06BANGKOK4888 A NEW CHINESE EXPORT

“74302”,”8/10/2006 5:17″,”06BANGKOK4888″,

“Embassy Bangkok”,”UNCLASSIFIED”,””,

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RR RUEHCHI

DE RUEHBK #4888/01 2220517

ZNR UUUUU ZZH

R 100517Z AUG 06

FM AMEMBASSY BANGKOK

TO RUEHC/SECSTATE WASHDC 0846

INFO RUEHCHI/AMCONSUL CHIANG MAI 2275”,

“UNCLAS SECTION 01 OF 03 BANGKOK 004888

 

SIPDIS

 

SIPDIS

 

E.O. 12958, AS AMENDED:N/A

TAGS: ECON, ETRD, TH

SUBJECT: A NEW CHINESE EXPORT

 

1. Summary: Emerging as the sixth largest source of engineering

contractors in the world, China’s construction industry is seeking

to increase exports of these services to Thailand. An experienced

Chinese industry executive spoke candidly regarding his company’s

difficulties in navigating the disparate layers of Thai bureaucracy,

asserting that Chinese construction firms are often outmaneuvered by

more established Thai and foreign firms. However, others have

complained the companies receive undue support from the Chinese

government, including low-interest loans and direct grants.

Finally, it appears that most members of Thailand’s construction

industry support caretaker PM Thaksin Shinawatra’s government, as it

provided political stability and maintained important existing

contacts. End summary.

 

2. As a close neighbor and a large developing market in Southeast

Asia, Thailand has attracted the attention of Chinese construction

firms as a destination for increased service exports. Currently the

world’s sixth largest exporter of engineering services, China’s

construction firms have relatively extensive foreign operating

experience. At the 2006 Global Construction Summit in India, deputy

president of the China International Contractors Association

(Chinca) Diao Chunhe said Chinese firms in 2005 reached a record

turnover of USD 21.76 billion globally, a 24.6 percent increase from

2004. New contracts signed by Chinese contractors in 2005 totaled

USD 29.6 billion, also up 24.2 percent. Moreover, one

Thailand-based Chinese industry source noted that the Chinese

Ministry of Commerce has facilitated a shift from mostly African and

Middle Eastern projects in the 1980s to increased emphasis on

countries bordering China, including Southeast Asia, Mongolia and

Russia.

 

A Chinese old Thai hand

————————

 

3. Despite a growing international market and support from China’s

policy-makers, one Chinese executive fretted that Chinese

construction companies still have difficulties in penetrating the

Thai market. During a candid July 5 meeting, Mr. Wang Yinfei,

managing director at China State Construction Engineering Company

(CSCEC), provided Econoff with his perspectives on the evolving

Chinese business and investment strategies in other countries. Wang

is rare among prominent Chinese business leaders in that he is

relatively young, well-experienced overseas and conversant in

Chinese, Thai and English. Graduating from Shanghai’s prestigious

Fudan University, Wang first arrived in Thailand as a middle manager

in 1988 for CSCEC. Since then he has spent all but one year living

in Bangkok. His company was a founding member of the Chinese-Thai

Enterprises Association, where Wang served as its first president.

 

4. Wang described the difficulties in receiving contracts in

Thailand, a process of building personal networks at multiple levels

of every ministry’s staff and navigating through a complicated

system of regulations. Wang claimed on certain projects Thai

companies influence ministers to block competitors by withholding

upgrades of technical rating certifications, necessary for larger,

more lucrative contracts. This practice also infiltrates bid

evaluations, which are divided into two categories: price and

technical expertise. Although the different bid values are open,

Wang deemed the technical evaluation an arbitrary process that often

depended on “personal connections”, where Thai and more established

foreign firms excel. Other limitations are requirements for

joint-venture partnerships with Thai companies under Thai government

procurement regulations. Mr. Lu Jiongtao, managing director for

Chinese hydropower company CWE, noted that all of his company’s

projects required a Thai company as lead bidder. (Note: Chinese

construction companies circumvent this by legally establishing

themselves as Thai entities. End note.)

 

5. Wang also noted that corruption is endemic in the construction

industry, a problem confirmed by Thai contractors as well. Still,

all parties seemed to accept this condition as a standard operating

expense. Mr. Thamnu Vasinonta, executive director for the Thai

Contractors Association said he disliked the current practices of

bribery, but interestingly not its principle. “A bribe should not

be an assumed cost of doing business,” he said, “but more like a tip

companies give to show appreciation after the bidding.” He implied

that better government ‘service’ to efficiently award contracts

deserved a bigger ‘tip’, and vice versa. Wang also conveyed that

CSCEC also had to adapt to this reality, and one must “brainwash”

away any notion of legal and administrative ethics. “You can’t come

to Thailand and expect to change the society,” he remarked. Wang

even joked about the relative transparency of corruption; the amount

of the bribe is rarely arbitrary, but a similarly fixed percentage

of the contract value.

 

Chinese construction companies: Pups or Wolves?

——————————————— —

 

6. Despite these difficulties, Chinese construction firms and other

service exporters have aggressively increased their presence in

Thailand. Aside from the large communications company Huawei, BoI

China desk director Mr. Charas Chitkittichamras listed construction

firms CSCEC, CHEC and CITIC as the most prominent players. He

 

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explained that thus far they have generally received contracts for

public housing complexes; for more complicated “megaprojects”,

Chinese companies usually play minor roles as subcontractors.

Charas suggested that the primary reasons include a relative lack of

capability and poor understanding of Thailand’s bidding process.

 

7. Since 2001 Wang said CSCEC has improved relationships with

different RTG ministries, winning the prime contractor role on a few

projects. Wang said that his company’s largest current contracts

include an 8.4 billion baht (USD 220 million) housing project with

20,000 units and a 1 billion baht (USD 26 million) local government

office tower, but he also added a 3.8 billion baht (USD 100 million)

outer ring highway for Bangkok. He also confirmed other projects

where CSCEC acted as a subcontractor, but he denied that CSCEC

accepted subcontractor status because of any technical deficiencies.

Rather, he contended that his company wanted to avoid the

complicated machinations in securing large projects from the Thai

government.

 

8. Chinese companies have also started making inroads into

contracts for pipelines and dams. For instance, the Petroleum

Authority of Thailand (PTT) recently chose Chinese Petroleum

Pipeline Engineering Corporation (CPPE), a subsidiary of the China

National Petroleum Corporation (CNPC), to build a 70 kilometer

pipeline near Bangkok that leads to the Wang Noi power plant. One

Thai construction expert from U.S. engineering giant Bechtel

confirmed the determination of Chinese companies to advance their

own processes, materials and information. For example, the Chinese

CPPE subcontractor has asked Bechtel repeatedly for copies of

information on unrelated construction projects. “The Chinese are

learning all the time,” the Bechtel representative noted, “and

they’re learning quickly.” Eventually he expects these companies to

be very competitive.

 

9. In almost every case, Chinese construction and service providers

offer the lowest prices as their primary advantage, and Charas noted

that sometimes their bids are half of its competitors. Part of this

advantage may stem from their tendency to use only Chinese

suppliers, traders and even labor. Andy Huang, president of

Taiwanese construction firm Sunflower Group, complained about

Chinese companies accepting smaller payments in installments,

sometimes with no up front payment, because of PRC financial

assistance. CSCEC’s Wang confirmed the practice, although his

rationale differed from Huang’s, citing his firm’s more flexible

payment option as a response to ministry budget shortfalls.

 

10. These activities have some observers questioning whether

Chinese companies are playing fair. For example, Charas believed

that Chinese companies lack many of the technical capabilities to

compete for major contracts. However, the Bechtel source noted that

Chinese companies are sometimes selected despite being less

qualified than other competitors. He suggested that the PTT is

“heavily influenced” by the Thai Ministry of Commerce, which in turn

is susceptible to Chinese influence through inter-government loans.

Although the evaluated Chinese bid on the pipeline project was the

cheapest, CPPE had the weakest qualifications, material support and

expertise. As project manager on behalf of the RTG, Bechtel also

has had to exert extra effort to administer the contract to ensure

CPPE does not cut corners.

 

11. Wang freely acknowledged that the Chinese government has

ratcheted up its support for outbound investments, including very

low-interest loans and liberal re-import/export policies that

allowed Chinese firms to transport their equipment and machinery

from China to Thailand. Even Thai contractor association

representative Thamnu agreed that some level of outside influence is

acceptable, but he balked at direct PRC loans to Chinese companies.

That type of advantage would create overtly unfair bidding

conditions. As an alternative, Thamnu thought that the Chinese

government should make more government-to-government loans for

construction projects, with the caveat that Chinese companies

receive preferential access. He suggested that this would help to

maintain fairness for existing projects while giving Chinese

construction more opportunities for previously unbudgeted works,

something of a win-win for everyone.

 

Politics and the waiting game

——————————

 

12. Thailand’s current political uncertainties have reduced the

overall level of construction, particularly for public-funded

projects. Thamnu suggested that members of his organization, which

is unaffiliated with any government or political entity, have

watched both new and existing contracts halted. Funding has crawled

to a standstill as the government lacks power to approve new

budgets. Lu noted that CWE will have no new projects for at least 6

months and can do nothing but wait. Perhaps as a result, Thamnu

expressed his personal view that the Thaksin government had been

good for contractors.

 

13. Wang also believed most Chinese companies supported the current

Thaksin government and the Thai Rak Thai (TRT) party because it

generally advanced pro-business economic policies. While

 

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acknowledging Thaksin’s special emphasis on Chinese trade and

investment has been helpful, he said the primary reasons for growing

Chinese business activities go beyond a cultural affinity with the

large ethnic Chinese Thai business elite. Wang liked Thailand’s

Buddhist mores, but political stability since 2001 has been the main

draw for further trade. This is magnified in an industry like

construction that requires strong business-government relations. He

did not object to the opposition Democrat Party except for

continuity’s sake. He gave an example of CSCEC’s local government

office building suffering delays and higher costs when the Democrat

Party took power and demanded significant changes to the project

design and materials.

 

14. Comment: The construction industry is an example of Chinese

potential to expand their growing exports to Southeast Asia beyond

traditional sectors involving cheap goods and agricultural products.

While China does not yet export highly-skilled services in finance

or consulting, its low-cost construction SOEs may prove formidable

competitors once they better navigate Thailand’s construction

networks. We note that none of the Chinese construction firms

discussed competing for private sector construction contracts

despite their apparent pricing competitiveness. End Comment.

 

Arvizu

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