Thursday, July 06, 2006

Foreign EPC in China --- The Road To Prosperity?

For those foreign EPCs who came to China after it opened its door since 1978, now some of them think it might be relatively easy to go back home rather than to enlarge their profits plotted for China. To leave or to stay, and how to do business effecitively, is becoming a round table discussion since 2002. To be specific, life became harder since then when more and more EPCs, especially medium scaled foreign EPCs, trumpted by local firms, appear at the tender list.

Local DI (design institute, CDI hereinafter) get used to carry out their design in a way that doesn't cosider construction too much. This is due to the fact that CDI and construction company are always two different entities, both of them tend to think for their own favor during the execution phase. If the design bases or preliminary design that carried out by CDI along with the client isn't clear enough for the precise design (detail design), then, most probably, another contractor, construction company will charge for your mistake when drawings are at their hands. In any case, time is lost, money is waste, and relationship between disputed parties are jeopardized. Local CDIs have been in the position standing alone without sufficient backup from Procurement and Construction for decades, and this, to my opinion, definitely lead engineering to the construction phase that frustrate them so much that nobody want to service at site any longer, exacerbated always by the poor site allowances.

So, to run an EPC locally and make money, first, it's crucial to create an environment that makes it possible for Engineering, Procurement, Construction to do their work in an integrated way. (That's what EPC/EPCM means) However, to own a construction team by themself in local isn't easy. Mostly, they'd have to rely on their constuction partner, with whom they worked with for years in China. At least, experts in construction has to be involved from the beginning as to feed Engineering to perfect their output.

As for the procurement, you can't do your business in a cheaper way unless you set up your local network. Currently, to my opinion, it will make more sense to introduce local vendors (if they have) into global market than only to select the best locals (cheapest) as then to make more profit in China. With the increasing competitiveness of local vendors in the world market thanks to the innovative technology which is no longer unreachable, it'll be more profitable if they join the team. This is important to the margin of the offshore project. Hence, you have to make efforts in exporting your local products.

Local resources, physical or mental, always seems to be the focus of international company in their strategy. Chinese made products have been always suffered high tax tariff because of their unbelievable cheap prices. International economic rampart existed everywhere, among nations of richest and poorest, all struggling to break through towards the hard currency: dollar and market occupancy. As I said, some international EPCs now are considering exporting their local resources to offshore, i.e., local engineers are sent to foreign countries doing the engineering work. It's meaningful especially for EPCs come from country like Japan, where manpowers are always on shortage. These EPCs are busy at their home owing to its boosting economy since last year, even though its zero-interest policy is to be changed. This local-out strategy takes time and even costly, since those engineers have to be trained with their special know-hows, which differ them from others.

Before local mentalities are also blockaded, it's not late to start up.

International EPC can hardly afford to take the risk of their reputaion by lowering their standards thus be able to get awarded. Once they are doing so, they are the same as locals, which are swelling in recent years, and will be further next year, when restrictions of establishing EPC in China will be relieved after 6 years protection since China joined the WTO.

More and more CDIs are trying to finish the local project as a EPC, taking the advantages of their familiarity with local construction company and local vendor, and most important, they have close ties with local government who can smooth the way for the project operation from the beginning of application for construction to the end of project hand over. It's more likely for clients (espcially local clients, or even join-ventures) to give the project to local EPC rather than to internationals. Even If international EPCs are joining the battle, utilizing every means from bribing (I hate to use this word) to inviting for traveling or whatsoever, then, I still can't see any positive perspective ahead. To make things worse, international clients are also flow away by the so-call local EPC or foreign-local EPC buzzing and busy at local market.

Predominance the internation EPC has over the local are quality and safety. First of which are done locally by E,P and C, they are the same compared with locals. Safety, which is often costly, are still to be understood and acceptable by local client gradually. Fortunately, Chinese government is reinforcing labor laws to protect labors from being hurt without compansation and be paid on time. On the other hand, the reinforcement are double-edged blades that may also burden international EPCs by requiring hirers pay housing fund, health issurance, etc. Of course, offshore EPCs are rarely found have been not doing so, however, there is a Chinese saying: "when the river rises the boat goes up too", the running cost will sure go up. Therefore, international EPCs have to balance the uprising local cost with then-be relative lower if outpouing these resources, be noted that, it's better to do so before Chinese Yuan's rocketed up.

Some serious safety incidents happened recently in China propelled government to monitor the factories' behavior more strictly than ever before, to assure no more contamination leaks into river nor any blast blow off the mines. The tough monitoring towards the clients will force them to draw cash out of China in a long run, and this situation may be worsened by the western propaganda on India's uprising. As a matter of fact, some Japaness companies have already decided to shift their production base from China to India.

"Take me home, country roads, to the place , I belong West Virginia, mountain momma take me home, country roads ..." John Denver knew of what and where he sang, memorizing his beloved, longing to see them. This song strongly deliverd his homesick mood after been strolling around the country for years, and hopefully, he got back home. EPC always follow the Client, if they move, where should EPC go?

When we talk about life in China, we must know what's happening in China.

China may suffer inflation if its economy keeps running at the speed of 10% annual GPD growth. Therefore, the government is now tightening the credit to avoid the abundant cash flooding the market as may then incur inflation, given the condition that huge amount of resident deposit that have been keet staying in their account, un-spent, pouring into market all of sudden someday, for housing, for example, or education or whatever. It's no wondering from the beginning of 2006, tens of billions of Yuan of bills as well as national debts were issued, while later in May, the Chinese people are for the first time granted to purchase dollars by as much as 50,000 Yuan in one year period. That's why I personally think housing price in China are far less likely to drop dramatically as anticipated by most of Chinese people desperately. Obviously, those rushed-out money on housing will trigger the inflation. This will explain well why government seemed or appeared to have less control over developer: once it stop building, the redundant countryside labors are laid off, the already-limited housing will become precious and will fueling the price inevitably, the GPD will lose its increasing, and most importantly, inflation will land from newspapers.

To invest or not, and to what extent, has been under strict control by government. In any case, willl these EPCs be affected by these investment restriction policy should be considered thoroughly.
There are some chances. For instance, nuclear power plant, or some other energy-saving project, or called sustainable project all have lucrative aspect in China.

Life will be easier when local standards are coming close to that of internationals, with respect to Quality, HSE, Contract compliance and Efficiency.

But before that, we have to deal with the dilemma, don't we?


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