Enter the dragon

They may not have won the tender for 
the second line of the Warsaw metro. 
and they missed out on the Gdańsk stadium project too. Nevertheless, three of the largest Chinese engineering and construction companies – China Overseas Engineering Group, China Railway Tunnel Group and the Shanghai Construction Group – are here to stay

Mladen Petrov, ‘Eurobuild CEE’:  Mr Xiang, is this your first visit to Poland?

Zhao Xiang, vice president, China Overseas Engineering Group: No, not at all. This is in fact my fifth visit here.

I see you are serious about Poland. What exactly brings you here?

ZX: Well, Poland is a large country. Ever since Poland joined the European Union a lot of progress has been made, but the country still has great potential. In fact, of the group of 10 countries that joined the EU five years ago, we believe this is the most promising market. Let’s just look at the current infrastructure in the country – there is still a massive amount of work that needs to be done.

It’s good to see you here then. What exactly can you offer us?

ZX: For thirty years now China has been developing at a pace which people often describe as beyond all expectations. This growth has enabled us to gain a lot of expertise, especially in the field of infrastructure, which we are now willing to share. Please remember that we have also developed a giant industrial base that can supply everything at very good prices. Another thing we are able to offer is financing. Over the years we managed to build up the largest foreign currency reserve in the world, which has now reached USD 2 tln.

Your company has been researching Poland for three years now. What fruit has this borne so far?

ZX: Three years is not a long time. We succeeded in signing a contract for the Gromada hotel in Kraków, which is to be completed by the end of this year or the beginning of 2010. We are now in negotiations regarding further hotel development in Warsaw and other countries. There are even talks about building Gromada hotels in China. In the meantime we took part in the tender for the second metro line in Warsaw as this is our top priority for Poland – carrying out infrastructure and PPP projects. We also tendered for the football stadium in Gdańsk and the A2 highway project.

Ren Jun, general director, Shanghai Construction Poland:  Right now the Shanghai Construction Group is undertaking two projects in Warsaw. One is the second stage of ‘Osiedle Przy Parku’, a multi-storey residential building with an area of 22,000 sqm. The second project we are working on is the Oriental Garden development. And there is more to come, and not only in Poland.  We are looking at a number of projects in Central Europe and have already launched a land investment project in Hungary.

Have you already noticed the criticism towards Chinese companies in Poland and in Europe as a whole? The general feeling is that Chinese competitors are not afraid to dump prices. “They do whatever it takes to win a tender,” is the sort of remark we are hearing. The other concern is that China is usually identified with cheap goods, rather than high quality.

ZX: Good point. My observations and conversations in Europe lead to me think that some people still perceive China as the country it used to be some 30 years ago: poorly developed, with lousy infrastructure. Those who have seen the new China are impressed – it is enough to take the speed train from the airport to the city centre. In five years from now we will have the same mileage of express highways as the US has. I could go on and on. The point is that we have changed and it is crucial for Europeans to understand that. Regarding the criticism that Chinese companies are opting for dumping, here we are competing with large companies, but not in terms of some fierce price competition. What we are trying to offer is a realistic price. We are accused of being a state company with a lot of additional funds at its disposal, which allows us to lower the price for the project. However, we are a publicly-listed company with millions of shareholders. We are not in receipt of government subsidies and we operate on strictly market terms. There is something else I have observed here. It seems to be common for European companies to re-negotiate the terms of their contracts. At the end of the day the final price turns out to be higher. The Chinese code of business conduct, however, says “Stick to the price you have promised.” Looking at the prices our competitors have offered in the Warsaw and Gdańsk tenders, I couldn’t help but wonder how they are going to make it at these prices.

How is your company going to solve the labour force issue? Are you going to rely on Chinese construction workers or hire local ones once you have been given the green light?

ZX: This is a lesson we have learnt from our experience so far. Hiring Chinese workers is very difficult for many reasons – including regulation and language issues to mention but two. This is why we have decided to form a partnership with a local company that we have put in charge of charge of supplying local labour and expertise. We don’t want to have to face any criticism about bringing foreign workers to Poland and taking jobs from Polish people.

The world is holding its breath for news on the condition of the Chinese economy. We simply cannot afford for there to be a recession in China. But GDP at the moment is not growing at the two-digit pace of recent years. Many economists are saying that for China this means recession in practical terms. How is this affecting your company in its attempts to grow globally?

ZX: The economic downturn is affecting everybody in the world, and China is hardly an exception. We have been affected, yes, but we are also well-covered in terms of available funding. I tend to be optimistic and agree with those economists who are predicting a decent GDP growth for China. In my opinion, the downturn won’t stop Chinese construction companies from growing abroad. On the contrary, the Chinese government is encouraging companies to work both locally and internationally.

Overseas engineering operations account for 10 pct of the USD 34 bln turnover of CREC, COVEC’s mother company. What is going to happen to this 10 pct? Are you planning to expand international activities or…

ZX: We would like to diversify our business, because as the numbers show we are still much too dependent on the local market. China is a big country, but still, no one can keep building forever. Diversification doesn’t simply mean geographical expansion. We are also looking to enlarge our core businesses instead of concentrating solely on infrastructure projects. Real estate is one of the industries we are particularly interested in.

Real estate? Any more details at this point?

ZX: There is more to come, but real estate and Poland definitely go together for us as a company. Right now we are doing some studies regarding the potential of possible future projects. Office and residential projects are on our radar. Regarding shopping centres we don’t think we possess the necessary experience for this kind of project, so we would rather do what we know best. Since we are at the beginning of our research, we still haven’t made any land acquisitions; and as a public company we are very cautious, even when it comes to Poland, a country we believe in.

RJ: Basically, the Shanghai Construction Group is a construction company. But if we can cooperate with a good partner on a project with a good location and a well-established distribution channel, then of course we would be interested in acting as a developer.

Are you also screening other CEE countries for opportunities?

ZX: The new EU members are of interest to us, but I was also looking at Ukraine. I have had a number of meetings with top-ranking government representatives and local partners, but the volatile political situation there remains our biggest concern. So that would be a ‘no’ for the time being. Russia is another very difficult market we are steering away from at the moment. It is very hard to understand the rules of the game there. I should also mention Bulgaria, Hungary and Romania, where the focus is going to be on infrastructure projects. Our company is not alone – a large number of Chinese-based competitors are also looking to be present in the region. The interest being shown by them is impressive.

Are we, as a country and a region, making it easier for you to come here and take a slice of the cake?

Zx: Honestly, it is tough. In Europe there is a higher level of regulation in comparison to the other foreign markets we are present in. People in Europe often ask me whether I see these regulations as an obstacle. Well, we don’t. These regulations are not specially designed for everybody, including the local competitors. All we have to do now is learn and adapt to the local environment.

RJ: As a newcomer to Poland, we are not very familiar with the Polish market and that’s why we are now facing some difficulties. Somehow we think it is a very normal situation and believe that through the experience we have gained from our two ongoing projects, we will know more about the operation specifications of the Polish market in the near future and become prepared to enter the market in an all-round manner.

ZX: There are things that both sides should work on. First comes the language barrier. During a bilateral economic forum, which was held in China, we asked Polish government officials to translate all of the bidding documents into English. When on a very tight schedule, having to translate a whole bunch of documents from Polish is definitely a big challenge. And when time is crucial, we would prefer not to be dealing with such red-tape issues. Next comes the decision-making process, which for us as a Chinese investor is hard to understand. Frankly speaking, I am a little confused who is making the decisions here. Next come the cultural differences. We are seeing some good signs though: in recent talks with the Minister of Economy I was assured that he also believes that all the tender documentation should be available in English.

What are your goals here?

ZX: We don’t have an annual goal that needs to be met by December 31st. We are a long-term player. For the last five years we have been gaining experience. We will start talking business goals and revenue targets probably in two years from now. The top priorities are motorway and railway projects.

Who is going to pay for all these projects?

ZX: We have a credit line with some of the major international and Chinese banks such as Bank of China and we feel confident about financing. Our successful IPO in 2007 provided us with significant capital, which we are looking to invest properly. Money is not an issue.

Three Far East tigers

The three companies, which form a consortium, are now working together on three major public tenders in China and one in Poland. In the future, the companies say, they are open to other possibilities and could work alone or with other partners. China Railway Tunnel Group (CRT) and China Overseas Engineering Group (COVEC) are part of the China Railway Engineering Group (CREG), one of the Top 500 World Enterprises and Top 500 World Brands. CRT is the largest enterprise group in the field of tunneling and underground works in China, which integrates design, construction, scientific research and manufacturing into a single entity. As part of CREG, COVEC is responsible for international project contracting, having so far undertaken over 1,000 large and medium-sized projects around the world in the field of building, highway, railway and stadium construction, mining, industrial development and agricultural projects. Shanghai Construction Group is a state-owned construction company, consisting of over 160 enterprises. The company has so far worked on projects such as the 468m high Oriental Pearl TV Tower, the 420m Shanghai Jin Mao Tower, the 492m Shanghai World Financial Center, the 610m Guangzhou TV Tower, the 32 km long East China Sea Bridge, 200 km of Shanghai metro construction, the National Grand Theatre in Beijing, Shanghai Stadium, Shanghai Exhibition Centre and the Shanghai Pu Dong International Airport with an area of 430,000 sqm.