The Growth of Chinese Contractors in the Malaysian Construction Market.

The Growth of Chinese Contractors in the Malaysian construction Market.

Since the mid 1990s, the international construction market has witnessed the steady growth of Chinese contractors competing for work overseas. Chinese contractors have steadily become important and influential players in the international construction and infrastructure markets. The demand for infrastructure development, especially in developing countries, has provided a solid platform for Chinese contractors to engage in the projects on the international arena. Similarly, strong support from the Chinese government together with competitive pricing has played an important role in the expansion of Chinese contractors globally and not least in Malaysia. Increasingly, local and international lenders now consider lending against Chinese contractors, bringing the competitiveness of Chinese contractors to the attention of the Malaysian project financing community.

Although the Chinese contractors are relatively new participants in the Malaysian construction market, particularly on project financed deals. Most of these contractors are familiar with limited or non-recourse financing as many projects in mainland China have been financed through project finance structures. Broadly, the ‘Chinese project finance model’ – where only banks provide funding – has been considered less rigorous than the traditional risk allocation and other bankability requirements commonly required by Malaysian banks and financiers. Until recently, these factors contributed to the reluctance of Chinese Contractors to step onto the international stage and assume higher degrees of risk than what was required of them in the local Chinese market. Further, many lenders were unfamiliar with the Chinese contractors’ ability to deliver given their relatively low international profile and lenders were wary of Chinese manufacturing after numerous high-profile failings in respect of manufacturing and quality control.

By way of example, in the Chinese power sector in general on domestic project financed construction deals the total cap on liability for an EPC contractor is between 10-15% of the Contract Price and there are relatively low performance and liquidated damage amounts, bonding and retention requirements. These would have been unacceptable to Malaysian lenders without government backing. Unsurprisingly, with the fallout of the recent global financial crisis, international lenders and those in Malaysia  became more conservative in their assessment of risk and bankable projects. This bankability evaluation includes close scrutiny of the technical and financial capability of a project’s construction contractor to deliver on time, within budget and to meet the required quality guarantees (regardless of the contractor’s origin). However, despite the fact that project finance structures do place particular risk pressures on contractors, many Chinese contractors have been quick to realise that such financing arrangements also offer significant opportunities where the risk profile is appropriately realised, managed and mitigated.

We are seeing the appetite for using Chinese contractors grow, especially in international open tenders due to the comparative advantages they bring to international projects. Many Chinese contractors offer significantly lower labour, materials and other procurement costs which positions them well to win projects based on cost. In addition they are no longer considered inexperienced having completed billions of dollars worth of infrastructure project over recent years including roads, railways, mass transit systems, airports, stadiums and utility infrastructure. Further where they are allowed to do so, importing their entire labour force allows Chinese contractors to offer accelerated timetables, delivering the end product well in advance of many local competitors. Although, we have also seen this approach can cause immigration  and visa issues which can ultimately affect the project delivery.

Chinese contractors now also enjoy strong backing from the Chinese government, mainland China lenders and the Export-Import Bank of China (China Exim Bank – China’s export credit agency). They are also supported by the China Export and Credit Insurance Corporation (SINOSURE) – China’s policy-oriented insurance company providing export credit insurance. It is mandated to promote Chinese exports and investments by offering export credit insurance against non-payment risks. We are now beginning to see a number of Malaysian banks lend against such guarantees, However, some local contractors have raised concerns regarding competition with Chinese contractors due to the fact that many are state-owned.

With the demand for infrastructure development, remaining steady we are witnessing more Chinese contractors seeking to participate in the Malaysian market either directly or through joint venture with local contractors. Their comparative advantage regarding labour, materials and build times allows them to remain competitive with other local and indeed other foreign contractors wanting to enter the market. Strong support from the Chinese government plays an important role for the expansion of Chinese contractors in Malaysia as to does the policies of the Malaysian Government. At present Chinese contractors’ strengthening reputation for project delivery is positioning many of them as a viable (and cheaper) alternative to other more experienced local contractors who are now seeking works overseas and competing with the Chinese Contractors in foreign markets. such as the Middle East, India and Africa.