chinese international engineering projects are mainly concentrated in building construction, communications and transportation, petrochemical industry, and power industry. Their respective percentage shares of the contract value in 2003 were 28.7, 24.7, 20.6, and 6.9 per cent. In addition, manufacturing industry accounted for another 8.6 per cent, and the remaining 10.5 per cent was contributed by projects in sewage disposal, electronic communications industry, water supply and others (李启明 / Li Qiming et al 2001).

Despite considerable progress in the international market in the past three years and with projects in more than 180 countries, Chinese companies are still largely concentrated in their traditional markets of Asia and Africa. In 2003. half of their contract value was derived from projects in Asia, almost a fifth in Africa. 8.4 per cent in Europe. 4.7 per cent in North America, and only 1.2 per cent in Latin America. In terms of countries and territories, more than four-fifths of the projects are in Pakistan. Sudan. Algeria, and Hong Kong. In the case of Malaysia, the contract value as mereh 1.1 per cent of the total (童继生 / Tong Jisheng, 2003).

More than 1.600 Chinese companies have the required qualifications to carry out international engineering contracts but the dominant ones are large-scale enterprises, such as China State Construction Engineering Corp (CSCEC). The total contract alue of the 47 Chinese companies that ranked within the "Global 225" in 2003 contributed 60 per cent of the total international contract value of all Chinese companies with the top ten accounting for almost 40 per cent (Reina and Tulacz. 2004).

After several decades of competition, more Chinese enterprises are able to compete successfully in bidding for large projects. In 2003, the aggregate value of individual projects with a minimum contract value of $50 million amounted to $6,630 million. Among these projects, the contract value of 18 projects exceeded $100 million.

Some Chinese companies have won contracts in Europe and America. The American subsidiary of CSCEC won a bid to build a high school and the technical centre worth $21.9 million in September 2002. In 2003, it was awarded contracts to build a subways station in New York and a hotel project management in Manhattan. The China Metallurgy group was awarded a contract by an America company in 2004 to build a factory for $402.5 million.

Along with the growth in the demand for energy in China, Chinese petroleum and natural gas companies are bidding for projects with large contract values in the petroleum chemical industry. These companies are making progress in developing their overseas services. Three regions in North Africa, Central Asia and South America and centring respectively at Sudan, Kazakstan, and Venezuela, are emerging as important markets for these companies. Similarly, in heavy and mining industries, Chinese companies are venturing overseas to bid for projects. In 2004, Baoshan Steel Corporation signed an agreement with a Brazilian corporation, which is the world's biggest iron ore producer, to conduct a feasibility study for a SI50 million integrated iron and steel complex. A similar contract was concluded with Angola whose contract value is $200 million (李启明等 / LiQiming tVa/,2001).

Strategies of the International Engineering Companies of China

In recent years, China has increased its share of contracts for large-scale international engineering projects though the absolute volume is relatively low compared with those of foreign corporations. At present, total global engineering contracts are worth about $1,000 billion each year. The overall contract value of international engineering projects of Chinese companies was about $13.8 billion in 2003, accounting for 1.3 per cent of the total international project contract value. Chinese companies are still not able to compete with those from many countries. Their contracts are also relatively small. The contract value of the 47 Chinese companies within the top 225 global contractors in 2003 was only $8.3 billion, whereas that of the six Korean companies in this elite group was $2.7 billion. Clearly, it is only through strengthening their competitiveness that Chinese companies will be able to win a larger share of the international market and to raise their turnover and profits.

In the increasingly keen competition for international engineering projects, financing ability is one of the key factors in deciding the outcome of bids. Most international engineering companies are capable of handling project financing and project management. However, most Chinese companies still keep to traditional management style. Not all companies possess the necessary qualifications and can only bid for projects in the domestic market. In the face of changing circumstances, these companies should rationalize their management structure by getting rid of useless assets, optimize the use of capital, and to adopt advanced management techniques (崔旭旺 / Cui Xuwang, 2004). They should aim at becoming integrated multinational corporations capable of dealing completely in design, building and management whether in domestic or foreign markets.

Both profits and risks are high in the international engineering contract market, especially for large-scale projects involving substantial investments and long construction time. It is vulnerable to delays and damage by unforeseen events. International projects of Chinese contractors are confined largely to developing countries where the relative absence of political and economic stability may multiply the risks to investment. Terror attacks on Chinese contractors in Middle Fast in 2004 are not only reminders of the importance of securin but also brings great damage to Chinese companies. The urgent need to establish an insurance system is obvious.

In the competitive market, it is indispensable for Chinese international contractors to utilize modern managerial skill to improve their management. Much depends on the competence of professional personnel in a diverse field of expertise in management, finance, insurance, law, foreign languages, and familiarity with international practices. One of the basic needs is the ability to constantly upgrade their knowledge through training and exposure to new ideas (刘颖琦 / Liu Yingqi and 李海开 / Li Haisheng, 2004).

Technological innovations play a crucial role in the development of the construction industry. In this regard, there is a considerable technological gap between companies in China and elsewhere. It is imperative that Chinese companies pay full attention to technological innovations and adopt advanced technology in order to switch from labour-intensive to intelligence-intensive methods based on scientific and technological progress.

Information and communications technology is the leading technology in the 21st century. A successful international engineering company must exploit the ability to access and to utilize all types of information management in the course of its operation and management as well as to arrive at scientific and accurate decisions.


With the spread of economic globalization, competition for international engineering projects is becoming increasingly intense. Chinese international engineering companies will have to face this competition within the terms of WTO. A sure way to meeting this competition and to succeed is for Chinese international engineering companies to be fully aware of new developments and changes in the international project contract market and to adjust their management strategies accordingly.


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