Are Chinese contractors edging nearer to working in the UK? The fact that the consortium chosen to develop the Hinkley B Nuclear Power Station project includes both China National Nuclear Corporation and China General Nuclear Power Corporation as minority shareholders will no doubt reignite debate about the potential “wave” of Chinese investment into the UK and the repercussions that may have on the UK construction industry, write Keith Brandt and Rachel Turner.
Other deals include the US$1bn development by ABP China of London’s Royal Albert Docks, the £90m purchase of the One Nine Elms development site, again in London, and the investment of Beijing Construction Engineering Group (BCEG) in the £800m Manchester Airport City project. Such projects raise hope that if not yet a wave, there is at least the potential for China to direct some of its reported £2.2bn foreign exchange reserves to infrastructure and development projects in the UK.
The Chinese government has, over the past decade, encouraged Chinese companies, including State Owned Entities (SOE) and private firms, to seek investment opportunities internationally. Initial efforts were predominantly focused on Africa and Asia, to secure strategic rights to minerals and petrochemicals.
More recently, the Chinese government has signalled its desire to see more investment in more politically stable countries. China has always been skillful at coordinating its approaches to new markets.
Established players in the UK construction market are likely to face competition from the large Chinese international contractors who will be keen to use the investment as a way to gain a foothold in the UK.
UK construction industry representatives have warmly welcomed such investments as being good for the UK construction industry. Investment in infrastructure and the development of sites that have lain dormant for decades should have a positive knock-on effect on the industry. However, established players in the UK construction market are likely to face competition from the large Chinese international contractors who will be keen to use the investment as a way to gain a foothold in the UK market.
It is no accident that Chinese international contractors have followed and directly benefited from Chinese investment. From the early days of infrastructure projects implementing Chinese state aid to developing countries, in the past few years Chinese contractors have raised their sights to the worldwide marketplace, directly competing with the more established global construction giants.
Their strategy, implementing their domestic approach as much as possible, has been devastatingly effective. Chinese investors and developers have traditionally preferred to appoint Chinese contractors. In turn, Chinese contractors, as much as possible, transplant their whole supply chain, including materials supply, mechanical and electrical plant and machinery, from China. They also prefer to draft in significant numbers of Chinese workers to undertake the project. This has left their competitors struggling to compete on price.
The UK has been a target for Chinese contractors for some time. Chinese cladding firms have found success, most recently shown by Far East Façade winning the contract for curtain walling on London’s One the Elephant project. However, the main Chinese contracting giants have yet to secure a significant project or win.
Certain hurdles in the UK have frustrated this strategy. The recent trade missions by George Osborne and Boris Johnson have left few in any doubt of the fervour with which the UK wishes to engage with and encourage Chinese investment. Things are changing, for example, Chinese machinery and plant is increasingly deemed bankable by lenders/ultimate clients.
However, even after Osborne’s recent announcement relaxing visa requirements, immigration requirements preventing significant workforce movement will continue to frustrate and undermine the Chinese model. In addition, the perceived complex planning laws and obligations of working in the UK raise concerns.
Europe has also been keen to attract Chinese attentions and in turn is also of great interest to the Chinese contractors. Central and Eastern Europe is seen as having great potential due to the number of projects resulting from accession to the EU with potentially less red tape than the UK. The first major European project won by China Overseas Engineering Group (COVEC), a subsidiary of China Railways, was in Poland.
Whilst Chinese contractors do joint venture regularly, their preference is to undertake a project on their own or take the lead contractor role. But Chinese contractors are increasingly aware of their risk exposure. High-profile disputes, including COVEC in Poland, have demonstrated that Chinese contractors can no longer count on high level governmental support when things go wrong.
It is therefore likely that we will see Chinese firms accept minority partner status in strategic joint ventures with established UK players. Such roles may even initially involve investment with little or no construction role. It is also likely that cash rich Chinese contractors may be looking for strategic acquisitions to obtain market access and knowhow.
So far, while there is definitely interest, the deluge of Chinese investment is not imminent or for that matter assured. Osborne and Johnson may have a wish list of investment projects, but much will be decided from the perceived success or failure of the first tentative investments. We, and no doubt Beijing, will be watching closely.
Keith Brandt is a Hong Kong-based partner and Rachel Turner is a Beijing-based associate at Dentons www.dentons.com
