China's construction gold rush

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China's construction gold rush
By Ralph Jennings

BEIJING - Rapid development has created gold-rush conditions in China's construction industry, but foreign companies that have broken ground in the normally profitable market sometimes find it hard to sell value-added equipment and question some of the regulations.

Infrastructure, such as expressways in the vast western regions or high-speed railways in the more populous east, and new skyscrapers in cities throughout the country give general contractors, materials manufacturers and equipment sellers plenty of work, with room for more. Many foreign firms are just starting out.

"This is a huge market, but everybody knows everybody," said Alex Hau, Asian division director with the US construction equipment firm Costex Tractor Parts. "You could have another 50 players here and absorb them easily."

To learn more about China and show their products, about 190 firms came from at least 10 countries, but mostly from China and the United States, to the first CONEXPO Asia Construction Machinery Exposition, held May 15-18 at a 15,000-square-meter Beijing exhibition hall.

Companies at the exhibit, which was organized by the US-based Association of Equipment Manufacturers, showed the latest earth-moving equipment and advanced construction materials. China's official Xinhua News Agency estimates the construction-machinery industry was worth US$15.5 billion last year. From 2001 to 2005, machinery imports to China were worth $14.1 billion and industry investments in China more than $63 billion, Xinhua reports.

The country's 11th Five-year Plan (2006-10) indicates that the amount of construction should stay steady through 2010. Chinese firms at CONEXPO said they had done especially well.

Pal Fin Mobile Controls of Shanghai got a contract in 2004 to install radio-control equipment in machines to be used along the Beijing-Shanghai high-speed railway line. A representative of 26-year-old, 600-employee Jiangxi Nante Construction Machinery Co Ltd said that her and other construction-equipment manufacturers can't import engines fast enough to keep up with client demand.

Qualified technical labor is also hard to find. "The competition is tough, but to tell the truth, we can't all handle the market," said Nante import-export department representative Chen Kaili. "All businesses in this field have gotten rich."

Foreign firms want a piece of the rock because they expect China's construction market to overtake that of the United States in five to 10 years. Some companies sell equipment engines to Chinese companies. Others make equipment in China and export it. Some sell parts sent in from abroad.

"China's got 20% of the world population, so there's a lot of concrete here," said Kym Nelson, chief executive officer of SealSource, a US company that sells concrete floor hardeners. SealSource attended CONEXPO to study its potential in China.

But CONEXPO exhibitors said Chinese building contractors do not always understand fully automated equipment and value-added supplies, or do not want to pay for them. For example, Chinese builders have not bought Italy-based Schnell House's noise-controlling, climate-controlling outer wall insulation, which costs 175 yuan ($21.80) per square meter. Developers that plan to sell a building right after its construction don't want this type of value-added material, said Schnell House sales agent Zhu Qigui, but developers with "foresight" will consider it.

"There's a process. People need to know about it. The relevant government departments need to know about it," Zhu said. "The country should be encouraging [wall insulation], since it advocates energy conservation."

CONEXPO exhibitor Maurice Abbott of Australia-based Advance Scaffold said Chinese indoor scaffolding often lacks top-deck handlebars and ladders down the side - meaning workers must climb the structure itself. "China is very much dollar-driven," said Abbott, who makes scaffolding in Guangzhou mostly for export but sells some items in Shanghai and Hong Kong. "The occupational health and safety standards are still a long way away."

But Chinese contractors often learn to buy quality products after equipment breakdowns set back construction timelines, adding costs, equipment sellers say. Hercules International Sealing Products, an exhibitor from the United States, hopes to charm China by selling replacement seals for one-third to two-thirds the original manufacturer prices, while ensuring that all of its 65,000 items are delivered on time for deadline-wary customers, said company international business manager Acyr Borges.

Future noise-control and environmental-protection regulations are also expected to raise prices of construction equipment and materials. Construction-industry representatives report few legal barriers to entering China, although new market arrivals generally stay offshore and do business through local agents who keep up with any sudden regulatory changes.

However, the American Chamber of Commerce in China says that since 2002, a year after China entered the World Trade Organization, the government approved two decrees that complicate bids by foreign building contractors and do not clarify which departments handle applications. Capitalization of $36 million for special-grade projects is also too high for foreign companies, the chamber said in a white paper this year.

"Since China's accession to the WTO, the industry has witnessed a reversal in market liberalization," the white paper says.

Tariffs on construction equipment are higher in China than for other major destinations such as Europe, and Chinese firms may get better prices on steel, said Scott Smith, international sales manager with DitchWitch, a US company that sells underground cabling machines. But he said the 59-year-old company did well on China's fiber-optic cable projects in the 1990s, and sees "opportunity" for laying gas pipes from trunk lines to end users.

With so many newcomers, relationships also matter in China's construction industry.

Hercules International got a number of offers at CONEXPO to distribute construction-equipment parts in China but found that some strangers wanted too much money up front. Pal Fin Mobile Controls prides itself on its "communication ability" with clients and will not make deals with unknown parties, said company sales manager Qu Qiang. "You meet strangers and must get to know them first," Qu said. "You can't be friends right away."

Zacklim's Floor Specialist managing director Lim Eng Hock said he had been advised about "getting burned" by irregular business practices in China. But he believes in country's potential for his Malaysia-based company. "The problem is where to start and where's a good place to set up," he said.

Ralph Jennings is a Beijing-based foreign correspondent.

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