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Cablegate: A New Chinese Export

VZCZCXRO6400
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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