The Ascent of the Chinese Contractors
Hew Kian Heong -
Fifty Chinese international contractors made it into the 2010 edition of Engineering News Record’s “Top 225 International Contractors”. Despite the global economic crisis of 2008, Chinese contractors continued their ascent in this sector, increasing total revenue that year for the 10th consecutive year.
Hew Kian Heong
China State Construction Engineering, China Railway Group, and Sinopec Engineering ranked as the top three Chinese overseas contractors in 2008 according to statistics published by Engineering News Record.
According to China Daily in 2009, Iran and Venezuela were the two largest overseas markets for Chinese contractors, displacing the 2008 records set by contracts from projects in India, Libya and Angola. Transportation replaced building construction as the largest sector for overseas projects with a market share of 23.6 per cent last year, and it appears that this would be the trend going forward with the Chinese government keen to export its expertise in high speed rail. As reported in the China Daily, the housing and power industries followed with market shares of 19.7 per cent and 18.4 per cent.
The size and complexity of projects undertaken by Chinese contractors internationally continue to go from strength to strength. Some notable recent examples include: the Cambodian Da Dai River Hydropower Station Project, with a proposed installed capacity of 246,000 kilowatts awarded to the Gezhouba group in the first quarter of 2010; the award to China Railway Construction Company of the Libyan coastal railway project from Hums to Cyert, of about 352 kilometres, which will become an important part of the Arabian and African railway network; and the US$6.25 billion Algerian East-West Expressway awarded to CITIC - China Railway Construction Consortium.
The Policy Drivers
An undeniable reason for the resounding success of the Chinese contractors has been the role of the Chinese government in its overall foreign policy and economic strategy. The decade following China’s WTO accession has seen China rise to the challenge of globalisation in the form of the highly successful “Go Global” policy.
From the announcement in 1999 of this policy, the role of the Chinese State has evolved from facilitation services such as risk assessment and insurance, bolstered by high-level political trade delegation participation, to a more driving role, which has seen a dramatic increase in state funding through low-cost export credit facilities to many friendly governments for the development of their countries’ infrastructure. This work has been undertaken primarily by Chinese state-owned companies, but private sector participation and competitive tendering in overseas projects has also been encouraged. Over the past decade, SAFE, the foreign exchange regulator, and MOFCOM, the commerce ministry, gradually relaxed capital controls and brought in rules to allow Chinese contractors easier access to foreign exchange and capital markets. Other government agencies have supported SAFE’s push to facilitate funding for overseas ventures. Since late 2008, Chinese contractors have had access to domestice commercial bank loans for cross-border mergers and acquisitions and as of 2009, Chinese firms could issue dollar-denominated bonds in China for the first time.
As a result of these policy drivers, Chinese contractors have in recent years increased market share in their established overseas markets of Africa and South Asia and, building on their experience and track record in these regions, have moved into and become serious contenders in other markets like South-East Asia, the Middle East, Latin America and even Europe. Chinese contractors have also been prepared to go to markets that contractors from other countries are not prepared or able to work in, notable examples being Iran and Afghanistan. It is therefore unsurprising that in recent years Chinese contractors have started to dominate certain markets through a combination of factors, namely strong Chinese government support, very competitive pricing and increasingly their technical excellence and the ability to work in the most difficult environments.
The Opportunities for Law Firms
Given the clear policy support for Chinese contractors to go global, it is not difficult to see the enormous opportunities for law firms, in particular those specialising in projects and construction law.
It is generally perceived that, perhaps due to their relatively late entry into the international arena, many Chinese contractors do not have the same commercial and legal savvy as their international counterparts. This is understandable since many international contractors have a much longer history of working on projects where the main indicator of success is the profitability of the project. Even today, we hear of state-owned Chinese contractors who take on a project solely on the basis that it is their “national duty” to do so because the Chinese government wishes to establish or maintain good relations with a foreign government.
But things are changing rapidly. As China continues its transition into a market economy, contractors, even state-owned ones, have to be profitable to stay in business. Their leaders have to ensure this for their own political survival, because a company that does not stay profitable will have difficulties keeping their employees, and unemployment will cause political instability which the Chinese government leaders do not wish to see. Hence, more and more state-owned Chinese contractors are increasingly being run along commercial lines. This means that the management of commercial and legal risks is becoming more and more important. This portends significant potential demand for legal services among Chinese contractors, ranging from market entry advice, tendering, contract negotiations, contract drafting, and project advisory work to dispute resolution.
In some ways, there is greater scope for external counsel to become involved in advising Chinese contractors than international contractors. Many international contractors have over the years built up within their organisations well-resourced and experienced in-house commercial or legal teams that are more than capable of dealing with the bulk of their legal and commercial work, resulting in fewer opportunities to outsource work. Chinese contractors, on the other hand, are generally not so well resourced and experienced and therefore would need to rely more on external counsel.
Given this, law firms that are able to capitalise on the opportunities with Chinese contractors will do very well. It would, however, be naïve for any law firm to think that the door to this market is wide open. A law firm would still need to have something interesting to offer the Chinese contractors. The obvious qualities that are most attractive to contractors are specialist industry knowledge, international experience and footprint, linguistic skills and cultural affinity, and cost-effectiveness.
The Challenges for Law Firms
The legal industry in China is relatively immature. Until the late 80s, all lawyers in China were still state legal workers. It was only by the enactment of the Lawyers Law of the PRC on 15 May 1996 that the legal profession was independently recognised. Although the Chinese legal industry has been very quick to learn, there is still a general lack of awareness within large Chinese contractors as to the need for and best use of professional legal services. The greatest challenge is that many Chinese contractors have little or no first-hand experience of the added value that lawyers can bring to their business. The reason is simple - very few law firms or lawyers in China truly understand the construction and engineering business. This unfamiliarity has bred a culture of resistance among contractors to the use of lawyers. For contractors that recognise the value that lawyers can bring, the law firms still have the difficult task to quantify in financial terms the value of their input in a way that can easily be understood and accepted by their clients. In particular there is great resistance to hourly rates as Chinese clients perceive this method as rewarding inefficiency, and law firms will have to find more innovative ways to charge for their services.
Another major challenge for law firms is the difficulty in identifying the real decision-makers for the procurement of legal services in large Chinese corporations. The pitch must be made to the right audience, who may not always be the direct beneficiaries of the services that are being pitched. In Europe and the US, the decision-makers for the procurement of legal services would usually be the heads of the legal or commercial departments, or these individuals would at least have a significant say in the process. In many Chinese contractor organisations, it is very difficult to identify the real decision-makers and they are usually not found in the legal departments. This difficulty is compounded by cultural and social mores in state-owned companies, which emphasise collective decision-making. This means that decision-making is much more complicated and often time consuming.
The importance of cultural and linguistic knowledge should not be overstated because while this is important, it is obvious to most clients that a lawyer with the relevant expertise and experience is to be preferred over a mere linguist. On the other hand, as lawyers are in the business of giving legal advice and not all Chinese managers understand and speak English, their advice should be capable of being easily understood by a native Chinese speaker. In an ideal world, a law firm seeking to serve the needs of the international business of Chinese contractors must have a team of lawyers who are experienced in international projects and construction and are able to communicate effectively in Chinese with the clients. However, in the current market, it is extremely difficult for any law firm to field a team where the individual lawyers all possess the ideal attributes. The challenge for many law firms is therefore to find the correct combination of lawyers, such that the strength of the team is greater than the sum of its parts.
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This is an exciting time to be in China for projects and construction lawyers. The future looks very promising, provided that law firms are able to rise to the challenges.