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Growth engines

Growth engines

 

The rate of new investment in China’s roads and railways is starting to slow after years of spectacular growth, says Anderson Chow, Head of Industrials and Infrastructure, Asia-Pacific at HSBC. So its largest construction firms have started to look overseas for new demand.

Almost all of China’s main railway industry players are involved, including construction heavyweights like China Railway Construction Corporation (CRCC) and China Railway Group (CREC), and train manufacturer China Railway Rolling Stock Corporation (CRRC) and its various subsidiaries.

“Companies like CRCC and CREC are building the railroads,” Chow explains, “while CRRC is selling the rolling stock that carries the freight and the passengers.”

The major contractors are increasingly ambitious about how they bid for business. CRCC, for instance, has diversified from its railway roots into highways, ports, airports and even residential real estate in China.

“They do much more than build ports and railways in single contracts,” Chow says. “They want to take the lead on integrated projects based around the new transport infrastructure, having learned from their experience with high-speed rail networks in China, which are opening up urban districts and transport corridors to wider development.”

In Malaysia, where the Chinese are battling with Japanese firms for the contracts to build the express line between Kuala Lumpur and Singapore, the plan looks likely to include townships, industrial parks and commercial zones.

Another trend is that the Chinese are taking a longer-term view and pushing for deals in which they have an ongoing role as an operator and equity investor. For example, CRRC has a ‘manufacturing plus service’ model that provides maintenance and operational support, keeping it in the markets in which it sells its trains.

Chow says that one of the key advantages for the firms in winning business on Belt and Road is the favourable prospects for funding. Project financing is readily available from multilateral backers like the Asian Infrastructure Investment Bank and policy lenders like the China Development Bank.

That still raises the question of how much the participants can profit, particularly in markets where the political and commercial risks seem greatest.

Chow says that earnings visibility on some of the contracts is limited and he acknowledges concerns that some deals may be more policy-driven than commercially motivated. Back in China, the largest engineering projects generally move quickly from plan into reality as well, which may not be the case in some of the overseas markets.

Of course, there have been disappointments for some of firms in their early forays outside China, before the Belt and Road initiative was launched. But at least the experience means that they have “paid their tuition fees”, as Chow puts it, leaving them better positioned to profit from newer opportunities.

CRRC has already had success selling lower-speed trains and light rail systems, including a breakthrough in the North American market this year where it won a $1.3 billion contract with the Chicago Transit Authority to supply hundreds of subway trains.

“Although that is outside the scope of Belt and Road, it is a huge deal and further evidence of how CRRC is growing its international business,” Chow says.

High-speed rail projects are fraught with challenges, however, with longer lead times and complex construction, which is why about three-quarters of the world’s high-speed rail is concentrated in just three countries – China, Japan and France.

Back in Belt and Road territory, CRCC is close to securing another massive contract for a high-speed line between Moscow and Kazan, with Russian media reporting that the Chinese will provide $6.2 billion in debt financing. CREC is leading the joint venture of Chinese and Indonesian companies for an express line between the Indonesian cities of Jakarta and Bandung, which is scheduled to start running in 2019.

Another Chinese-led consortium that was promising a link between Las Vegas and Los Angeles was dissolved earlier this year, while a planned connection between Mexico City and the city of Queretaro was cancelled shortly after it was announced two years ago.

“Focus most on the companies that are winning overseas contracts directly through open bidding and not as a result of government-to-government negotiations, which can be less convincing in purely commercial terms,” Chow advises.

He also suggests that the benefits from Belt and Road are going to be felt more broadly, and not just by the Chinese firms. For heavy-duty machinery in construction projects like excavators, major global manufacturers include Caterpillar and Komatsu. “And don’t forget the local guys, who are going to be the real winners in many of these projects,” he says. “China’s railway firms might provide a few hundred project engineers for a new railroad, but the 30,000 workers who do the manual work will be hired locally – and that means the local economy will get a boost.”

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