Construction Practices in China

Construction practices in China

Abstract

Chinese economy has experienced rapid growth since the adoption of the open door policy in the past over 20 years. Real estate and construction, which act as a core industry in mainland china, developed quickly as well. Quality professional services in the area of real estate development and construction is one of four main industries in Hong Kong which is internationally renowned. Since the Central Government of China has continually introduced policies like the signing of CEPA to stimulate economic growth, the real estate market will booming in the coming decades. The Hong Kong professionals in the field of real estate and construction industry should take these opportunities to explore mainland China market to give full play to their advantage of the ability to combine economic and financial principles with project management and construction technology.

The objective of this paper is to estimate the market opportunities for Hong Kong professionals in the areas of real estate, building and construction consultation in Mainland China. This paper will analysis the market environment using SWOT method and give some suggestions to the clients while they are making strategic management plan.

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Introduction

China, the world’s second largest economy, enlarge their demands for professional consultancy services in the field of real estate and construction market which including real estate, surveying, planning, project finance, development, building and construction after access World Trade Organization (WTO).

In the meantime, the competition patterns of China’s construction industry have been formally changed since China became a member of WTO. These changes comprise three perspectives. The first one is the growing foreign competitions in the Chinese construction industry. Secondly is the increasing participants of native construction firms in the worldwide construction market. The third one is changes of construction market environment by envisaging China’s WTO commitments. The implementation of the WTO framework raised the level of legal enforcement in the construction industry which means a quick response to the changes is essential for Chinese contractors in developing their competitive advantage. This increase the numbers of professionals and consultants who are intend to expend their business in mainland China with their unique insight and professional advantages. Hong Kong professionals and consultants are familiar with western laws as well as both eastern and western culture, they can take their advantages in this particular chance. Moreover, Hong Kong real estate and construction industry is a developed and competitive field, explore mainland market can release some competitive pressure during process of talent output .

Market environment in Mainland China

The demand on the construction industry is closely related to the national fixed capital construction investment scale, which has been increasing rapidly along with the country’ s economic growth. The growth can be seen in the chart below and we can conclude that the fixed asset investment will increase continually in the coming years as china still define construction as a pillar industry.

Although China accepts open-door policy and some economic innovation to develop the country, mainland China market still hold its unique characteristic as uses Centrally controlled system. The hierarchy in China is too complicated that the Joint Ventures have difficulties in developing business in China (Walker, 1991).

China’s Background Information

• Nature of work
• Qualification
• Human resources
• Management skills
• Technical / Financing ability
• Organisation structure
• Social influence (CSR)China-related factors
• Qualification in China
• Business coverage
• Public relation

There are many types of Joint Ventures in China Mainland, namely, equity joint ventures, co-operative ventures, compensation trade and wholly foreign owned ventures. China uses this way to develop for many reasons:

1) The investors bring the professionals and advanced equipments which contributing to rapid development

2) China can save a lot of money of the construction development

3) The modern construction methods have been brought into China

To sum up, China welcomes international and competitive investors like the developers of Hong Kong to have business in China Mainland and if the company does not know too much about China or it has no qualification of construction work in China, it should co-operate with local government or local companies and this is main part of the paper.

Identification of business objective

As a Hong Kong developer needs to start business in mainland China, first of all, the objectives must be confirmed in the initial stage:

Objectives:

1) Qualification of construction in China Mainland

Since the company does not have any qualifications of construction work in China, it must co-operated with the government or some local firms, the best strategy is to have long term partnership with one company which possesses relevant qualifications, so when there is a new construction project, less time is needed for getting government’s approvals.

2) Expend the reputation in mainland China

3) Business extension

The company is still in the developing stage and intends to occupies part of the market in main cities of China.

SWOT assessment for the business development

SW (Strengths and Weaknesses)

Good project management skills – Hong Kong developers are equipped with mature project management internet system. Project workshop like project process management, risk management are increase their management ability in a large extent.

Better information management facility – Hong Kong has new information and technology and these become the advantages when developing business in China Mainland, e.g., the cyclical and sustainable system are widely applied to different fields of construction work in Hong Kong (Lam, et al., 2010). Moreover, the communication systems including project management system and business administration system make sure the process and linkup between different parties proceed effectively and smoothly. The use of building information modeling (BIM) also improve effectiveness of construction practices.

Advanced machinery and equipment – t

Higher labour productivity – In general, labour productivity growth increases the capacity of the economy as more outputs could be generated from any given amount of labour inputs, thereby enabling the economy to expand at a faster pace. In the case of Hong Kong, a city with limited natural resources as well as modest population growth, the continued enhancement in labour productivity is particularly vital for rendering growth impetus to support a sustainable and healthy economic development. Moreover, Hong Kong labour own a good reputation in high productivity as they are keen on improving their living standards continually.

Good finance-raising ability – Compared with local developers, Hong Kong developers own more comprehensive finance raising method which including RIETS, foreign loan and bonds, securities or even raise the money from their parent companies. Base on the statistic annual book of China, for the native developers, there are over 80 percents of funds for property development only comes from direct and indirect bank loans. This factors also illustrate that Hong Kong developers are easier to diversified their invest risk through combining different sources of investment amount.

Good cost control ability – the utilize of modern information facilities ensure Hong Kong developers control project cost better than local companies. The cost control system generate a higher profit and monitor the construction cost during project life cycle.

Attraction to good human resources – Hong Kong government pays great attention to the quality of the construction worker and managers, take the Construction Industry Training Authority (CITA) which was established in September 1975 with an amendment in 1991 (Rowlinson and Walker, 1995) as a example, CITA offers trainings and helps to the ones who are in the construction field or will enter in the near future and it level up the quality of the staff, furthermore, numerous professional from western world come to Hong Kong which is also contributes to the high quality construction design and build.

Higher production costs– Increasing production costs on the Chinese mainland will eating into thin profit margins for Hong Kong developers definitely. Demographic dividend in China is reduce day by day and developers are facing manpower shortage as well.

Limited channels for market information – Although the internet smaller the world and it seems that all the information can be found from it, actually, in China Mainland some real information of the market will be to some degree blocked by the government, so some depression parts cannot be clearly found and there would be more risks when having construction projects in China.

Lower businesses qualification, – Nothing can be done if the developer of Hong Kong has no qualifications of having construction work in China Mainland, such as safety qualification, construction qualification and some land acquisition problems. Every place has its own guideline of design and build, and the developer who wants to have business in China should learn relevant law and regulation, if something is done over China’s law and regulation, the project cannot get the stamp from the authority department even though the project is in the final stage.

Limited businesses relationship – One of the most important things of having business in China is the relationship with China’s government, it is very common for China’s government to assign projects to the companies they have good relationship with, even in the tendering, both reputation of a company and the relation with government are important, in short, without government’s help, the project cannot be approved in the initial step.

Leung, Chan and Chong (2010) also mentioned that relations meant a lot in China, people in the construction industry should have good relations with friends in the society, especially the ones within construction organizations. Zhang (2011) also illustrated that in China, prior to the commencement of construction work, the company must apply to the Planning Bureau and obtain a Construction Planning Permit, so to build up good relations with the local Planning Bureau is very important.

OT (Opportunities and Threats)

Improved policy environment for foreign business – The policies published by China government stated that they would continue to improve economy environment to attract foreign businesses such as the accession to the WTO and signing of CEPA.

Government promotion of construction – The 12th Five-Year Plan which begins in the year 2011 set the mission that the whole social fixed assets investment on construction industry must grow more than 15% every year. This is a strong evidence that Chinese government want to cement the pillar industry status of construction industry which also strengthen confidence of Hong Kong developers to explore their business in mainland China.

establishment of credit system – China will promote the establishment of a nationwide social credit system comprehensively in the next five years, or the 12th Five-Year Plan period (2011-2015). The China’s State Council stated that the country will accelerate legislation and regulation improvement concerning the credit system and push forward the construction of credit systems within industries and government departments, and at local levels. The government will also give their mind to make sure the credit system be shared in the nationwide, develop credit rating agencies and promote use of credit products in an orderly way. Meanwhile, the government should enhance its own credibility by increasing transparency, and strengthen education on social honesty.

development of understanding of international practice

certain restrictions on foreign investment – China uses law to restrict the foreign investors in China, e.g. China welcomes the investors who hold advanced technology and can improve the living environment of China, can provide international level products, etc., so China’s government would spend a lot of time to assess whether the investor is suitable or not.

increasing intense competition – The open door policy creates opportunities for many foreign companies to enter China’s huge market which increase the competition among companies.

the risk of breaching contracts.

Reassessment of the feasibility

After the SWOT analysis, it is necessary to reassess based on the advantages and the disadvantages.

References

Ganesan, S., Hall, G. and Chiang, Y. H. (1996). Construction in Hong Kong. England.

Lam, P. T. I., et al. (2010). A sustainable framework of “green” specification for construction in Hong Kong. Journal of Facilities Management, Vol. 9, No. 1, pp. 16-33.

Leung, M. Y., Chan, Y. S. and Chong, A. M. L. (2010). Chinese Values and Stressors of Construction Professionals in Hong Kong. Journal of construction engineering and management.

Shen, L. Y., Leung, B. Y. P. and Hao, J. J. L. (2010). Construction and real estate practice in China. Department of build and real estate, The Hong Kong Polytechnic University. Hong Kong.

Walker, A. (1991). Land, property and construction in the People’s Republic of China. Hong Kong.

Zhang, X. L. (2011). Social risks for international players in the construction market: A China study. Habitat international, 35, pp. 514-519.

Chan, J. H. (2012). A hybrid knowledge-sharing model for corporate foreign investment in China’s construction market. Expert Systems with Applications, 39, pp.7585-7590.

Shen, L. Y. and Tam, V. W. Y. (2002). Implementation of environmental management in the Hong Kong construction industry. International Journal of Project Management, 20, pp. 535-543.

Zou, P. S. W., Zhang, G. M. and Wang, J. Y. (2007). Understanding the key risks in construction projects in China. International Journal of Project Management, 25, pp.601-614.