Chinese Contactors Grapple With Risks of Working Globally
With 82.6% of their market share in Asia and Africa, Chinese construction companies working globally and in mostly unstable nations face unforeseeable risks that, if not managed properly, could weigh heavily on their business. Attacks on construction sites have pushed companies to adopt more comprehensive defenses and take further precautions for risk recovery and management.
Uncertainties aside, last year was a good one for Chinese contractors working globally, according to the China International Contractors Association (CHINCA), an alliance of companies that work outside China. Both the monetary worth of completed projects and new contracts grew by at least 10% over 2011, more than stabilizing the recovery from recession.
Zhejiang Construction Investment Group (ZCIG) had to learn about risky global business the hard way. During the 1990s, ZCIG had significant losses after attacks on its construction sites in Yemen and Sierra Leone. In recent years, the firm has been operating its biggest overseas branch in Algeria, where local instability creates frequent business interruptions. Two of ZCIG’s residential projects were attacked in 2011, during the Arab Spring. The equivalent monetary loss was more than $3 million, according to Gao Xingfu, the company’s CEO and board chairman.
After the most recent attacks, however, the company negotiated with the local government and was able to obtain compensation for most of the loss. “We are learning how to strike better deals with local governments,” Gao says. ZCIG also is taking more precautions against possible attacks and implementing more comprehensive procedures in the event of an attack, Gao adds.
Chinese companies completed overseas projects worth $116.6 billion last year, 12.7% more than the total for 2011, according to the CHINCA annual market report. Newly awarded contracts increased the backlog by 10%, to $156.5 billion, over 2011, the report says.
To forestall losses from attacks, some firms harden construction sites, which include worker housing compounds, and increase site security. “We are building sturdier and more concentrated sites for our workers to defend against future attacks,” Gao said. ZCIG also has detailed employee evacuation plans in the event of a sudden burst of conflict.
In addition to better risk management and recovery, Chinese firms working internationally have been exploring other ways to cut costs and stabilize operations.
Labor costs are weighing more and more on companies in light of the decade-long trend of rising wages for Chinese workers, both domestically and abroad. In China, the average annual salary of an urban worker more than quadrupled to 25,959 RMB last year from 5,854 RMB in 2002, according to the Chinese Academy of Social Science.
The dollar-to-RMB exchange rate, on the other hand, dropped to 6.3 RMB per $1 from 8.3 RMB per $1 from 2005 to 2011. Consequently, Chinese companies working outside China, which typically are paid in U.S. dollars, also have had to deal with the weaker exchange rate. Increased wages compounded by a weaker exchange rate have dramatically increased companies’ expenses for labor and cut further into profit.
The climbing labor cost is pushing companies with overseas operations to hire local labor or bring in crews from nations with cheaper labor than both China and the host nation. For instance, workers from the Philippines, paid in U.S. dollars, receive lower salaries than Chinese workers.