China’s construction market is currently in a state of over-supply, with an overreliance in the past on residential and commercial construction to drive economic growth leading to an apparent ‘glut’ in the market (AECOM, 2013).This shift has created a number of concerns in the market, with the most prevalent the risk of further declines in house-prices in a bid to spur additional demand and correct the possible supply-demand imbalance (BREE, 2014) (Wu et al., 2014).Another risk within the market has been the levels of debt taken on by construction companies during the years of exceptional growth; since the slowdown in demand began, it has been noted that a number of developers have come under pressure, with some defaulting on payments due (Liu et al, 2014).
However, it must be mentioned that despite the recent slowdown, the construction market in China still remains a key and significant part of the country’s GDP and is expected to continue growing in the long-term given rising urbanisation and incomes, albeit at a lower rate (Financial Times, 2014).
China will still remain an attractive market to consider for EU and US corporations; moving forward, rising labour costs, greater concerns for environmental issues and an increasing middle class will also increase the desire for China’s construction sector to develop more efficient and technological methods in a bid to lower costs, which in turn could present a number of opportunities for UK, EU companies wanting to gain access into the market (EUSME, 2013).
Moving forward, both residential and commercial construction will see growth as development moves inland to western provinces looking to industrialise, while the major cities of Shanghai, Wuhan and Beijing etc will all continue to grow on urbanisation and rising populations (Wu et al, 2014). As the Chinese government looks to rebalance growth towards domestic consumption and demand, expect greater investment in infrastructure, especially investment designed to open up the western regions to the eastern, coastal cities.
When considering a potential JV into the Chinese market, a business must be aware of the change management that would need to occur to effectively merge into business regulation and practices within China (Anderson, 2010) (Cameron, 2012). As noted above, the potential to form a JV based on the technology and knowledge within the company is immense as Chinese builders look to rein in costs and compete more effectively in an oversupplied market. One area of consideration for a business would be the current structure of the market, with previous research noting that the Chinese construction market is largely made up of state-owned and local private enterprises (World Bank, 2014). According to recent research undertaken (EUSME, 2013) privately-owned companies control 81% of the market, state-owned 18%, while foreign-funded firms control less than 1% of the overall market. From this, it could be assumed that regulation and business practices may restrict some international companies from moving into the market.
Regulation: many companies that have attempted to establish Chinese entities have experience strong regulatory constraints; with the Chinese see protective of their domestic industry (Rowley, 2014). It has previously been noted that it is difficult to obtain building sector licenses given that Chinese provinces will favour the use of local construction companies, with corruption still a major issue to overcome (US Department of Commerce, 2012). Furthermore, it could be mentioned that China is quite risk adverse to the introduction of new building/material techniques, with regulation in place that quite often restricts the entrance of new technology into the market due to an inability for the country to assess its implications on the wider industry, which to some could be seen as a form of protectionism given that the construction sector is such as large employer within the country. While a JV may be beneficial for an international company given its access to a local market player who understands the market, the company must be wary of the technology or knowledge it would be sacrificing in the process (Cameron, 2012). It may also be noted that given current market conditions in China, some Chinese companies may be willing to form JV’s with Western counterparts in a bid to gain access into the recovering markets in Europe and the U.S. Again, the difference in regulation may affect the attractiveness of the Chinese market to some businesses.
Business Practices: taking into account practices, it could be seen that major contracts in China have been known to be awarded more through relationships rather than product/ service quality (World Bank, 2014). To some Western companies, this may be business practices they are unwilling to follow, or in some cases unwilling to support the management change that is needed to facilitate business in the Chinese market. Taking this into account, the business must ensure that is able to trust the business and its employee’s in the joint venture. Given the difference in doing business and ethics, the UK Company must ensure that the JV does not contradict its standards in the UK (Cameron, 2012).
Key Characteristics: key characteristics of the market may also be of importance given that it could be assumed the Chinese growth in construction has to part been fuelled by quantity over quality. There have been a number of reports detailing the major $Billion efforts by cities within China to essentially support rapid expansion, however most of the building work appears to be of a much lower standard/ design than similar projects in the western economies. With this, it becomes a question of whether the current market in China would fit in with the interests and desired outcomes of the UK Company seeking the JV.
To provide come concluding remarks, the UK must ensure that it picks a Chinese partner that meets its UK ethical standards and business practices, essentially aligning their priorities to develop a viable business plan for the JV’s development in the marketplace (Paton, 2008). The company must also ensure that it’s safeguarding its intellectual property, mainly when dealing with Chinese companies that are in need of new development/ technology to improve competitiveness in their home market. The company must also ensure that it picks a partner where it can be an equal stakeholder it he project (Bosshart et al, 2010)
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Anderson, D. and Anderson, L. (2010) Beyond Change Management, London, Wiley Publications.
Bosshart, S., Luedi, T. and Wang, E. (2010) Past lessons for China’s new joint ventures, London, McKinsey & Company.
BREE (2014) China Resources Quarterly: Southern Winter- Northern Summer 2014, Sydney, Bureau of Resources and Energy Economics.
Cameron, E. and Green, M. (2012) Making Sense of Change Management, London, Kogan Page Publishers.
EUSME (2013) The construction sector in China, Beijing, European Union Research Centre.
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